RBC Balks at Trust Structure

Duncan Mavin, Financial Post, 17 October 2006

Royal Bank of Canada helped spark a volatile debate on income trusts last year by indicating some parts of the bank's business could be turned into a trust.

But yesterday Canada's largest bank provided a categorical statement it will not join in the latest wave of income trust conversions sweeping through corporate Canada.

"We do not have plans to convert any of our operations into an income trust," said David Moorcroft, senior vice-president of communications for RBC.

"It's an official no," Mr. Moorcroft said yesterday.

The bank's statement appears to settle its position on the controversial income trust issue that proved a major headache for the Paul Martin Liberal government.

At an investor conference in September, 2005 -- days before the Liberal government caused a political firestorm by announcing a review of income trusts, which are believed to be draining hundreds of millions of dollars from federal taxation coffers -- RBC chief executive Gord Nixon was reported to have said that all companies, including banks, were under pressure to jump on the trust bandwagon.

Mr. Nixon said at the time that for parts of the bank's business "it would make sense for us to look at" trust conversion.

Income trusts pay out earnings to investors before any corporate taxes and have tripled in numbers over the past five years as investors look for income producing investments.

In contrast, corporations must pay federal tax before determining what is left to be paid out as dividends.

As a result, a number of Canadian corporations have felt pressure from shareholders to convert to the more tax-efficient trust structure.

In recent weeks, the debate on trusts has been revived thanks to a series of high-profile trust conversion announcements, including those at BCE Inc. last week and a similar move by Telus Corp in September.

Financial services firms too have joined in the trust party -- Dundee Wealth Management Inc. announced last week it will spin off 15% of its investment management division into an income trust, while CI Financial has also converted to trust status.

Those moves have led to some speculation that other Canadian corporations, including the banks, would consider trust conversion.

However, RBC's rivals also denied they will turn all or part of their operations into trusts.

A spokesman for Toronto-Dominion Bank said, "At this time we have no plans related to income trust conversion. We're very focused on investing in and growing our businesses in both Canada and the U.S."

Bank of Montreal and Bank of Nova Scotia offered similar messages, saying they have no plans to convert any part of their business to a trust at the moment. A spokesman for Investors Group offered a similar message.

Also, Canadian Imperial Bank of Commerce chief executive Gerry McCaughey said at an investor conference in September that banks would only be able to consider trust conversion after "significant" discussions with regulators.

The Bank Act -- the main law regulating the banks' behaviour -- does not permit the banks to convert their businesses into trusts.

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Foreign Banks in Canada

Investment Executive, Rudy Mezzetta, 16 October 2006

Foreign banks are playing an important role in Canada’s financial services industry. Despite the challenges of competing against established domestic banks, they are slowly gathering a growing slice of the market.

They have done so, experts say, by concentrating on distinct product and service offerings, or by focusing on the needs of a particular customer segment.

“We have seen some successes among the foreign banks,” says Diane Kazarian, a partner at PriceWaterhouseCoopers LLP in Toronto. “We have seen that success usually when they’ve done excellent target marketing; when they’ve provided an excellent product, in terms of origination, servicing and selling; and when they’ve done so at low cost.”

The three biggest foreign bank subsidiaries, as of July 30, are: HSBC Bank Canada, with $53.1 billion in total assets; ING Bank of Canada, with $22.7 billion; and Citibank Canada, with $14.7 billion. According to a Statistics Canada report released earlier this year, foreign banks’ share of the Canadian banking market, in terms of value of services produced, rose to 7.9% in 2004 from 5.7% in 1997.

Still, the foreign banks’ presence here remains relatively small. National Bank of Canada, by far the smallest of the so-called Big Six Canadian banks, is roughly twice as large as HSBC Bank Canada, the seventh-largest bank in Canada.

And foreign banks have more to contend with than just the size and brand recognition of the Big Six. They also have the Canadian regulatory environment to cope with.

Foreign banks can choose to incorporate themselves as a separate Canadian bank subsidiary, known as a Schedule II bank, or as a foreign bank branch, known as a Schedule III bank.

Schedule II banks have all the powers of a domestic bank but, as separate entities from their parents, they aren’t able to leverage fully the parent bank’s lower cost of capital.

Schedule III banks are subject to key restrictions, which in effect limit them to providing only investment banking services, usually to companies in their home country that are doing business here.

Some foreign banks have both Schedule II and Schedule III entities.

