Inside Scoop on Overseas Banks

Morningstar.com, Ganesh Rathnam, 11 January 2006

Most individual investors treat stocks of foreign banks, trading as American Depository Receipts (ADRs), like litter on Wall Street. After all, there are more than 5,000 listed stocks in the U.S. to choose from. Moreover, timely information and financial disclosures on foreign banks is hard to come by. However, a well informed investor willing to focus on the right parameters and do the due diligence could profit handsomely by investing in foreign banks.

At Morningstar, our approach to researching foreign banks mirrors our approach to local banks. We use SEC filings such as the 20-F (the foreign-firm equivalent of a 10-K) to glean information about the business. In addition, we focus on several other critical aspects when looking at a foreign bank to better understand the landscape in which these firms operate. Our investment theses on these banks include all the subjective information that individuals should study before investing. We've highlighted some of the more interesting and important factors in this article. We will follow up with an article highlighting our favorite foreign banks, the firms that investors should pounce on should they ever trade in 5-star territory.

Economy

Famed investor Peter Lynch once said "If you spend 13 minutes per year trying to predict the economy, you've wasted 10 minutes." At Morningstar, we generally refrain from making macroeconomic and other top-down forecasts. However, when dealing with foreign banks, it is impossible to overlook the state of the economies in which they operate. Economic health is deeply intertwined with the health of resident banks and vice versa. Our list of international banks operate in different economies across the globe, and the economic cycles and characteristics vary widely. Rather than trying to determine what the economy or currency will do in the coming quarter or year, we look to see if sound policies are adopted to promote economic growth, the extent to which market forces are allowed to determine investment and capital allocation decisions, and whether growth is sustainable in the long run. We prefer to invest in banks that are not hobbled by a restrictive or structurally unsound economy.

Take the case of Ireland. Policies adopted in 1987 erased many socialist policies, established low corporate tax rates, and lengthened the work week. These initiatives turned Ireland from the poorest country in the European Union to one of the richest. Real GDP growth has averaged 6% over that time, attracting copious amounts of foreign capital and even reversing 200 years of emigration from the Emerald Isle. Needless to say, these factors provided a favorable tailwind for the success of Allied Irish Banks, one of our favorite foreign banks.

On the other hand, Japan has dragged its feet in implementing policies to reverse 16 years of economic decline. Two separate but related problems need to be addressed: writing off bad loans and letting insolvent companies die. These measures would have reduced overcapacity and diverted funds from the "living-dead" companies to stronger, more competitive firms in need of financing, speeding an end to the deflationary spiral. Japanese politicians, however, seem to lack the chutzpah to act. Millions of people would suddenly lose their jobs and many banks would fail to meet capital ratios. Instead, Japan watered down proposed reforms and prolonged the pain. Consumer confidence and thereby consumption continues to plummet as the population saves furiously, anticipating a huge hike in taxes to pay off the public debt, currently 165% of the GDP.

Regulations and Banking Laws

Different countries have vastly different banking regulations, determining how their banks are governed. The rationale is that each country's central bank knows what's best for its country. As such, the central bank has much leeway in making rules. For example, some countries require banks to have higher capital ratios than ones stipulated in the Basel Accord, a global agreement on a set of guidelines for bank supervision. In an effort to force weak banks out of the market, the Bank of Japan mulled disallowing certain types of assets ("deferred-tax assets" for you accounting types) from being used to compute the Tier I capital ratio, a primary indicator for a bank's health. This move would have forced weak banks to merge with healthier rivals.

Because of banks' power to allocate capital, governments also implement laws to subsidize sectors deemed economically vital. In Brazil, banks are required to extend heavily subsidized loans--equaling at least 25% of checking deposits--to the agriculture sector, regardless of merit or the creditworthiness of the recipient. The Reserve Bank of India requires 40% of all bank credit to be used for loans to so-called "priority sectors." Lending terms are generous and banks rarely profit from these loans. Often, lobbyists and special interest groups abuse loopholes in these regulations to secure below-market loans for clients. Consequently, banks and their shareholders are forced to shoulder the cost of development.

Another, more insidious form of regulation is driven by politics and xenophobia. Governments can--and often do--meddle opportunistically with the financial sector by changing laws or employing fierce protectionism. These moves are often sudden and unexpected, catching investors by surprise and dissuading foreign investment for fear of repeat events in the future. The damage done by government meddling can often haunt the country for decades in the form of a lack of confidence. This risk is more prevalent in politically volatile developing countries, but some developed nations are not immune to it.

The nationalization of Indian banks and insurance companies in 1969 was a wildly populist move that was championed as a victory for the poor. It hindered economic growth, stifled innovation, increased bureaucracy, and subsidized politicians' pet initiatives. Liberalization in 1991, after an economic crisis, slowly reversed the damage and led to the high growth that the Indian economy enjoys. However, the lingering effects still plague banks under government control, at which computers were a novelty even in 1999.

In Italy, erstwhile Central Bank chief Antonio Fazio blatantly thwarted ABN Amro's bid to acquire Italian bank Banca Antonveneta, instead favoring a bid by another poorly capitalized Italian bank, Banca Popolare Italiana. His motivation for this was partly personal; Banca Popolare is run by a close friend of Fazio. In the process, he destroyed all the credibility, much of which Fazio himself was responsible for, that the Italian central bank built with the public as well as the European Union.

Generally, we prefer countries with independent central banks and an independent policymaking body, free from partisan politics. Over time, this characteristic is a good predictor of stability and profitability of a country's banks.

Corporate Governance

Last but not the least, we look for evidence of solid corporate governance, more so because ADR shareholders have limited rights and need someone to protect their interests. Governance standards vary widely across countries. In some nations, the CEO holds the whip, whereas in others, it's the chairman of the board. Compensation and ownership structures are different. In our research, we highlight both the good and bad management practices of a bank to bolster our investment thesis. All told, we would steer clear of banks with questionable management.

For example, we view the management practices at HSBC Bank very favorably. Management is compensated for generating economic profits. Management is paid a pittance, especially when compared to U.S. peers. Cost control is an obsession that begins at the top with chairman Sir John Bond. He is known to estimate the cost of meeting, i.e. compute compensation being earned while managers sit in the meeting room, to keep meetings short. He travels economy class and personally turns off his office lights at the end of each day, a lesson he was taught when he first joined the bank in 1960.

On the other hand, we have management teams that show no compunction in giving shareholders a raw deal. Banco Santander Central Hispano's management team is a prime example. The Botin family--owners of the bank for more than 100 years before it was a public entity--control the bank and its board, even though they collectively own just 3% of its shares. Emilio Botin, the chairman, inherited the position from his father, and Ana Botin, Emilio's daughter, seems to be the heir-apparent to his throne. Empire building seems to be the main goal, with numerous acquisitions consummated around the world, especially in Latin America. The bank grossly overpays for these acquisitions, destroying shareholder wealth. Return on equity was just 8% in 2004, whereas return on tangible equity was over 20%. The bank exports its style of corporate governance wherever it goes, with the latest saga involving its attempt to re-enter the U.S. market via a 20% stake in Sovereign Bancorp. The move triggered a vicious ongoing shareholder battle between Sovereign and its largest institutional shareholder, partly over the obscene terms intended to protect Sovereign's CEO and board from being replaced.

There are, of course, numerous other anecdotes--both good and bad--we've come across. Next week, we'll profile our favorite foreign banks.

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TD Banknorth Says Earnings to Miss Forecast

Financial Post, Wojtek Dabrowski, 11 January 2006

TD Banknorth Inc. said yesterday its first-quarter earnings will be below analyst forecasts and announced plans to restructure its balance sheet ahead of the closing of the purchase of Hudson United Bancorp.

Banknorth, the U.S. banking subsidiary of Toronto-Dominion Bank, said its fourth-quarter diluted earnings will be US62 cents per share, US2 cents lower than analyst estimates. Its earnings are due Jan. 23.

"The primary reason for this is the pressure on net interest margin currently being experienced by TD Banknorth, like many other financial institutions," the lender said in a statement. "TD Banknorth's net interest margin, on a fully taxable-equivalent basis, decreased from 4.09% during the third quarter of 2005 to 3.96% during the fourth quarter of 2005."

At the same time, Banknorth said it plans to sell US$2.6-billion of mortgage-backed securities and reinvest the proceeds in shorter-duration assets as it shores up its balance sheet.

"The asset sales will reduce the earnings volatility inherent in these interest-earning assets as a result of prepayments and call features," Portland, Me.-based Banknorth said.

Banknorth will take an after-tax loss of US$29.3-million connected to the restructuring. Then, once it buys Hudson, the bank said it plans to sell another US$2.7-billion of investments and spend the proceeds to pay down debt.

"The company anticipates that these actions will not have a material impact on earnings per share on a going-forward basis," it said.

In a research note to clients, Genuity Capital Markets analyst Mario Mendonca wrote that "we believe this announcement has minimal impact on [Banknorth's] cash contribution to TD Bank."

However, the note stated Banknorth's move suggests "management is concerned that the flat-to-inverted state of the yield curve in the U.S. may continue for an extended period of time."

Banknorth's US$1.9-billion stock and cash purchase of Hudson, a New Jersey-based bank, is expected to close in the first quarter of this year. Also in connection with the deal, Banknorth yesterday announced it plans to repurchase up to 8.5 million of its shares.

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RBC CM's Q1 2006 Cdn REIT Outlook – Summary

RBC Capital Markets, 10 January 2006

Investment Opinion

• Amidst the universe of 25 TSX-listed REITs we have a “basket” of eleven Outperform-rated entities. We believe the most timely names currently include: Allied Properties REIT, Calloway REIT, Canadian Hotel Income Properties REIT, CREIT, Chartwell Seniors Housing REIT, H&R REIT, Morguard REIT, Northern Property REIT, and Retirement Residences REIT.