Over the years, many foreign banks have come and gone. Last November, Bank of Nova Scotia bought NBG Bank Canada, the Canadian subsidiary of National Bank of Greece SA, for an undisclosed amount. In August, Bank of Montreal acquired Bcpbank Canada, the Canadian subsidiary of Portugal’s Millennium Bcp, for $41 million. Both deals gave the big Canadian banks a fairly inexpensive way to enter a niche market.

“Customers are tough to acquire,” says Kyle Murray, professor of marketing at the Richard Ivey School of Business at the University of Western Ontario in London, Ont. “When you can get them cheap, it’s better than an ad campaign.”

“The reality at the retail level is this is an extremely competitive market,” says Raymond Protti, president and CEO of the Canadian Bankers Association. “[Foreign banks] are competing against five, six, seven active, aggressive players in the market. To do that successfully, you have to have a really specialized niche or a parent with an enormous amount of capital.”

Vancouver-based HSBC Bank Canada, a subsidiary of London-based HSBC Holdings PLC, has prospered by leveraging the global expertise of its parent, by acquiring more than dozen smaller banks over the years and by focusing on the mid-market and not just corporate and institutional business, says the firm’s COO, Sean O’Sullivan.

Because of its links with its parent, HSBC Bank Canada, which started in 1981, can also draw on a loyal base of Asian-Canadian customers. But, O’Sullivan says, a foreign bank can’t survive in Canada over the long term if its sole focus is serving an ethnic niche.

“A niche market eventually goes away,” says O’Sullivan, who argues that as an immigrant community matures, its need for a bank all its own diminishes. “A niche is good place for a foreign bank to start, but you can take it only so far.”

O’Sullivan believes that in the retail marketplace, any new foreign-bank entrant would have a very tough go. “Given the regulatory environment, the competition from the Big [Six] and us, it is almost impossible to compete [in the retail space] unless you can make a major acquisition,” he says.

ING Bank, a subsidiary of Holland-based ING Groep NV, entered Canada in 1997 and shook things up by leading with one key product — a high-interest savings account — a branchless set-up and an effective marketing campaign. Today, ING Bank offers other products, including mortgages and mutual fund distribution.

New York-based Citigroup Inc. has both a Schedule II bank, Toronto-based Citibank Canada, and a Schedule III entity, Citibank NA, the latter of which has $9.4 billion in assets. Citigroup has roots in Canada going back 50 years, and offers credit cards, consumer finance, and private and retail banking, among other products and services. It is also active in the corporate and institutional marketplace.

“If I were giving advice to a foreign bank entering Canada, I would say be completely customer-centric,” says Grant Rasmussen, president and CEO of UBS Bank Canada, the Toronto-based subsidiary of the Swiss banking giant. “If you look at what ING did, for example, it came out with a much better offering than there had been previously. It caught the attention of the marketplace.”

UBS Bank Canada and its Schedule III sister, UBS AG Canada Branch, are involved in investment banking, global asset management and private wealth management for high net-worth (more than $1 million in assets) and ultra-high net-worth (more than $50 million) clients.

The entry and retreat of foreign banks have often followed business cycles, experts say. But there may be another reason a foreign bank would want to gain a toehold.

“If mergers between the Big Six were to become more of a possibility,” Murray says, “and banking regulations were to change, it wouldn’t be a bad idea, if you were a foreign bank, to have a brand identity here.”

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Why Banks Won't Convert to Income Funds: A Lust for Fees

The Globe and Mail, Eric Reguly, 14 October 2006

You're a bank shareholder and you're grumpy. When will the bank CEOs hit the income trust button? Telus and BCE did it and saw their shares pop. Dozens of other big companies will follow because the feds apparently don't have the guts to shut down the trust market. Surely, the banks, or juicy parts thereof, will be next. It's the CEOs' fiduciary duty to game the tax system to create instant value. Forget long-term wealth creation -- that's for deluded U.S. and European investors and their backward economies.

Banks seem perfect candidates for trust status. They are big, dominant beasts that pile up more capital than they need and often spend it recklessly. They haul in obscene profits and pay a lot of taxes. With the exception of Bank of Nova Scotia, they are largely confined to the Canadian market. Trusts work best when they're not cluttered with income from countries that, bizarrely, insist on businesses paying tax.

Royal Bank has a market value of almost $62-billion. Turn it into a trust, eliminate the tax bill and a bank worth perhaps 25 per cent more flies out the other end like a cannon ball. Suddenly, you've got an $80-billion bank and a fat smile on Gord Nixon's face. He had been fretting about the bank's slide in the international rankings. A trust would propel the bank in the opposite direction without having to do so much as open a new branch.

Dream on. It's almost surely not going to happen. What certainly won't happen is a trust formed by a bank in its entirety.

An inconvenient bit of legislation called the Bank Act insists that banks, that is, lenders, be structured as banks, that is, not trusts in their various guises, like limited partnerships. Okay, but a bank is hardly a bank in the classic definition of the term. They have become all things to all people. There is asset and wealth management, insurance, capital markets, trading, credit cards and businesses you never heard of, like the interbank settlements system. Theoretically, the non-lending bits -- wealth management is probably the best example -- would make ideal trusts. Mutual funds flogger CI Financial boosted its value considerably when it went from corporation to trust earlier this year.

So let's go lads! Again, it's not that simple. Start with some basic psychology. The banks are genetically programmed to do one thing -- get bigger for the sake of getting bigger. You can spot the future bank CEO contender in any kindergarten class. He's the kid glommed onto the biggest toy truck. The teenage contender is the guy who thinks the oil sands are really neat because they use trucks the size of houses. Every bank CEO is obsessed with penetrating every financial services market and dominating it, obsessed with merging with other banks to create enough bulk to make huge acquisitions.

Turning into a trust would move them up a few shoe sizes on the Toronto Stock Exchange. But it wouldn't actually make the business bigger. On the other hand, turning wealth management or other non-lending divisions into trusts -- their sale, in effect -- would substantially reduce a bank's size and the number of the CEO's playthings. That's no fun.

The threat of political interference has to make the banks wary too. A year ago, the Liberals tossed a bucket of water onto the trust bonfire and arguably lost the election for it. The Tories have given no indication they will soon pronounce on the pluses and minuses of the resurgent trust market, even though they must fear that turning Canada into a nation of coupon clippers might damage long-term competitiveness and tax revenue. The feds had an opportunity to reveal their thoughts when Telus and BCE announced their conversions, and passed.

But converting large parts of the banks might push the feds over the edge. If the Finance Minister reacted, say, by slapping a small tax on trust distributions, the trust market would wither, perhaps die. Then the banks would be in real trouble, for the simple reason that their Bay Street arms have been making fortunes on trust initial public offerings and conversions.

They love the trust business because it is essentially immune from foreign competition. Trusts are a retail product; selling them requires retail distribution networks, which firms like UBS, Citigroup and JPMorgan lack in Canada. And the numbers are huge. Six years ago, the value of the trusts on the TSX was less than $20-billion. Today, it's $200-billion. Next year, with the arrival of BCE and Telus and other biggies, it could easily be $300-billion. When you've all but lost the cross-border business to American investment banks, you don't want to upset what remains. With every trust IPO, Bay Street collects a 5-per-cent underwriting fee. Every time a trust hoses out new units to finance an acquisition or a big capital expenditure program, it collects 4 per cent.

In other words, the value of exposure to the rapidly expanding trust market may offset the value of converting chunks of banks into trusts. Banks don't like paying taxes. But they must know that keeping the taxman happy by avoiding trust status will earn them political brownie points and potentially endless trust underwriting fees.

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Life Insurance Cos in Takeover Speculation

Bloomberg, Hugh Son, 13 October 2006

Shares of UnumProvident Corp., the largest U.S. disability insurer, had their biggest gain in more than a year on speculation the company may be a takeover candidate.

The stock climbed $1.84, or 9.3 percent, to $21.72 in New York Stock Exchange composite trading, the most since August 2005. Canadian insurers including Sun Life Financial Inc., Manulife Financial Corp. and Great-West Lifeco Inc. are among potential buyers, according to Colin Devine, an analyst at Citigroup Inc. in New York.

"We have long viewed UNM as an attractive consolidation candidate if doing so would not get an acquirer downgraded," Devine wrote in a research note today. He has a 'buy' rating on the Chattanooga, Tennessee-based company.

Standard & Poor's and Moody's Investors Service lowered UnumProvident's credit ratings to junk in May 2004 after the company recognized shortfalls in reserves for claims. Later that year the insurer settled with regulators probing allegations it improperly denied benefits to clients.