• The Canadian REIT industry finished 2005 with an equity market capitalization of $22.1 billion. Over the course of 2005, the group’s market cap surged by over $4.5 billion, or +26%. Market cap growth in 2005 was driven by a combination of new equity issuance plus strong and broad-based unit price appreciation. The end-of-year figure represented an all-time high for the Canadian REIT universe. Of the 24 REITs that were public for the full twelve months of 2005, only three (Retrocom REIT, Retirement Residences REIT, and TGS North American REIT) finished 2005 with unit prices that were lower than at the beginning of the year. This statistic compared favourably to six REITs with declining units prices during the prior year. Secondary equity offerings and one initial public offering added approximately $1.9 billion to the industry’s equity market cap during 2005, while the balance of $3.6 billion was due to the combined effect of unit price appreciation and distribution reinvestment programs. Offsetting these amounts was the Q4 2005 privatization of O&Y REIT, which removed 59.1 million trust units at $16.25 each, thus reducing the industry’s equity market cap by some $960 million. As at December 31, 2005, six REITs had equity market caps in excess of $1 billion, up from four issuers at the end of 2004.

• Economic & Property Sector Review – Our economic and property sector review concludes that property segments are almost universally stable or improving. Nationally, office owners seem to be experiencing stronger demand than during the past several years, and we believe that rental growth will soon follow. While retail property markets posted another very strong year, we expect growth in consumer spending to temper in 2006, and we foresee a slowing pace of retail development the next year or two. The Canadian dollar remains be strong, and this continues to work against the lodging sector. The dollar has yet to hurt industrial demand, but we believe the effect could be more noticeable in eastern industrial properties in 2006. Following upon several years of somewhat challenging operating conditions, apartment owners are seeing more stable occupancy statistics. Unfortunately cost pressures have increased, and we believe it could take until 2007 before rental growth becomes more noticeable. Regardless of their specific property sector or focus, the Canadian REITs appear operationally and financially well positioned.

• The Ideal Environment – REITs currently offer an equity risk-premium that is approximately 75 basis points below historical averages. In 2005, however, REITs gained “mainstream” acceptance in Canada, an event that was symbolized through their inclusion in the S&P/TSX Composite Index. Higher valuations and volatility could be two consequences of this. Funds flow and interest rates have, and should continue to be, the sector’s two most important determinants of short-term performance. We believe the present group-average multiple of 15.1x (15.5x on the REIT Index) AFFO to be reasonable within the context of current interest rates and property market fundamentals. Our target valuations are driven from the one-year forward implied 10-year Canada bond yield, which equates to approximately 4%. The industry remains awash in capital (private, pension fund and REIT) and M&A activity has been a growing theme within the U.S., despite seemingly high REIT valuations. After one high profile transaction during 2005 (the O&Y deal) we see potentially more activity in Canada in 2006.

• With the group finishing 2005 at an AFFO yield of 6.6%, or the equivalent of a 15.2x AFFO multiple, the above analysis means that we see little in the way of prospective multiple expansion for the group over the next year. On the other hand, with AFFO growth possibly in the 5% range, even steady multiples provide the opportunity for modest capital appreciation. Therefore, with a 6.6% average distribution yield (6.3% on the S&P/TSX REIT Index) and modest AFFO growth, the macro conditions suggest to us that Canadian REITs could be poised for total returns of 7% to 11% in 2006.

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Catalysts Elude US Bank Stocks

TheStreet.com, Matthew Goldstein, 10 January 2006
URL: http://www.thestreet.com/stocks/banking/10261085.html

The risk-reward calculus for bank stock investors is turning negative.

Fourth-quarter earnings, which banks will start to report next week, are not likely to generate much heat. The expectation is for bank profits to rise anywhere from 8% to 10% compared to a year ago.

That's not bad. But it's nothing for investors to get too excited about, either.

"I don't think anyone is expecting great things,'' says Michael Stead, manager of River Aire Investment, a hedge fund that invests mainly in financial stocks. "It's looking like a ho-hum quarter.''

Bank stocks would appear to have little near-term momentum, what with the Philadelphia KBW Bank Index up nearly 10% since the end of the third quarter. Much of the run-up has been fueled by the hope that the Federal Reserve will soon stop raising interest rates and anticipation of a revival in bank mergers.

However, don't be surprised if bank stocks give back some of those gains, especially if a number of bank earnings disappoint the next two weeks.

Meanwhile, the earnings outlook for 2006 is not much rosier than the quarter just ended. Analysts say a tricky interest rate environment coupled with the need by banks to begin bolstering their loan-loss reserves in an anticipation of darker days ahead should keep a lid on bank profits.

Thrifts and regional banks will continue to be hardest hit by the so-called inversion of the yield curve, which is likely to haunt the bond market this year. That's the unusual phenomena, which occurred earlier this month, in which the yield on short-term Treasury notes is actually higher than the yield on longer-term government bonds.

The inversion of the yield curve makes it particularly difficult for banks, which generate much of their profits by investing customer deposits into interest-bearing securities, such as mortgage-backed bonds. The flattening yield curve has all but wiped out the ability of banks to borrow on the cheap and reinvest the money in longer-term mortgage-backed securities.

A case in point is Tuesday's earnings warning from TD Banknorth. The Portland, Maine-based company said fourth-quarter earnings will come in 2 cents shy of the current consensus estimate of 64 cents a share because of the negative impact of the flattening yield curve on its deposit and investment operation. Look for other banks that are heavily invested in mortgage-backed securities to sound a similar cautionary note in the coming weeks.

Maybe the best thing bank investors have to look forward to this year is an expected revival in industry consolidation, an event that often sparks speculation in the sector. Most experts are looking for a surge in bank deals in 2006, especially because last year was a relatively quiet one with few headline-grabbing combinations.

"There should be a lot of consolidation, especially with smaller banks being acquired,'' says Timothy Ghriskey, a money manager and chief investment officer of Solaris Asset Management in Bedford Hills, N.Y.

To be sure, no one is expecting a repeat of 2004, which began with the announcement of one of the biggest bank mergers ever: J.P. Morgan Chase's $59 billion acquisition of Bank One. By year's end there were 245 announced bank deals in the US worth more than $113 billion. The only other year involving bigger deals was 1998, in which bank mergers totaled $250 billion, according to Thomson Financial.

By comparison, there were 188 mergers last year for a total value of $61 billion.

But with the U.S. banking market still much less consolidated than Europe's, analysts say the environment is ripe for a new round of deals. Mergers also are a way for big banks to drive revenue growth, which could come under pressure if demand for consumer borrowing slows this year as expected.

David Hendler, an analyst with CreditSights, expects Citigroup, Wells Fargo, Wachovia, and J.P. Morgan all to be on the prowl this year. He says big banks will be looking for deals that bolster their national retail banking reach. Some potential targets, he says, are Washington Mutual, PNC Financial, Fifth Third, and Huntington Bancshares .

Just about the only big bank that investors can count on standing pat this year is Bank of America . Over the past two years, the nation's second-largest lender has pulled off two of the biggest deals: the acquisition of FleetBoston Financal and credit-card giant MBNA.

But investors trying to play the merger game may find slim rewards in betting on individual acquisition targets.

"In the past, a target bank has enjoyed an acquisition premium. However, given that the stock prices of potential targets have already 'priced in' potential takeover premiums, we think the upside potential of these targets is diminished,'' says Hendler, in a recent research report analyzing banking industry trends.

So what's a merger speculator to do?

One option is to buy shares in the Merrill Lynch's Regional Bank HOLDR, an exchange-traded fund that tracks the performance of about two dozen bank stocks, including some oft-mentioned acquisition targets. This ETF effectively serves as a basket of regional bank stocks. An investor who purchases this security can hope to get upside from merger speculation that spreads across the sector.

A better bet, say traders like Ghriskey, is to look for small banks, ones with market caps under $1 billion, that lack a big analyst following.

But the trouble is that identifying smaller, off-the-radar banks is not easy. And Ghriskey says an investor may have to "sit on them a while'' to gain any merger benefit.

Either way, it looks like the easy money is gone out of the banking sector this year.

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Canada Polls Show Tories Leading: Sparks Bank Merger Talk

Dow Jones Newswires, Monica Gutschi, 10 January 2006

As Canada's Conservative Party surges in the polls ahead of the Jan. 23 election, the talk inevitably turns to the possibility of domestic bank mergers.

"Although the probability remains quite low, it does apear that the possibility of a majority government, and bank mergers with it, is rising," ventured Robert Wessel of National Bank Financial in a note Tuesday.

In polls released Monday, the Conservatives had a healthy lead over the governing Liberal Party, which holds a minority position in Canada's Parliament. Pundits are now speculating on the possibility the Conservatives, or Tories, will win an election for the first time since Brian Mulroney held back-to-back majority governments from 1984 to 1993.

Many observers believe bank mergers have a greater chance of receiving government approval under a Conservative government than with the Liberals, who have delayed the release of a position paper on the issue for more than a year.

Prime Minister Paul Martin rejected two proposed bank mergers in 1998 when he was finance minister.

But Wessel noted that, given the "political sensitivity" of the issue in Canada, the likelihood of mergers increases with a majority government, whether Liberal or Conservative.

As well, he said, such a decision by a majority government would be far better for bank shareholders. A minority government - were it to allow mergers - would impose much more onerous conditions and thereby reduce any potential premiums paid, Wessel said.

Bank executives have long pressured the government to allow their institutions to merge, claiming they need the greater size to compete globally. And Bank of Canada Governor David Dodge has said the limitations on banks joining forces may be hurting the financial sector's productivity.

If a majority government of either stripe is elected later this month, Wessel said the potential acquirer banks - Bank of Nova Scotia and Royal Bank of Canada "may begin to reflect some level of acquisition risk in the form of modest multiple compression."

He said both now trade at large premiums to their peers.

The probable targets - Bank of Montreal and Canadian Imperial Bank of Commerce, may benefit from relative multiple expansion, he said.

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TD Banknorth Hurt by Yield Curve

TD Banknorth, 10 January 2006

Portland, Maine--(Business Wire)-TD Banknorth Inc. announced today that its board of directors has approved a balance sheet restructuring program which is to be implemented in connection with its pending acquisition of Hudson United Bancorp. The program consists of the sale of approximately $2.6 billion of mortgage-backed securities with the proceeds to be reinvested in shorter duration assets. The asset sales will reduce the earnings volatility inherent in these interest-earning assets as a result of prepayments and call features. TD Banknorth will incur a pre-tax loss of approximately $45 million ($29.3 million on an after-tax basis) in connection with this balance sheet restructuring. In light of the decision to sell these investment securities, the securities will be reflected as impaired at December 31, 2005 and the related loss will be recorded in TD Banknorth's results in the fourth quarter of 2005.