UnumProvident spokesman Jim Sabourin declined to comment on the speculation, as did Peter Fuchs, spokesman for Manulife and Sun Life's Michel Leduc. Marlene Klassen, spokeswoman for Great West Life, didn't immediately return a call seeking comment.

The stock has fallen 65 percent since its high of $61.88 in 1999. In August, UnumProvident said it was taking longer than expected to lower its rate of payouts because of delays in a restructuring triggered by the regulatory settlement.

"This company has underperformed for so many years that if someone made a legitimate offer to the board it's kind of hard for them to argue they should remain independent," said Anton Schutz, who helps manage $260 million as president of Mendon Capital Advisors Corp. in Rochester, New York.

The firm sold its UnumProvident shares about a month ago, Schutz said.

Edward Spehar, an analyst at Merrill Lynch & Co. in New York, said he was 'skeptical' of a takeover. The shares are worth something in the 'high teens,' he wrote in a research note that rated the company a 'sell.'

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US Fund Firms, Banks Vie for Sun Life's MFS

Scotia Capital, 13 October 2006

Event

• Yesterday CNBC reported Mellon Financial and Wachovia are both bidding for MFS, which we believe is likely to fetch a price tag in the US$3 billion range, with a deal expected to be announced in the next few weeks.

What It Means

• The reported US$3 billion price tag, or 15x 2006E earnings for MFS is 18% below our estimated value (18x or $7.25 per SLF share) and we suspect significantly below Street expectations.

• An outright sale of MFS at this price, with a significant share buyback using the proceeds (either 60 or 50 million shares depending on a 20% or 35% tax rate on the gain), would be dilutive by $0.01-$0.06 per SLF share, we estimate.

• A vend-in deal would give SLF less than 20% ownership of either acquirer, essentially ruling out equity accounting and forcing SLF to record only dividends and the change in market value as income. We estimate SLF would own 16% of Mellon or just 3% of Wachovia.

• If equity accounting were allowed for the Mellon deal we estimate SLF's share of cost cuts (10% of combined asset management operating expenses, or 30% of MFS operating expenses) to be $0.05 per share.

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The Globe and Mail, Andrew Willis, 13 October 2006

As Sun Life Financial Inc. screens suitors for its U.S. money management arm, the insurer is finding that the potential partners with the most to offer aren't the richest bidders.

Sun Life has found both U.S. fund companies and cash-rich banks are vying for MFS Investment Management, a Boston-based money manager worth up to $5-billion (U.S.) that the Toronto-based insurer has been shopping since the summer.

When Sun Life began its strategic review, the company's ideal outcome was swapping 100-per-cent ownership of MFS for a 20- to 49-per-cent stake in a larger, publicly traded money manager, according to sources in the money management industry and at investment banks. At least two fund managers have made it through Sun Life's initial round of screening, according to investment bankers working with bidders. They are Nuveen Investments Inc. and Federated Investors Inc.

If Sun Life could merge Boston-based MFS with either firm, it would come close to fitting that ideal description, as Chicago-based Nuveen has a market capitalization of $4.1-billion and Federated Investors of Pittsburgh sports a $3.6-billion capitalization. Sun Life has told bidders it wants to strike a deal by the end of the year.

Nuveen has won kudos in the past for its ability to integrate acquisitions, and the firm now has six different fund families and $149-billion of assets. Federated is focused on mutual funds and has $210-billion in assets.

But the MFS auction, which is being run by Morgan Stanley, has attracted at least two ambitious U.S. banks with fund management arms. Wachovia Corp. and Mellon Financial Corp. are both interested, according to reports on the CNBC business television network and wire services. If either ended up buying MFS and paid with shares, Sun Life would end up with small holding in a U.S. bank. A cash deal would likely mean a $3-billion gain for Sun Life, but the insurer does not need extra capital.

The prospect of a bank buying MFS put a damper on the insurer's stock price in the past two days and left analysts scratching their heads. "In our view, neither of the two [bank] suitors is ideal from Sun Life's perspective," Mr. Mendonca said. He wrote in a note to clients: "Based on the move in the stock following increased speculation of an MFS transaction, we believe that an outright sale is not what investors had in mind."

Since speculation on negotiations with Wachovia and Mellon emerged on Tuesday, Sun Life shares are down 85 cents (Canadian) or 1.9 per cent on the Toronto Stock Exchange, closing yesterday at $44.74.

"There's a scenario that sees MFS merged with Mellon's money management arm, then the resulting company spun out, and jointly owned by Sun Life and Mellon, but that's a complex deal to do," said one financier involved in the bidding.