It is anticipated that an additional approximately $2.7 billion of investment securities to be acquired from Hudson United will be sold soon after completion of the acquisition with the proceeds used to repay an equal amount of borrowings.

The Company anticipates that these actions will not have a material impact on earnings per share on a going-forward basis. "In the current interest rate environment, these actions mitigate our interest rate risk going forward," said William J. Ryan, TD Banknorth Chairman, President and Chief Executive Officer.

TD Banknorth also announced that exclusive of the effects of the balance sheet restructuring, merger and consolidation costs, and the amortization of identifiable intangible assets, its diluted earnings per share for the fourth quarter of 2005 will be $0.62, or two cents less than the current Thomson First Call consensus analysts' estimate (on a GAAP basis, diluted earnings per share for the fourth quarter of 2005 will be $0.32). The primary reason for this is the pressure on net interest margin currently being experienced by TD Banknorth, like many other financial institutions. TD Banknorth's net interest margin, on a fully taxable-equivalent basis, decreased from 4.09% during the third quarter of 2005 to 3.96% during the fourth quarter of 2005. Details concerning the Company's earnings for the quarter and year ended December 31, 2005 will be released by the Company on January 23, 2006, as previously announced.

Finally, TD Banknorth announced that its board of directors has approved its planned repurchase of up to 8.5 million shares of its common stock in the open market in connection with the acquisition of Hudson United. It is anticipated that share repurchases will commence on or about the acquisition date and occur at such times and at such prices as management deems appropriate. The acquisition of Hudson United is subject to the receipt of the approval of the shareholders of Hudson United and TD Banknorth, which will consider the transaction at meetings to be held on January 11, 2006, as well as the receipt of all required regulatory approvals and is expected to close later in the first quarter of 2006.

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Simpler Annual Reports

The Globe and Mail, Janet McFarland, 9 January 2006

Manulife Financial Corp.'s most recent annual report hardly looks like a trendy document.

There are no pages filled with glossy photographs, no colourful graphics, and no clever design themes. The bland 128-page booklet is printed almost entirely in black and white on inexpensive, flimsy paper.

"Over the last couple of years, we've spoken to some of our shareholders and we've asked them what they want to see, and most of them have said, 'Just give us the numbers,' " says Terri Neville, Manulife's assistant vice-president of shareholder services. "So we decided to take a risk and go that way."

While a glossy annual report has long been the key marketing document for many companies, experts say a far simpler annual report is the trend of the future. A growing number of companies are abandoning the glitzy format as investors turn to the Internet for simple electronic versions that can be downloaded and printed quickly.

A new survey shows investors have little interest in receiving printed annual reports any more. And while few Canadian companies have so far adopted Manulife's bare-bones approach, the trend is in full swing in the United States.

A survey of U.S. companies found that 47 per cent, including one-third of Fortune 100 companies, have adopted a basic annual report format. Most of these companies now prepare what is known as a "10-K wrap" -- or their legal 10-K document wrapped in a cover, sometimes with a couple of pages of extra commentary at the start.

A survey of 144 Canadian companies, meanwhile, found just 16 per cent are preparing a basic annual report.

The Canadian survey was conducted by Toronto-based investor relations firm Genoa Management Ltd., the Canadian Investor Relations Institute and CCNMatthews.

John Sadler, managing director of Genoa Management, said he was amazed to see the U.S. data, especially the number of giants at the leading edge of the trend -- including Microsoft Corp., Sprint Nextel Corp. and Motorola Inc.

"My jaw dropped," said Mr. Sadler, who has spent his career working in the investor relations field. "The fact that that many companies are moving away from the traditional, big-budget annual reports was a startling statistic."

He believes Canadian companies will inevitably follow the U.S. trend.

"If you can get the document to shareholders by posting it on the website and having the information instantly available, then the utility of spending all that time and effort producing a fancy document starts to become questionable."

Given the choice, most investors say they don't even want a printed annual report. The Canadian survey found that more than half of Canadian companies asked investors last year if they wanted a copy of the annual report, and 61 per cent of the companies reported that fewer than 10 per cent of their investors chose to continue receiving the mailing.

CIRI president Bob Tait, the former director of investor relations at Canadian Tire Corp., says annual reports have traditionally been a key marketing vehicle, but said that feature is becoming less significant as more investors turn to companies' websites to learn about products and operations.

Instead, financial information is becoming the overwhelming focus, with companies now beefing up financial data and analysis.

"There's no question that there is a growing importance of the MD&A [management discussion and analysis] statements and notes as the prime pieces of annual reports, and there is likely a reduced emphasis on doing a full-blown, full-colour annual report," Mr. Tait said.

Sun Life Financial Inc. spokeswoman Susan Jantzi said her company's research confirms that investors who read annual reports are primarily interested in financial data. As a result, Sun Life began streamlining its annual report last year, eliminating large colour photos and simplifying the design.

"Our annual report is a focused document, and it's really designed to provide a snapshot of the financial performance of the company," Ms. Jantzi said.

At Manulife, the change was driven in part by time constraints. Companies must send financial statements to shareholders within 90 days of their year-ends. Other new rules require more detailed disclosure in MD&A sections, building pressure to produce more in less time. Last year, Manulife began combining its shareholder proxy circular with its annual report to save time.

The new survey found the average Canadian company spends $17.27 a unit to produce and mail annual reports to investors, more than 2.5 times the U.S. average of $6.78 a report. Manulife, by comparison, spent just $3.35 for each of its 850,000 annual reports last year, including distribution costs.

Ms. Neville says shareholders seem satisfied with the documents.

"We received not one single complaint," she said. "And lots of people called me to say, 'I really like what you did, it's very environmentally responsible, and obviously you are concerned about how you are spending the company's money.' "

The cost of reporting

Canadian companies spend more per copy than U.S. companies to prepare their annual reports, typically because they spread their costs over a smaller shareholder base.

Canada U.S. (all figures Cdn)
Average annual report budget $142,000 $169,500
Average number of copies printed 23,900 61,900
Average cost per copy 17.27 $2.93
Average number of pages 65.3 72.8
Provide report on website 71% 88%

144 Canadian companies surveyed: 278 U.S. companies, U.S. figures exclude mailing costs.

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China Opens its Doors Wider to Scotiabank & Manulife

The Globe and Mail, 7 January 2006

Two of Canada's most international financial institutions have received regulatory approval to add branches in China, as the country opens its financial services market to foreign competitors.

Bank of Nova Scotia said yesterday that the China Banking Regulatory Commission has agreed to let the bank upgrade its Shanghai office into a full branch.

The branch will be the hub for Scotiabank foreign exchange and treasury services in China, as well as offering loans and deposit-taking services to Chinese and international companies, with a focus on trade finance.

Scotiabank, which has been operating in China for more than 20 years, claims the largest Canadian bank network in the country, with branches in Guangzhou and Chongqing and representative offices in Beijing and Shanghai.

Also yesterday, Manulife-Sinochem Life Insurance Co., a subsidiary of Toronto-based Manulife Financial Corp., said it had received approval for a branch in Chengdu, the capital of Sichuan province.

China's business landscape has changed since Manulife began getting Chinese licences in 1996, spokesman Peter Fuchs observed.

"Those licences [came] a couple of years apart," Mr. Fuchs said.

"In the last couple of years, the licences have been coming much more frequently and I think that speaks to the difference in regulation with [the China Insurance Regulatory Commission] and the government."

Chengdu is the 12th Chinese city in which Manulife-Sinochem has approval to operate.

The company is a joint venture of Manulife and China Foreign Economic and Trade Trust & Investment Co., a subsidiary of state-owned Sinochem.

It currently does business in nine cities in and around Shanghai, Guangzhou and Beijing, with plans to open in Shenzhen and Shaoxing in the first quarter of this year.

The Chengdu branch is to open in the second quarter.

For Scotiabank, upgrading the Shanghai office into a full branch will "expand our level of service in the eastern region of China, the most rapidly growing market in the country and the location of many of our multinational clients," stated Robin Hibberd, senior vice-president for Asia Pacific and the Middle East.

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Scotiabank Poised for a First in China

The Toronto Star, Stuart Laidlaw, 7 January 2006

By this summer, the Bank of Nova Scotia plans to become the first Canadian bank to offer retail banking in China's fastest- growing market.

The bank announced yesterday that the communist country's central banking authority has decided to allow Scotiabank to offer loans and take deposits at its office in Shanghai.

"People will be able to operate just like (at) a neighbourhood branch," Scotiabank spokesman Frank Switzer said. "We're proud to be the first bank to be doing this."

Scotia is the first Canadian bank to enter the retail banking market in Shanghai, a major international trading centre for China. However, Scotia is not the first Canadian lender to offer such services in the country.

The Bank of Montreal opened a retail branch in Beijing in 1996, and converted a Guangzhou office to business retail banking in 1997. The bank has a retail licence to operate in Hong Kong, but no retail operations there, and has applied to convert the Shanghai office to retail banking.

With the announcement yesterday, Scotiabank will be similarly converting a representative office in Shanghai to retail operations. Representative offices deal exclusively with businesses, helping them do their banking with larger offices in other cities.

Scotiabank also has operations in Guangzhou, Chongqing, Beijing and Hong Kong; and a minority investment in Xi'an City Commercial Bank, a leading bank in western China with 113 offices and more than 1 million customers.

The bank said its new Shanghai branch will be the hub for Scotia's foreign exchange and treasury services throughout China, and focus much attention on trade-finance services and import and export customers.

"It's an indication of our continued interest in China," Switzer said.

Personal-banking operations will be limited to customers Scotia already works with through its business operations.

The fast growth of the Chinese economy has attracted the interest of the foreign financial-services industry, with several banks and insurers opening offices there and investing in domestic companies.

The Bank of Montreal, for example, has taken a 28 per cent stake in Fullgoal Fund Management Co. Ltd. of Shanghai, a mutual fund company, and is part of a consortium of foreign banks that has worked with the Chinese central bank to open the country's foreign-exchange market.

Canada's Manulife Financial Corp. announced yesterday it had won approval from the China Insurance Regulatory Commission to operate in the Sichuan provincial capital of Chengdu, increasing the company's presence in the Chinese life-insurance market.

The venture, 51 per cent-owned by Manulife and 49 per cent held by Sinochem Corp., China's largest chemicals trader, will operate in nine Chinese cities and plans to open in three others this year. Manulife is licensed to operate in more cities than any other foreign life insurer.

Guangdong Development Bank, meanwhile, is considering a 24.1 billion yuan ($3.5 billion Canadian) bid from a group led by U.S.-based Citibank for an 85 per cent stake in the Chinese lender. That's higher than bids from Société Générale and Chinese insurer Ping An.

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RBC : Problems at Centura Largely Behind It

Financial Post, Wojtek Dabrowski, 7 January 2006

For the past two years, Gord Nixon, Royal Bank of Canada's chief executive, has had to contend with nagging criticism about the bank's performance in the United States. RBC Centura, the regional southeastern U.S. bank that Royal bought in 2001, was hardly living up to expectations.
Even though a relatively small piece of Royal's overall business, the Raleigh, N.C.-based institution had become a beacon of negativity as observers honed in on weak results and uncertain strategy. In 2004, Royal's U.S. banking earnings plunged by $324-million on poor performance from Centura and RBC Mortgage, the Chicago-based mortgage bank sold last year, as well as goodwill and restructuring charges.

Now, following a tough year of changes at Royal and the stabilization of Centura's rocky performance, investors and analysts are anxious to once again talk about the big picture. For Mr. Nixon, who became the bank's president and CEO in April, 2001, about two months after the Centura acquisition was announced, it's a welcome change.

"In a way, it's a positive, because for the last year or so, nobody's been asking about what we're going to do next," Mr. Nixon said in an interview. "Now, all of a sudden, people are starting to ask."

Centura's problems aren't completely in the past, but it's clear Mr. Nixon, 48, is pleased to discuss the subsidiary's budding recovery.

"The performance of Centura is moving in a positive direction at a time when there are some challenges within the banking market in the U.S.," Mr. Nixon says, seated in his office on the eighth floor of one of Royal's towers in downtown Toronto. Still, he is also quick to point out that a turnaround is still far from complete.

The market seems to be behind his efforts thus far -- RBC stock posted a robust total one-year return in 2005 of 46%, the best of Canada's Big Five banks. Now, the question on the minds of many investors and industry observers, including many of those who heaped criticism on Centura, is will Mr. Nixon be buying again, particularly south of the border?

"I think, from a management's perspective, our most important function is to ensure that we are well-positioned to take advantage of opportunities if and when they arise," Mr. Nixon responds. "There is no intention in the short term of going out and making a big acquisition for the sake of a big acquisition." He also points out that Royal's businesses have continued to grow in recent years without major deals.

Genuity Capital Markets analyst Mario Mendonca thinks shareholders may not be ready for a big acquisition just yet.

"I don't know that the market's quite ready yet for Royal to go out and do a big deal," he says, adding that something smaller, however, could be more palatable.

"I don't think they're out of the woods yet entirely," Mr. Mendonca says. "What was important about Centura in 2005 is that it stopped deteriorating. It's not that it improved. I think a few quarters of improvement in Centura might give them the leeway to go out and do something a little larger in the U.S."

Mr. Mendonca says while Royal's executives have signalled Centura's performance is on the upswing, it's not certain whether Centura is making money.

"You can't be conclusive on [profitability]; the disclosure isn't there," he notes. Indeed, Royal now reports Centura's performance as part of its U.S. and international personal and business operations. That segment accounted for 15% of revenue from continuing operations in 2005.

For now, it seems Centura's continued turnaround will largely be organic.

Today, RBC Centura has total assets of more than US$20-billion, ranking it among the five largest banks in North Carolina. It has 273 branches and 3,740 employees in five southern states, including Georgia and Florida.

As well, the team of Peter Armenio, Mr. Nixon's lieutenant in the United States, has focused on pushing Centura into the faster-growing urban centres of the southeast, such as Atlanta, while selling some branches in rural areas.

"While our market share may not be as high in Atlanta, relative to what it might be in Raleigh or parts of North Carolina, et cetera, certainly it's moving in the right direction," Mr. Nixon says, adding that efforts are also under way to bring underperforming branches to shape, with a focus on Centura's core strengths.

Royal, meanwhile, sold off its U.S.-based mortgage business in the summer to New Century Financial Corp., a California real estate investment trust.

Mr. Nixon argues that Royal, the biggest bank in Canada, doesn't have to be a giant in the United States to be successful there.

"There is a bit of a perception out there that one has to be very big in terms of market share -- or potentially very small -- in order to survive," he says. "If you actually look at the relative performance of those with large market share or small market share versus those in the middle, that theory does not necessarily hold true."

Total shareholder returns of Western banks (in U.S.-dollar terms) seem to bear out that logic: Citigroup Inc. delivered a one-year return of 6.2% as of Oct. 31, 2005. Bank of America Corp. came in with 1.7% during the same period. By comparison, the much-smaller Royal had a one-year total return of 40% as of Oct. 31.

In 2005, the bank earned $3.39-billion, up 21% from 2004. Without a $326-million after-tax reserve related to Enron Corp. litigation, the jump would be even more impressive, up 32% from the prior year. Revenue was $19.22-billion, up 8% for the year.

But it's unfair to call 2004 a dismal year for Royal overall -- four of its five divisions had record performance, Mr. Nixon says. Banking was the laggard, dragged down by weak U.S. results.

Some observers maintain Royal may be better off abandoning Centura altogether, even though a turnaround has begun to take root.

"There's nothing they can buy that would transform [Centura]," says Gavin Graham, director of investments at the Guardian Group of Funds in Toronto.

"If [Mr. Nixon] wants to go and do something else, it may well be sensible to go somewhere else completely -- get out of the southeast, where there's a lot of big competitors and not many suitable targets to buy."

But Mr. Nixon insists the woes at Centura weren't what worried him most during 2004.

"The most concerning aspect of 2004 to me was not necessarily the U.S. -- I mean, that was concerning as well -- but it was the fact that if you looked at the trend for the bank after three or four very strong years in terms of revenue growth, operating leverage, the revenue growth was starting to slow down, our expenses were not starting to slow down and as a result, our operating ... performance was deteriorating."

Structural realignment, as well as the need to expand revenue while keeping costs down, was the catalyst for Royal's three-year Client First plan -- what Mr. Nixon calls a "rallying cry" for the bank.

He would not provide dollar specifics, but the strategy consists of 50% in cost cuts and 50% in revenue growth, running into 2007. The elimination of more than 1,600 positions that began in late 2004 and a top-echelon shakeup of management showed the bank meant business. As part of the process, Barbara Stymiest, the former TSX Group Inc. chief executive, was brought on as chief operating officer.

The bank's five business lines were consolidated into three groups and Royal created a centralized technology and operations group, consolidating its information technology and business infrastructure units under one umbrella. It also set up what it calls a Transformation Management Office, which tracks its progress toward meeting goals set out as part of its plan.

So far, it looks as if the bank is doing well at reining in costs aggressively and continuing to show strong growth in its domestic operations, Genuity's Mr. Mendonca says.

"I think they still have good momentum in their domestic business -- and improvements they made in the U.S. business -- that a deal isn't necessary in 2006 to outpace their peers in terms of earnings growth."

Canada is by far the most important piece of Royal's business. Sixty-five per cent of 2005 revenue from continuing operations and 68% of net income came from its Canadian personal and business division.

Mr. Nixon certainly agrees that Canada is far from tapped out in terms of growth potential.

"We still think there's good growth potential for us in the domestic Canadian marketplace," he says.

Sure, there are products -- such as mortgages -- facing margin compression, but there is also strong growth in such areas as Royal's mutual funds and credit cards.

As well, "the growth in their personal loans has been astonishing," Mr. Mendonca notes. "I think, at some point, that could come back to haunt them, although Royal is pretty adamant that they're getting well-compensated in terms of yield for the additional credit-card exposure they're taking on."

At the fourth quarter of 2005, the bank's Canadian credit card balances, including securitized assets, grew 12% from the fourth quarter of 2004 to $9.1-billion, while Canadian personal loans jumped 14% to $32.3-billion during the same time.

However, Mr. Mendonca cautions that could mean higher provisions for credit losses "if the Canadian consumer kind of rolls over.

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U.S. Bancorp Research Report

Friedman, Billings, Ramsey & Co., Gary B. Townsend, CPA, Bob Ramsey, Ram Gowrisankaran, 6 January 2006

We reiterated coverage of U.S. Bancorp with an Outperform investment rating and a 12-month price target of $35.00 per share.

U.S. Bancorp is a financial and bank holding company with $207 billion in assets (in the third-quarter of 2005) based in Minneapolis, Minn.

The company estimates mid-teen growth in payment services and plans to double revenues over the next four to five years. Payment services generate approximately 22% of revenues, up from 17% in the first quarter in 2003.

U.S. Bancorp's earnings mix includes a growing proportion of earnings from higher price-to-earnings businesses, yet the stock trades at a discount to the large-cap bank peer group.

Given its low efficiency ratio (43.9%) and peer-low cost of interest-bearing deposits (1.79%), U.S. Bancorp is a low-cost provider. The company competes on price and maintains peer-high profitability metrics. The return on average assets and the return on average equity are 2.23% and 22.8%, respectively.

U.S. Bancorp targets a return of 80% of earnings to shareholders through repurchases and dividends. Management believes that it has sufficient deposit funding and prefers not to pay up for excess deposits. The company emphasizes customer satisfaction and net new checking accounts.