Sun Life, Canada's second largest insurer, has owned MFS since 1982. With $168-billion (U.S.) under management, the fund company ranks as the 45th largest U.S. money managers. Any deal would vault it into the top tier. Having a publicly traded U.S. arm would also put a precise value on the unit. In the past, Sun Life executives have expressed frustration with the perceived lack of premium that investors ascribe to MFS.

In addition to the increased marketing heft that comes with size, analysts say a merger of MFS would help the company improve profitability and fund performance, which currently lag peers. For example, MFS could cut costs by outsourcing administration and moving to less expensive office space.

MFS's assets are split almost evenly between mutual funds and institutional accounts. The firm had $6.8-billion in net deposits since the start of 2005, as institutional sales offset redemptions from stock and bond funds.

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Financial Post, Duncan Mavin, 13 October 2006

Speculation that Sun Life Financial Inc. will sell Boston-based MFS Investment Management to U.S. banking giant Wachovia Corp. was dismissed as just one of a number of possible outcomes by Sun Life and by insurance industry analysts yesterday.

Sun Life said in September it has engaged advisors to consider "strategic alternatives" to improve performance at MFS, the laggardly asset management subsidiary that has been a drag on performance and the company's stock price of late.

That has lead to a wave of speculation about possible buyers for the company, with Wachovia the latest name to be added to the list. There have also been rumours in the U.S. media that Pittsburgh-based Mellon Financial Corp. is another possible suitor.

A spokesperson for Sun Life would not comment on the speculation.

The spokesperson acknowledged that MFS has already been linked with several possible buyers but he said that no decision has yet been made whether selling the asset manager or any other type of transaction is even the most desirable next step.

In fact, Sun Life is thought to be eyeing a range of options, namely; improve profitability without any deal with an outside party; sell off MFS; or find another asset manager to partner with it. The company's preferred outcome at the moment is thought to be a deal to roll MFS into another asset manager, with Sun Life then taking back a share of the combined entity of between 20% and 49%.

Analysts, meanwhile, said there would be many parties interested in MFS, which may or may not include the companies whose names have been thrown into the ring so far.

"I think Sun Life's conducting a pretty wide search and there are lots of candidates that fit the other side of the equation," said UBS Investment Research analyst Jason Bilodeau.

Genuity Capital Markets analyst Mario Mendonca went a step further.

"In our view, neither of the two potential suitors [Mellon or Wachovia] is ideal from Sun Life's perspective," said Mr. Mendonca in a note.

A deal to sell MFS to Wachovia with Sun Life taking back a minority interest in the larger wealth management company would leave Canada's second-largest insurer with only a small share of about 4% or 5% in the combined company, said Mr. Mendonca.

Although it is "conceivable" that Sun Life could do a similar deal with Mellon -- taking back about 20% of the combined company -- "we are hard pressed to believe that Sun Life would benefit from owning a very small interest in Wachovia," said Mr. Mendonca.

If Wachovia is the winning bidder for MFS, Sun Life would be more likely to receive cash for its interest in the asset manager, he said.

But the insurer already has plenty of capital and raising further cash, possibly in excess of $3-billion, from selling MFS outright "is not what investors had in mind," said Mr. Mendonca.

Sun Life currently owns about 98% of the shares in MFS, which oversees about US$170-billion for clients.

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Morgan Stanley Upgrades Manulife

Manulife Financial was upgraded from 'underweight' to 'equal weight' by Morgan Stanley. The price target was raised from C$38.00 to C$39.00 per share.

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NBF Cuts TD Bank to 'Sector Perform'

Toronto-Dominion Bank was downgraded from 'outperform' to 'sector perform' by analyst Robert Wessel at National Bank Financial. The price target is C$72.00 per share.

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Scotia Capital, 12 October 2006

Price Competition in Discount Brokerage - U.S. Platforms Under Pressure

• Bank of America announced that effective immediately, its primary retail brokerage company, Banc of America Investment Services, Inc., will offer free online equity trades for self-directed investors who maintain a combined balance of US$25,000 or more in BAC deposit accounts.

• Customers with a combined US$25,000 in CDs, savings and checking accounts can make up to 30 free stock trades per month.

• The potential impact of this particular announcement is difficult to gauge, although the incumbents feel that active trading rates are already low, with the primary concern for these traders being the ability to execute. However, this announcement is consistent with the trend of lower pricing and increased competition.