Our price target assigns a 13.3x multiple to the company's 2006 earnings, implying expansion from the 12.4x multiple currently accorded to 2005 earnings. Our price target implies a 19.5% investment return, including the stock's 4.34% dividend yield.

U.S. Bancorp currently trades at 12.4x and 11.6x our respective 2005-2006 operating earnings-per-share estimates of $2.46 and $2.63 and 4.63x tangible book value, a slight discount to the large-cap peer group.

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Japan's Megabanks

The Economist, 5 January 2006

THE world's biggest bank, with $1.6 trillion of assets, opened for business on January 4th, and you are forgiven a few trips of the tongue before you can say “Bank of Tokyo-Mitsubishi UFJ” as readily as “Citigroup”, the number two. The new entity is the core bank of Mitsubishi UFJ, formed last autumn and one of three huge groups that now dominate retail banking in Japan. All are the products of mega-mergers. Mizuho, the second-biggest group, was formed in 2000 by crunching together Industrial Bank of Japan, Dai-Ichi Kangyo Bank and Fuji Bank; Sumitomo Mitsui grew in 2001 out of the merger of Sumitomo Bank and Sakura Bank. All these entities at the time were in the greatest distress, and deep concerns about the state of the financial system occasioned government intervention on a vast scale.

What a difference time, lashings of public money and strong-arming by regulators have made. At the peak, in 1986, Japan's top banks made up over a quarter of the Topix stockmarket index by capitalisation. At the nadir, in April 2003, when the sky still looked like falling, they accounted for just 2.7%. Since then, however, bank share prices have risen up to 16-fold (see chart); banks have been the engine driving Japan's stockmarket to five-year highs. Meanwhile, bad loans have been written off and losses turned to profit. Last autumn the banks announced record first-half profits. Mitsubishi UFJ alone expects full-year profits of ¥520 billion ($4.4 billion) in the year to the end of March.

Now banks are even thinking of expanding overseas for the first time since their sharp retreat in the Asian financial crisis of 1997-98. This week Bank of Tokyo-Mitsubishi UFJ was said to be thinking about investing $300m in the state-run Bank of China—which would be the first Chinese stake of any big Japanese bank. Many analysts and investors express a growing confidence that the megabanks have not only turned the corner, but have a sunny path before them. Are they right?

Certainly, the banks are far healthier than they have been in a long time. At the end of March 2002, the big banks' ratio of bad to total loans stood at 8.4%. The government subsequently gave them until March 2005 to cut the number by half. The banks beat that, bringing the ratio down to 2.9%, and by last September to 2.4%. At the same time, banks have rebuilt their capital. Today, capital-adequacy ratios stand at 11%, comfortably above the 8% required for international banks.

Of course, none of this would have been remotely possible without government help, which is now being repaid. Mizuho expects to repay its remaining ¥600 billion in public funds this year, and Mitsubishi UFJ and Sumitomo Mitsui expect to take a year or so longer to repay their remaining aid, ¥820 billion and ¥1.1 trillion respectively. Both profits and the ability to repay bail-out money have been greatly boosted by a recovering economy, which has allowed the banks to write back big amounts of bad-loan provisions.

There are lingering health concerns. One is over information-technology systems—the reason why this latest merger was put off by three months, so as not to have a repeat of glitches that plagued Mizuho. Another is the scale of non-recourse lending by banks to property funds. But by and large, says Toshihide Endo, director of the major-banks division at the supervisory bureau of the Financial Services Agency, banks have now “put their past problems behind them at last, and have managed to get to the point where they can build strategies for the future.”

And the strategies? Awkward question. Given that so much of the banks' recent profits comes from provisioning write-backs, profitability remains abysmally low by international standards. In the core business of lending to corporations, the market is still topsy-turvy: the weakest credits pay a lower rate of interest than stronger ones, partly because the maturity of such loans is shorter, but largely because to demand more would send many weak companies to the wall. Profitability from lending will presumably improve when the central bank finally abandons its policy of zero interest rates, perhaps next year. At that point, lending rates would rise faster than would deposit rates, and banks would pocket the spread.

But almost everybody expects companies to raise money more from debt markets in future, by-passing the banks. That is why the big three are looking increasingly at lending to small and medium-sized enterprises (SMEs) and to catering better to retail clients, a class wretchedly treated hitherto. Sumitomo Mitsui, in particular, is focusing on SMEs with less than ¥1 billion in annual sales. The bank no longer demands collateral, but runs sectoral portfolios of loans. It promises to respond to requests within three days, with loans of up to ¥50m. This type of lending has grown fast, much of it simply poached from smaller local banks. As for the longer-term potential of SMEs, Koyo Ozeki, credit analyst in Tokyo at PIMCO Japan, an international bond-fund manager, points out that such lending will not necessarily be an automatic answer for the banks, because of the pressure of competition on interest margins.

Hope is therefore fixed on retail banking, the former poor relation, to generate not just interest income but welcome fees. Drab branches are slowly being tarted up, renamed consulting centres. Some are even open at weekends. There has been some success selling new products: Sumitomo Mitsui, for example, has made a go of selling cast-iron dollar bonds, such as those issued by the World Bank, as well as bond and equity mutual funds. All three banking groups are big on mortgages, and are attracted by consumer finance.

Yet building solid retail businesses will prove hard. For a start, with Japan's population likely to fall (see article), demography is not on the side of the banks. Mortgage lending, certainly, has grown, but this reflects a one-off shift as people borrowing from public institutions remortgage with private ones. Meanwhile, deep cuts in branch networks over the past few years, welcomed at the time for bringing down costs, are now working against the sowing and harvesting of new revenues. David Atkinson, banking analyst at Goldman Sachs, calculates that, flat out, staff at Mizuho, which has the least appealing retail business of the big three, could spend at most 20 minutes a year with each of the bank's individual clients. That is an infeasibly short time to sell complex yet profitable financial products.

The big banks, in other words, while out of trouble, are now likely to be plagued by poor profitability and productivity. They will therefore face increasing pressure from investors to cut costs further, for instance, by streamlining or outsourcing cumbersome IT systems and by cutting staff. That could take years. Meanwhile, they will be tempted to seek profits abroad where they cannot be had at home. That may not be wise without a strong domestic base to build on; still, Citibank's snatching of Guangdong Development Bank (see article) must be galling for Japanese banks which have sat on the sidelines of the China game. One American banker puts it more bluntly. Will Japanese banks commit overseas some of the mistakes made in the past? “You bet.”

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Ameritrade Votes to Acquire TD Waterhouse

Associated Press, Josh Funk and Chuck Brown, 4 January 2006

Omaha, Neb. (AP) -- Shareholders of online brokerage Ameritrade Holding Corp. approved the company's acquisition of TD Waterhouse Group Inc.'s U.S. retail securities business on Wednesday, an Ameritrade official said.

Voters approved each part of the $2.9 billion dollar deal, said Ellen Koplow, general counsel and corporate secretary of Ameritrade.

More details about the vote were not immediately available, Ameritrade spokeswoman Kim Hillyer said.

As part of the deal, Ameritrade will borrow almost $2 billion to pay each of its shareholders a $6 per share special dividend. Any investor who buys the stock and holds it when the deal closes, which is expected to happen on Jan. 24, will receive the dividend.

Those who held Ameritrade stock as of Nov. 16 were entitled to vote on the acquisition.

Analysts who follow the online brokerage industry have said the deal makes sense because it will likely give Ameritrade a leading position in the market.

Ameritrade expects to lead the online brokerage industry in trades after the acquisition by handling an average of 239,000 trades a day and to build on its roughly 25 percent share of the active investor market. By comparison, Charles Schwab Corp. reported 194,000 trades a day, on average, and E-Trade Financial Corp. said it handled 125,000 a day in the quarter that ended in September.

Here are the details of the $2.9 billion deal:

Ameritrade will give TD Bank Financial Group 196.3 million shares of Ameritrade stock and $20,000 cash for TD Waterhouse USA.

That will give the Canadian bank 32.6 percent ownership in the new TD Ameritrade, and make it the largest shareholder in the new company. Immediately after the deal closes, TD Bank Financial would offer to buy an additional 7.3 percent of outstanding shares for a minimum of $16 per share.

The agreement allows TD Bank Financial to have a maximum ownership of 39.9 percent for the first three years and a maximum 45 percent for up to 10 years. Toronto-based Toronto-Dominion Bank and its subsidiaries are known collectively as TD Bank Financial Group.

TD Bank Financial also will acquire Ameritrade's Canadian brokerage operations, for $60 million.

Ameritrade plans to obtain the financing for this acquisition from a consortium of Wall Street firms, including Citigroup Inc., Merrill Lynch & Co., UBS AG and JPMorgan Chase & Co. One loan of $1.65 billion is to be paid back in seven years, while a second loan of $250 million is due in six years. Ameritrade will also open a $300 million line of credit for operating capital.

Customers of Ameritrade and TD Waterhouse may have to wait until after the deal closes to learn exactly what this will mean for them. But a few things are clear.

Generally, the owners of TD Waterhouse's 2.3 million accounts will have to adjust to using Ameritrade's trading platform, and the owners of Ameritrade's 3.7 million accounts can expect to be offered investment advice through a nationwide network of branch offices created out of TD Waterhouse's 143 offices.

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Insurance Mergers Could Get Hot

Analysts expect a flurry of deals that could set a record for the industry in 2006.

CNNMoney.com, Shaheen Pasha, 4 January 2006

The sleepy insurance industry could see a lot of action in 2006, as consolidation in the arena gains steam.

Last year brought some big mergers in the industry, notably MetLife $11.5 billion purchase of Citigroup's Travelers Life & Annuity business as well as Lincoln National $7.5 billion acquisition of Jefferson-Pilot.

But analysts said 2006 should prove to be an even more active year for deals as interest rates remain low and corporations find themselves with more excess cash. Additional drivers include increasing demand for universal life and variable annuity products, as well as a largely untapped global market.

"Most life insurance companies lack the critical mass to survive long term," said Rob Haines, insurance analyst at CreditSights. "The sector is highly fragmented and rife with overcapacity. We do not see how most of the smaller players" can effectively compete and remain profitable in this environment.

According to insurance ratings firm A.M. Best, there are 1,262 rated life and health insurance companies in the United States today -- a huge number given the market environment.

But ever since the 2001 recession, with the stock market under pressure and regulators focused on corporate malfeasance, companies have been wary of making any deals.

Instead, life insurers became focused on turning around their own businesses and growing their stock prices. In the last year, however, as earnings growth improved, stock prices rebounded and companies began nibbling on deals.

In 2005, there were only 59 insurance company deals as of October with a total value of $39 billion, Haines said.

But in the current environment, merger activity could hit a record this year, surpassing the 190 transactions worth $82 billion recorded in 1998, he added.

The surge in demand for products such as variable annuities with guaranteed returns, as well as life insurance that doesn't lapse will drive some consolidation, said Julie Burke, senior insurance analyst at Fitch Ratings.

New guidelines from state regulators that require companies to hold more capital in order to offer these products are another factor likely to spur more deals, Burke and other analysts said.

The new guidelines could make it harder for smaller companies to meet stringent reserve requirements for these hot insurance and annuity products.

"Given the pressure from ratings agencies and rising capital requirements, if you're going to participate in life insurance and annuities, you need to be a significant player," said Suneet Kamath, senior research analyst at Sanford C. Bernstein & Co.

Companies that only dabble in the business may find it increasingly difficult to compete.

Analysts said the industry may see more financial institutions sell off their life insurance and annuities businesses to more established players, much like Citigroup's decision last year to sell its Traveler's unit to MetLife for $11.5 billion.

"A lot of people used to talk about the financial supermarket but it's clear that companies aren't getting rewarded for that model anymore," said CreditSights' Haines. "For the foreseeable future, it's likely banks will be spinning off (or selling) their insurance operations."

The market is paying particularly close attention to JPMorgan Chase amid speculation that the nation's No. 3 bank has put its own life insurance business on the auction block. A representative from JPMorgan declined to comment regarding a possible sale.

Property-casualty insurer Allstate is also attracting some attention as industry observers expect the largest publicly traded auto and home insurance to either spin off or sell its underperforming Allstate Financial unit, which sells life insurance and annuities, Haines said.

But as consolidation picks up, smaller life insurance companies will be the most likely targets, analysts said.

Haines said AmerUs Group and Protective Life Corp.are top candidates for acquisition. With market capitalizations of $2 billion and $3 billion, respectively, the companies are large enough to attract a potential buyer but still small enough to be digested by a larger corporation with relative ease, he said.

As for potential acquirers, analysts are placing bets on Prudential. The company closed out 2005 with a healthy $3.5 billion in excess capital that could be used for an acquisition. Haines said a small to mid-sized acquisition could bolster the company's scale without too much risk. Principal Financial is also in a solid position to make acquisitions in the near-term, Haines added.

Growth overseas could also fuel the consolidation fever, analysts said.

"A lot of domestic-based companies have expanded internationally and there is a feeling that there are opportunities abroad," said Andrew Edelsberg, assistant vice president in the life and health group at A.M. Best.

He said the domestic market is moving towards sophisticated life insurance products that are related to retirement savings while internationally the focus remains on basic life insurance and annuity products -- creating more opportunity for life insurers to make strategic acquisitions.

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World's Biggest Bank Debuts

Associated Press, Yuri Kageyama, 4 January 2006

The debut of the world's biggest bank, Bank of Tokyo-Mitsubishi UFJ, was marred Wednesday by a minor system glitch that halted some online remittance services on the bank's first day of business.

The bank's launch completes the merger of Mitsubishi Tokyo Financial Group Inc. and UFJ Holdings Inc., the world's largest financial group by assets at around 190 trillion yen, or $1.6 trillion (U.S.), topping U.S.-based Citigroup Inc.'s $1.55 trillion, based on most recent company figures.

The Japanese financial giants merged Oct. 1 to become Mitsubishi UFJ Financial Group Inc., but the merger of the group's core banks had been pushed back as engineers rushed to integrate their computer systems and automated banking machines.

But troubles surfaced Wednesday after the new bank's software prevented the processing of about 10 Internet-based remittance payment orders, according to Yuichiro Moto, a spokesman for the newly merged bank.

The bank was investigating the exact cause of the glitch, Moto said. All other operations at the bank seemed to be going smoothly, he said.

A similar merger effort about two years ago by rival Mizuho proved a disaster when a spate of computer glitches caused its ABMs across the country to go off line, causing double-billings on credit card purchases and stalling bill payments, cash transfers and withdrawals.

At a tape-cutting ceremony earlier Wednesday at Tokyo headquarters, Bank of Tokyo-Mitsubishi UFJ president Nobuo Kuroyanagi said the new bank still needs to boost profitability and come up with attractive investment products if it hopes to keep abreast of global competition.

"I'm not sure we should be talking about our weaknesses on our first day of opening for business," he said after cutting a red ribbon with huge scissors with two other officials in the lobby. ``It's a fact that we are lacking in profitability."

But he said his bank hopes to control about 50 per cent market share for Japanese companies doing business in Asia.

The banks' computer systems are not totally unified yet although they are linked up, and it's still undecided when the complete integration will take place, Kuroyanagi said.

The new bank's birth is the latest development in a continuing realignment of this country's banking sector, which has in recent years been slowly recovering from massive bad loans that had piled up during a decade-long economic slowdown.

Some analysts are skeptical about whether size alone will help Japanese banks compete against the likes of Citigroup and HSBC Holdings PLC.

"Size is often accompanied with a lack of focus and a slowness that results in losing touch with what the customers really need," Fariborz Ghadar, director of the Center for Global Business Studies at Penn State, said in an e-mail.

Fitch Ratings said Wednesday it has upgraded the outlook for Bank of Tokyo-Mitsubishi UFJ to positive from stable, reflecting that the good assets and capitalization of the combined bank could lead to a rating upgrade.

The Bank of Tokyo-Mitsubishi UFJ is among the three big banks that now dominate retail banking in Japan, including Mizuho Bank, and Sumitomo Mitsui Banking Corp.

Mizuho's parent group, Mizuho Financial Group Inc., was established in 2000 from the integration of the Industrial Bank of Japan, Dai-Ichi Kangyo Bank and Fuji Bank, while Sumitomo is the core bank of Sumitomo Mitsui Financial Group Inc., created in 2001 through the merger of Sumitomo Bank and Sakura Bank.

Mitsubishi UFJ Financial Group posted strong earnings in November due to lower bad-loan writeoff costs, and expects to post a group net profit of 520 billion yen ($4.4 billion) for the fiscal year through March 31, 2006.

Other banks are also posting healthy results, the latest indication that Japan's financial sector is on the mend after years of losses.

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Time is Right to Buy Options on Cdn Banks

But conditions this year provide a classic case study on when not to write options against your portfolio

Investment Executive, Richard Croft, 4 January 2006

Option premiums remain at or near 10-year lows, at least if we use as our proxy the Chicago Board Options Exchange volatility index (VIX) or the Montreal Exchange implied volatility index. The former measures implied volatility using options on the Standard & Poor’s 500 composite index; the latter measures implied volatility using options on the S&P/TSX 60 index.

The VIX closed Nov. 18 at 11.12%, which is well below the 200-day moving average of 13.75%. We tend to look at the 200-day moving average because it is a better measure of the trend in option premiums, and can be used as a proxy for fair value. Similar numbers can be found in Canada, as the Mx implied volatility index is at 14.1%.

The disparity between so-called “fair value” and the actual level of option premiums provides an interesting case study of why investors need to look at more than just one strategy when trading options.

We know, for example, that covered call writing is a reasonable long-term strategy. It can lower the risk associated with a buy-and-hold strategy. And over the past 15 years, both in Canada and the U.S., covered call writing as a strategy (before factoring in transaction costs) has actually outperformed buy-and-hold.

I cite the long-term performance of the Mx covered writers index. This is a passive option writing index that assumes an investor holds a long position in the S&P/TSX 50 iUnits and writes one-month, at-the-money calls against the shares. As each option series expires, the short option is settled in cash, and a new one-month, at-the-money call option is written.

Since December 1993 — the starting date — the Mx covered writers index has returned 10.36% compounded annually, vs 8.93% compounded annually for the S&P/TSX 60 iUnits. Neither the Mx covered writers index nor the S&P/TSX 60 iUnits accounts for dividends that would have been collected along the way. Moreover, the Mx covered call writers index has an annual standard deviation of approximately 11.91% vs 16.78% for the S&P/TSX 60 iUnits. Bottom line: covered call writing has, on a long-term basis, delivered better returns with less risk.

However, there are periods when covered call writing actually detracts from portfolio performance. This is particularly true in a choppy market environment with low premiums.

This year is a classic case study of when not to write options against a portfolio. Looking at the performance of our two proxies in 2005, the S&P TSX 60 iUnits are up 17.4%, compared with 2.49% for the Mx covered call writers index. To state the obvious, Canadian-based strategies that involve covered call writing have not fared well in 2005. And the main culprit is low option premiums.

In such an environment, as I have said in this column on more than one occasion, buying options makes sense at this stage in the market cycle. And I continue to believe that option-buying remains the strategy of choice.

There are a couple of ways to play this. The first approach is obviously to buy calls or puts on companies toward which you have a bias, either bullish or bearish. The second approach is simply to buy straddles on either the S&P 500 index (if you want to play the U.S. market) or the S&P/TSX 60 iUnits (if you want to play the Canadian market).

The key to any directional trade is to be right about the direction the underlying stock is about to move. Equally important is making certain not to overpay for the options. This point may seem counterintuitive, as I have just said that option premiums are cheap. But, as with any investment axiom, there are caveats. Options are cheap when you look at the cost of options on the broad market as measured by either the VIX or the implied volatility for options on the S&P/TSX 60 index.

But not all sectors of the market have cheap options. Energy stocks, for example, have been more volatile than the general market, making options on energy stocks generally more expensive. The same is true of options on gold stocks, although not to the same extent. On the flip side, options on financial services companies, particularly Canadian banks, are inexpensive, both in nominal terms and relative to the options on the broad market.