• TD Ameritrade shares fell 11.9%, with E*Trade declining 8.8% and Charles Schwab declining 4.7% in response to BAC's announcement.

• In April, AMTD announced a simplified pricing structure of US$9.99 for all equity trades regardless of the number of shares or order type. However, BAC's announcement creates further concerns about earnings and profitability for the brokerage industry as price competition is expected to continue to put pressure on margins and earnings.

• TD AMTD earnings represented 6% of TD Bank earnings in Q3/06. Every 10% decline in TD AMTD earnings would impact TD earnings by 1%.

TD Ameritrade to Announce Fiscal Year End Results - October 24

• AMTD will announce fiscal year end results on Tuesday October 24, 2006. Current IBES estimates are US$0.22 per share for the September quarter and US$0.89 per share for the year end.

• Earnings estimates (IBES) for FYE 2006 declined 7% to US$0.89 from US$0.96 going into 2006, primarily due to fee cuts. We suspect earnings will continue to be under pressure due to price competition, with further earnings estimate reductions possible.

TD Banknorth - Earnings Expected to Decline 13% in 2006

• TD's U.S. platforms continue to face a difficult operating environment, particularly TD Banknorth. TD Banknorth’s fiscal earnings are expected to decline 13% to US$2.17 per share (IBES) in fiscal 2006 as the bank continues to face margin pressure, flat/inverted yield curve and price competition in deposits.

Maintain 2-Sector Perform on TD Bank

• Our 2006 and 2007 earnings estimates remain unchanged at $4.67 per share and $5.15 per share, respectively. TD continues to rely on TDCT and wealth management for earnings momentum with BNK and potentially AMTD muting earnings growth.

• Maintain 2-Sector Perform rating on shares of TD as the strong operating performance of TDCT is being somewhat offset by weakness at BNK and AMTD.

• In the third quarter, BNK and AMTD earnings represented 14% of total bank earnings, with BNK representing 8% and AMTD 6%.

• We expect TD valuation to trend to a premium P/E multiple to the group longer term, but in the near term, concerns about the bank's U.S. operating platforms are expected to negatively impact valuation.

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S&P Cuts TD Ameritrade to Hold

Shares of discount brokers fell Wednesday after Bank of America announced a plan to offer free online stock trades for some account holders

BusinessWeek, Sonja Ryst, 11 October 2006

Bank of America unveiled a plan to offer free online equity trades to about 40% of its customers, hammering its rivals' stock prices with the latest skirmish in a commission war that has lasted for years. But industry players remain calm.

The Charlotte, N.C.-based financial-services giant serves around 54 million households, or about half of those existing in the U.S. On Oct. 11 its primary retail brokerage unit, Banc of America Investment Services, said it will offer up to 30 free online equity trades per month for self-directed investors with a combined balance of $25,000 or more in Bank of America, N.A. deposit accounts.

"We're interested in building quality relationships with customers," said Liam McGee, president, Bank of America Global Consumer & Small Business Bank, and Brian Moynihan, president, Bank of America Global Wealth & Investment Management, in a conference call on Oct. 11. The new plan, which started on Oct. 11 with promotions in Northeastern cities such as New York, Philadelphia, and Boston, is expected to roll out across the country by February of next year.

When asked how much revenue they expected to lose initially from the new plan, Moynihan and McGee declined to quantify. "It's not a material number," they said at the conference call. They care more about grabbing customers - particularly those that already have deposit accounts with Bank of America but are doing their stock trades with other firms.

Investors sold Bank of America's rivals after the news. TD Ameritrade Holding plunged 11.9% to $16.82 per share and Charles Schwab sank 4.7% to $17.22 near closing time on the Nasdaq, while E*Trade Financial lost 8.8% to $22.31 per share on the New York Stock Exchange.

"It's largely an over-reaction," said Patrick O'Shaughnessy, an equity analyst at the Chicago investment research firm Morningstar.

When online brokerages began their price war a few years ago after the dot.com bubble burst, critics had asked whether the industry could survive. But now, discount brokerage firms have resolved their problem by figuring out other ways to earn revenue, such as selling margin loans for use with investments or charging fees for asset management. Brokerage trading revenue only accounted for about 16% of Charles Schwab's total net revenue as of the second quarter, 22% of E*Trade's, and 39% of TD Ameritrade's.