This suggests that buying calls or puts on energy stocks means a more significant move will have to occur in order to overcome the cost of the option. Not impossible, to be sure, but certainly challenging, especially given that we have already had significant moves in the energy sector.

On the other hand, buying calls — assuming a bullish bias — or puts — assuming a bearish bias — on bank stocks has a higher probability of success. It is quite probable, given how inexpensive bank options actually are, that the share values will move enough to cover the cost of the option.

Personally, I like the idea of buying calls on Canadian banks, for a number of reasons.

First, banking is a risk-management business that tends to follow the general direction of the economy. If we see a boost in the U.S. economy as a result of rebuilding efforts after two major hurricanes, stocks will rally. In that scenario, banks will rally and, because options on banks are cheap, the leverage will enhance the position more positively than would be the case if you were long options on a sector in which premiums were more expensive.

On the other hand, if we get a sell-off in the equity markets in 2006, which could happen if U.S. consumers become shell-shocked because of the high cost of heating oil and natural gas, equity investors may run for cover. In that scenario, banks are an attractive alternative with a high dividend payout.

Finally, if oil prices begin to subside or at least stabilize in, say, the mid-US$50s per barrel, energy stocks may fall slightly. And that also could cause some investors to move money out of energy and into, say, gold and perhaps — dare we say it? — financial services.

Because of the possibilities and because of the fact that options on banks are inexpensive, buying longer-term calls on any of the major Canadian banks may turn out to be an excellent low-cost option-buying opportunity.

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Cdn Bank Stocks are Losing their Allure

Although profitability has improved, the stocks of all the Big Six banks are dropping in value

Investment Executive, Carlyle Dunbar, 4 January 2006

Just about every investor owns a bank stock, and most investors regard them as close to bulletproof.

That’s why banks and other financial stocks dominate North American markets, especially in Canada. In this country, financial stocks account for almost $1 of every $3 of total market value; in the U.S., they account for $1 of every $5 of total market value.

So popular are these bank stocks, in fact, that banks alone account for 7% of the Standard & Poor’s 500 composite index and a hefty 19% of the S&P.

TSX 300 composite index. This is because banks have flourished in the past 20 years in the benign environment of a secular drop in interest rates and ample money supply.

If there is one thing the stock market does, it gives — and then it takes away. Any industry group that has had fair sailing for several decades is positioned to be overtaken by storms, if not disaster.

You have only to think of the U.S. automobile industry or the U.S. supermarket chains as examples. This systemic or cyclical risk has become a risk for bank stocks.

But valuations have also become a major risk. You clearly get less for each dollar invested in a bank stock today than you did even five years ago. Average profitability, however, has not changed much in recent years — and profitability is as variable as it ever was.

Over the long term, then, basic valuations have changed greatly. Today, banks trade between two and a half and three times their book value. Two decades ago, you could, at times, buy a bank stock for less than book value — a true bargain. At today’s multiples, there is no margin of safety, meaning that three times book value enters the high-risk zone for bank stocks.

Although book value is a theoretical measure for most businesses, it is real for banks because their only asset is money (although, increasingly, goodwill has been swelling their balance sheets).

Another way of looking at bank values is to see how much you get for your investment dollar. Each dollar that is invested in Royal Bank of Canada, for example, buys $8.20 of total assets. Five åyears ago, $1 invested in Royal Bank bought $10.54 of assets; and five years before that, a dollar bought $21.33.

The pattern of dropping value is the same for all Big Six banks. Bank profitability has improved since the 1980s, but not sufficiently to justify such a large swing in valuations.

Risk is increasing for more than just valuations. Monetary conditions are clouding over and rising short-term interest rates have flattened the yield curve, which is always a harbinger of a slowing business climate. A greater threat is the possibility of yield-curve inversion, with short-term rates higher than long-bond yields — an invariable precursor to an economic recession.

Return on equity

As the Canadian banks make their initial reports for the fiscal year ended Oct. 31, 2005, it is clear that their profitability is bumping along a ceiling. Over the past decade, return on equity has ranged as high as 20% for most banks. In the occasional exceptional year, ROE has been as high as 27% for an individual bank.

The contrast with their performance 20 years ago is not that large. Average ROEs were generally lower in the five years ended 1984 compared with the five years ended 2004. ROE also peaked around 20% in the first half of the 1980s, but there were no one-year spikes above that.

In the past decade, return on average assets has generally gone as high as 0.8% — again, with occasional exceptional years for a single bank going as high as 1.3%. Two decades ago, returns on average assets were definitely lower, however, hovering around 0.5% for most banks in the early 1980s.

In terms of volatility of profitability, there is little difference between the two periods. If anything, there was less variance or volatility in ROE and return on average assets 20 years ago.

Nevertheless, a comparison of bank returns in this decade and those of 20 years ago shows another thing: industry leaders and laggards change. Two decades ago, the TD Bank Financial Group produced the best average returns. Now, Royal Bank and Bank of Nova Scotia are the leaders.

High relative dividend yields, as well as frequent dividend increases, are the foundation of banks’ appeal. Up to the late 1970s, the yield from bank stocks differed little from the average market yield. After that, bank yields climbed relative to the market.

In the late 1980s, the TSX bank index yield was double the TSX composite index yield. At the banks’ peak in 2000, they yielded 2.9 times more than the TSX composite. This has subsequently dropped to the point at which the bank index dividend yield is about 1.8 times the market yield.

One final consideration: although bank stocks recently stood at their highest level in relation to the broad market in their 86-year stock market history, they have not improved this position since the beginning of 2003. This is actually their “normal” behaviour.

Since 1919, Canadian bank stocks have generally performed in line with the overall market — sometimes a little better; sometimes a little worse. The period from the late 1980s until the early 2000s, when bank stocks rose faster than the market, has been an exception.

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TD Banknorth Shareholders to Vote on Hudson United Acquisition

SNL Financial LC, 3 January 2006

Portland, Maine-based TD Banknorth Inc. ($31.82 billion) said Jan. 3 that its shareholders will vote on the company's pending acquisition of Mahwah, N.J.-based Hudson United Bancorp ($9.07 billion) on Jan. 11.

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Cdn Financial Industry by the Numbers

The Globe and Mail, Rob Carrick, 3 January 2006

So many devilishly interesting little numbers and factoids fly past me each year that it's impossible to tell you about them all, even though you'd be fascinated.

Seriously. The glory and greed of the financial industry is never as plain to see as when it's depicted by numbers like annual returns, fees, interest rates and such. Take a look for yourself in the first annual Personal Finance compendium of numbers that may not have received the attention they deserve (all due credit to Harpers's Magazine and its Harper's Index).

• $24.6-billion: The amount, according to on-line bank ING Direct, that Canadians have paid their banks over the past eight years in fees and service charges.

• 0: Interest paid on Royal Bank of Canada's Signature Plus account for people with a balance under $1,000.

• 0.05 per cent: Interest paid on the same account for VIP clients with the same balance.

• $4.97: The fee that people with the no-fee chequing account at President's Choice Financial pay once each month if they use their overdraft protection.

• 19 per cent: Interest rate PC Financial customers pay on their overdraft.

• 20.3 per cent: 2005 return of an exchange-traded fund called the iUnits S&P/TSX Capped Financials Index Fund, which comprises banks, mainly, but also insurers and other financial companies.

• 24.4 per cent: The return of the S&P/TSX composite in 2005, with dividends reinvested.

• 26: Number of Canadian equity funds, out of 266, that beat the index.

• 4: The number of Canadian equity funds that lost money in 2005.

• Minus-4.1 per cent: The return last year of Brandes Canadian Equity, part of the lineup of the respected U.S. money manager Brandes Investment Partners in Canada and the worst-performing fund in its category.

• 23 per cent: Return last year of an exchange-traded fund called the TD Select Canadian Value Index Fund that will be eliminated next March by its sponsor, TD Asset Management.

• 19.5 per cent: Return of TD Canadian Blue Chip Equity, a mutual fund managed by TD Asset Management.

• 0: Number of competitors that Barclays Global Investors will have in the Canadian ETF market after TD bows out.

• 7.1 per cent: The 2005 return of Mackenzie Ivy Canadian, the biggest Canadian equity fund of them all.

• $5.1-billion: The amount that people have invested in Ivy Canadian.

• 30.5 per cent: The 2005 return of Goodwood Capital Fund, the top performer in the Canadian equity category and an offering for small investors by the successful hedge fund manager, Goodwood Inc.

• $19.6-million: The amount money that investors have in Goodwood Capital.

• 1.5 per cent: The average return of the five largest Canadian money market funds in 2005.

• $14.8-billion: Amount of money investors are frittering away in these funds.

• 8: Ranking of Templeton Growth, once the gold standard for mutual funds in Canada, among the country's largest funds by assets.

• 1: Templeton Growth's perennial ranking by assets up until a couple of years ago.

• $5-billion: Assets in Templeton Growth at Nov. 30.

• $10.2-billion: Assets in the fund five years earlier.

• 0.3 per cent: The five-year compound average annual return of Templeton Growth.

• 9.4 per cent: Yield on a General Motors Acceptance Corp. of Canada bond due in January, 2010.

• 3.9 per cent: Yield on a Government of Canada bond due around the same time.

• 10.5 per cent: Dividend yield on General Motors shares, listed on the New York Stock Exchange.

• 3.6 per cent: Dividend yield for Canadian Imperial Bank of Commerce shares, the highest yielding of all the big bank stocks.

• $500,000: Minimum investment for King & Victoria Fund LP, a hedge fund.

• Minus-9.4 per cent: Your loss if you were an investor in King & Victoria Fund LP through the first 11 months of 2005.

• 3.5 per cent: Return over the same time frame for Sprott Hedge LP, the largest hedge fund in the Globefund.com database.

• 129: Number of income trusts and closed-end funds, out of the 428 tracked by Globeinvestor.com, that declined in value last year.

• 2: Number of trusts that lost more than 70 per cent of their value (Menu Foods Income Fund and Boyd Group Income Fund).

• 20.5 per cent: Return of the S&P/TSX capped income trust index in 2005.

• 16: Number of mutual funds in the Canadian income trust category, out of 50, that beat this performance.

• 1: Rank of the Nasdaq-100 Tracking Stock, a technology-focused ETF that tracks the 100 largest non-financial stocks listed on the Nasdaq Stock Market, among all U.S. and Canadian ETFs in terms of average daily trading volume.

• 1.2 per cent: 2005 return for this ETF; Minus-24.4 per cent: Five-year cumulative loss for this ETF.

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Wall Street Banks Pledge to Avoid Spending Excess

The Financial Times, David Wells, 2 January 2006

A hiring spree helped push up banks' expenses on Wall Street last year. But several leading banks that managed to keep revenues ahead of their rising costs are vowing to keep a rein on spending, and avoid repeating the excesses of the past.

Goldman Sachs, Lehman Brothers, and Bear Stearns all produced record full-year profits in 2005 and say they are eager to invest in people, and in business services, to keep profits growing this year. But they also claim they are keen to avoid the meltdown that followed the previous boom, should markets turn for the worse.

After the technology stock bubble burst, Wall Street weathered its biggest loss of jobs in a quarter of a century. Those employees who remained on staff had to give up many of the perks they had been offered to keep them from defecting to internet start-ups. Incentives included concierge services, increased meal allowances and personal Bloomberg terminals.

Nonetheless, banks are still pinching pennies, making sure they get bulk discounts when buying services, combing through telephone bills, and outsourcing tasks to cheaper workers in India.

Goldman Sachs had operating expenses of $16.51bn in 2005, an increase of 19 per cent. But the Wall Street bank was able to boost revenues by 21 per cent to $24.78bn and net income by 23 per cent to $5.61bn. Goldman spent $11.69bn on compensation and benefits, up 21 per cent from a year earlier, and its non-compensation expenses – such as office space, communications and fees for consultants and lawyers – rose 14 per cent to $4.82bn.

Lehman and Bear Stearns also managed to boost revenues and profits more than expenses.

But as Wall Street hires, it can become harder to control costs. Goldman and Bear Stearns boosted staffing levels by 8 per cent in 2005 and Lehman increased its staff by 17 per cent. All three plan to hire this year and will have to be diligent when awarding compensation, as well as when choosing and allocating office space, desks, phones, BlackBerries and the like.

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Betting on a Return to Normal Yield Curve through ETFs

Barron's, Jack Willoughby, 2 January 2006

Tired of second guessing the Federal Reserve Board on whether it will hike interest rates under new Chairman Ben Bernanke? Rest easy. Brian Rauscher, chief portfolio strategist at Brown Brothers Harriman, the New York private bank, has concocted a special New Year's cocktail mix of index ETFs that could allow you to profit as the yield curve twists.

"Our research has showed us that when the yield curve is at its steepest point, it pays to rotate from regional banks into diversified financials," says Rauscher, who developed Brown Brothers' proprietary system after moving from U.S. Trust. "Now, it's time to go the other way."

Normally, short-term interest rates are lower than long rates. The lower they are relative to long rates, the steeper the curve. But recently, long and short rates have been pressed together so tightly that there's almost no difference between them.

In fact, the curve was slightly inverted at week's end; the yield was 4.41% on the two-year Treasury, 4.39% on the 10-year. Financial shamans say that a flat or inverted yield curve anticipates a recession within one year or two. Modernist economists love to scoff at these old-time notions, arguing that the yield curve has lost its predictive value. (They're probably the same economists who have in prior epochs declared an end of the business cycle, the death of equities and the repeal of gravity.)

Rauscher is advocating a trading strategy that requires no forecasting of rates' direction. Instead, he says, you're simply "betting on the probability that interest rates will return to normal." And rates always do return to normal at some point. That's only, well, normal.

Here's how the strategy works. First you sell short the popular Financial Select Sector SPDR (XLF), an exchange-traded fund tied to the likes of Citigroup and Morgan Stanley. Then you plow the proceeds into an equivalent amount of Regional Bank HOLDRs (RKH). The idea is to keep these trades linked as a pair until the yield curve becomes steep once again -- a development that should help the regionals and hurt the big financials.

Right now, stocks of the big financials in the XLF are on the upswing, their diversified asset base and fee businesses favored by analysts. It's thought that they will weather a flat yield curve better than smaller, regional banks. But the prospects for the group may be overstated, according to Brown Brothers, which closely tracks earnings revisions to detect analyst sentiment. Roughly 34% of recent revisions for diversified financial companies in the S&P 1500 have been by analysts who see brighter prospects for them. That's a historically high level, and an oversupply of optimism often precedes a fall from grace.

In contrast, regional banks have fared worse, since they depend heavily on the difference between short-term rates, which they pay for deposits, and long-term rates, which they receive on their loans. RKH shares have fared poorly in the rising short-rate environment. Brown Brothers has found that 23% of rating revisions on banking companies were downward, indicating a severe lack of enthusiasm.

The widely varying performances of big financials and regional banks make Rauscher's bet attractive. In fact, the performance gap between the two hasn't been this wide since March 2000, when the tech bubble burst. (See chart.)

Once the strategy is in place, investors need only to wait for the yield curve to steepen. The short position in big financials will pay off as the sector's supposed advantage in a flat-curve environment becomes irrelevant. Likewise, the long position in regionals will be rewarded as the banks enjoy a fatter spread between their loan yields and deposit rates.

"This could well turn out to be an 18-month proposition, one with very little market risk," says Rauscher. "I'd anticipate keeping it on for a while." Of course, you could experience some pain if the yield curve continues to invert, but history shows that such periods are usually short-lived.

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Price Targets for Cdn Banks & Insurance

Bank of Montreal ($65.00)
• Blackmont Capital maintains a "hold", 12-month target price is raised to $62.00
• BMO Nesbitt Burns maintains a "market perform", target price raised to $65.00
• CIBC World Markets maintains a "sector performer", 12-18-month target price raised to $68.00
• Dundee Securities maintains a "market neutral", 12-month target price is raised to $65.00
• RBC Capital Markets maintains a "sector perform", target price raised to $63.00
• Scotia Capital Markets upgrades to "sector perform", 1-year target price raised to $72.00
• TD Newcrest maintains a "hold", 12-month target price is raised to $65.00

Bank of Nova Scotia ($46.14)
• Blackmont Capital maintains a "hold", 12-month target price is raised to $47.00
• BMO Nesbitt Burns maintains a "market perform", target price is $49.00
• CIBC World Markets maintains a "sector underperformer", 12-18-month target price raised to $48.00
• Dundee Securities maintains a "market neutral", 12-month target price is raised to $48.50
• RBC Capital Markets maintains a "sector perform", target price raised to $49.00
• Scotia Capital Markets "rating: restricted", 12-month target price is $56.00
• TD Newcrest maintains a "hold", 12-month target price is $48.00
• UBS maintains a "neutral", 1-year target price is raised to $49.00

CIBC ($76.41)
• Blackmont Capital maintains a "buy", 12-month target price is raised to $83.00
• BMO Nesbitt Burns maintains "outperform", 12-month target price is $81.00
• Credit Suisse First Boston maintains "outperform", 12-month target price is $82.00
• Dundee Securities maintains "neutral", 12-month target price is $78.00
• RBC Capital Markets maintains "underperform", 12-month target price is $76.00
• Scotia Capital Markets maintains "sector underperform", 12-month target price is $85.00
• TD Newcrest maintains "hold", 12-month target price is cut to $78.00

National Bank of Canada ($60.32)
• Blackmont Capital downgrades to "hold", 12-month target price is raised to $64.00
• BMO Nesbitt Burns maintains a "market perform", target price is $61.00
• CIBC World Markets maintains a "sector outperformer", 12-18-month target price is $22.00
• Dundee Securities maintains a "market outperform", 12-month target price is raised to $64.50
• RBC Capital Markets reiterates "outperform", target price raised to $65.00
• Scotia Capital Markets maintains a "sector perform", 1-year target price is $72.00
• TD Newcrest maintains a "hold", 12-month target price is cut to $63.00
• UBS maintains a "neutral", 1-year target price is raised to $62.00

Royal Bank of Canada ($90.81)
• Blackmont Capital downgrades to "hold", 12-month target price is raised to $93.00
• BMO Nesbitt Burns maintains a "market perform", target price is $92.00
• CIBC World Markets maintains a "sector performer", 12-18-month target price raised to $93.00
• Dundee Securities maintains a "market neutral", 12-month target price is raised to $92.00
• RBC Capital Markets maintains "outperform", 12-month target price is $96.00
• Scotia Capital Markets maintains "outperform", 1-year target price is $110.00
• TD Newcrest upgrades to "buy", 12-month target price is raised to $98.00

Toronto-Dominion Bank ($61.13)
• BMO Nesbitt Burns maintains an "outperform," target price is $66.00
• Blackmont Capital maintains a "hold," 12-month target price is raised to $64.00
• Desjardins Securities, target price is raised to $70.00
• Dundee Securities maintains a "market outperform", 12-month target price is raised to $62.00
• National Bank Financial maintains a "top pick," 12-month target price is raised to $68.00
• RBC Capital Markets maintains an "outperform," target price is raised to $70.00
• Scotia Capital Markets maintains a "sector outperform," 1-year target price is $75.00
• UBS maintains a "buy", 1-year target price is raised to $69.00

Manulife Financial Corporation ($68.27)
• BMO Nesbitt Burns maintains "outperform", 12-month target price is raised to $74.00
• Credit Suisse First Boston maintains "outperform", 12-month target price is $69.00
• GMP Securities Securities maintains "buy", 12-month target price is $70.50
• RBC Capital Markets maintains "top pick", target price is $74.00
• TD Newcrest maintains "buy", 12-month target price is raised to $73.00

Sun Life Financial Inc. ($46.73)
• BMO Nesbitt Burns maintains "outperform", 12-month target price is $51.00
• GMP Securities Securities maintains "buy", 12-month target price is $53.00
• National Bank Financial maintains "outperform", 12-month target price is $50.00
• RBC Capital Markets maintains a "sector perform", target price is $47.00
• Scotia Capital Markets maintains a "sector perform", 1-year target price is $46.00

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