Now that Bank of America has started to give trades away, O'Shaughnessy expects commissions to fall further industry-wide. "But I don't think it's catastrophic," he added.

Standard & Poor's Corp. pointed out that TD Ameritrade might have a tough time winning market share, in spite of synergies from Ameritrade's $2.9 billion purchase of TD Waterhouse announced last year. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.) Equity analyst Royal Shepard downgraded the stock to hold from buy on Oct. 11, explaining that TD Ameritrade "faces challenges from Bank of America's announced offer" given competitive pricing conditions and ongoing industry consolidation.

TD Ameritrade disagrees and has no plan to change its pricing, which is currently at $9.99 per online equity trade. "Zero commission pricing is not new within our industry," said Katrina Becker, a spokeswoman at the Omaha, Nebraska-based firm, which has around 6 million clients. Before buying TD Waterhouse, the legacy Ameritrade had charged $10.99 per online equity trade. TD Ameritrade had already tried a free online equity trading offering for some customers in 2000, only to discontinue it in early 2005. Winning market share "is about more than the price," Becker says. "It's things like the tools, the trade execution and the service."

Jarrett Lilien, the president of E*Trade, felt frustrated about how investor fears of a price war made investors sell his company's stock today. "I don't see pricing as the battleground. I see functionality as the battleground," he said. Lilien added that prices are already low in the industry, so businesses have to compete by providing better services, such as advanced order types that automatically sell stocks at predetermined price points. E*Trade added 1,000 customer representatives in the past year so it can compete with better service, for example.

The online business performance services firm Keynote Systems found that Web site service levels in the brokerage industry far exceed other industries, with industry average reliability of 99.5%, the highest reliability rating of any industry measured by the company. According to the study, pages that download in more than one and a half seconds, a download time that is considered excellent in other industries, are outside best of class in the brokerage industry.

"Investors have very high expectations of online brokerage Web sites both in terms of the customer experience and in terms of service levels," said Dr. Bonny Brown, director of research and public services for Keynote. "Given the very competitive state of the brokerage industry, performance problems and customer experience frustrations can translate into problems in attracting new investors." Ameritrade and Schwab were among those judged to provide the industry's best overall service levels.

This isn't the first time Bank of America has gunned for more customers with a price cut. On Dec. 1, 2005, for example, Bank of America established a plan to charge Bank of America personal checking account holders $7 or $10 per trade for online self-directed equity transactions. Customers who had only the self-directed brokerage relationship got charged $14.00 per trade, reduced from $19.95, which had previously been the cost for everyone.

Wells Fargo offered a free online equity trading component for the first time in mid-2005, when customers with more than $250,000 deposited with the San Francisco bank could do 50 online trades per year at no charge. "We don't have plans to change our fees," said Kathleen Golden, a spokeswoman at Wells Fargo.

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TD Ameritrade Investors Put Stock in Merger Success

Special to The Globe and Mail, Peter Moreira, 10 October 2006

In case you hadn't noticed, Sam Waterston has replaced Stuart the multicolour-mohawked day trader in Ameritrade's advertisements.

It's not just that Stuart -- the guy who called his girlfriend's dad a chicken for not investing more -- now seems a relic of the dot-com boom. Mr. Waterston, who was once cast as Abraham Lincoln, personifies strength and dignity, which is more fitting for Ameritrade since it added the initials "TD" to the beginning of its name.

The new image is the result of Toronto-Dominion Bank merging its TD Waterhouse USA unit with Omaha, Neb.-based Ameritrade Holding Corp. in January, to form TD Ameritrade Holding Corp., the No. 3 discount brokerage in the United States.

The deal, announced in June, 2005, was something of a coup for both TD Bank chief executive officer Ed Clark and his Ameritrade counterpart, Joe Moglia. Ameritrade at the time had two problems: Not only was it a unidimensional business designed almost exclusively for on-line day traders, but it also was facing an unwanted $6.2-billion (U.S.) takeover bid from New York-based rival E*Trade Financial Corp. TD's Mr. Clark had a different problem: He wanted to merge the Waterhouse wealth management unit with another discount broker, but he also wanted to retain control of the merged entity.

To solve these problems, TD agreed to wrap Waterhouse into Ameritrade, taking 32 per cent of the merged broker, then purchase an additional 7.9 per cent of the TD Ameritrade stock at $16 a share. Existing Ameritrade shareholders received a $6 dividend, while TD was able to add $900-million (Canadian) to its valuation of Waterhouse on its balance sheet. Since it would exercise considerable control over the board, TD would retain a say, if not absolute control, in how the business was run.

The deal created a discount brokerage with about six million accounts, ranking behind only Boston-based Fidelity Investments and San Francisco-based Charles Schwab Corp.

After the deal closed Jan. 26, the hard part came. The two companies had to combine a predominantly trading brokerage like Ameritrade with Waterhouse, which had become a vehicle for wealth management.

"The major issue for them is integration," said Sang Lee, a managing partner at Boston-based research consultancy Aite Group LLC. "How do you get a company that has focused on its on-line channel to focus on different channels?"

Ameritrade says the integration is proceeding well. The company originally forecast cost and revenue synergies of $578-million (U.S.) within 12 months of the close of the deal, and chief financial officer Randy MacDonald said in an interview he now believes revenue synergies alone will add a further $100-million to the total.

"And we haven't yet put the firm together at the back end," he said, referring to the administrative side of the business, "and that's where you really get the [cost] synergies." The big event so far in the integration process was the launch on April 24 of the new "value proposition," meaning Ameritrade told clients of the merged group what services it would offer and how much it would charge for them.

The proposition was the beginning of a shift in culture that would allow it to manage the wealth of the upper middle class rather than just lead the industry in the number of trades it executed. Mr. MacDonald said the broker is now targeting people with $100,000 to $1-million in liquid securities, who make up 30 per cent of the U.S. population and own 40 per cent of its wealth.

Although shares in the company fell in the first six months of the merger, they are now rising on an improved outlook. After closing at $19.38 on the day the deal closed, the shares slipped to $13.84 in July, largely because of concerns about customer satisfaction, and have since rebounded to $19.13 on the Nasdaq Stock Market.

"The environment now is probably better than what was expected when they announced the deal, so I think the synergies will be of a greater magnitude than expected," said David Trone, an analyst with Fox-Pitt Kelton Inc. in New York. He now has an "outperform" rating on the stock and a price target of $22.

A survey of seven analysts by Zachs International shows share profit forecasts for the 12 months ending Sept. 30, 2007, average $1.20, up 33 per cent from the estimate of 90 cents for 2006.

Mr. Trone added, however, that it will take time to "bring these two disparate customer bases together" and there are risks involved in rebranding the product and appealing to a different client base.

Then again, some of those day traders who were enticed by the mohawked Stuart may be greyer and wealthier now and feel more comfortable with Sam Waterston.

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Manulife Set for Broad Expansion in China

Reuters News Agency, George Chen, 10 October 2006

Manulife Financial Corp. is preparing to sell insurance in 40 Chinese cities by 2010 and is looking to start a money management venture as business is booming.

Total premiums for Manulife-SinoChem Life Insurance Co. Ltd., the Toronto-based company's 51-per-cent-owned China joint venture, should be more than 840-million yuan or $120-million (Canadian) this year, up 20 per cent from 700 million yuan in 2005, Emil Lee, chief financial officer of the insurance venture, said in an interview.

Manulife, which owns the John Hancock Mutual Funds group, was talking to Chinese regulators about setting up an asset management joint venture in China, Mr. Lee said.

"China's market has very high potential and is probably the fastest growing market in Asia [for Manulife]," he told Reuters.

The growth is coming off a low base, though: The China venture's premium income makes up around 1.5 per cent of Manulife's total.

"We have very high hopes in China . . . I think the premium growth of the company will definitely be in the double digits every year" in the next three to four years, said Mr. Lee, a Hong Kong-born Canadian.

Manulife plans to double its China sales outlets to about 40 cities by the end of the decade, Mr. Lee said. It wants to hire about 2,000 new direct sales agents in 2007, increasing the total number to about 7,000.

"Insurance sales agents are so far our single distribution channel so they are our [premium] growth engine," Mr. Lee said.

"We are also looking into some alternative channels such as telephone sales and bank insurance, but I think to hire direct sales agents is still the most efficient way for us," he said, adding that banks currently charge too much in distributing fees.

Manulife-SinoChem was established in 1996 after becoming the first joint venture in China's life insurance industry to be approved by Beijing.

Insurance joint ventures in China generated a combined 32.4-billion yuan in premiums in 2005, with Manulife-SinoChem ranking as the third-largest life insurance venture, according to official data.

Most analysts still regard China as an infant market for life insurance business, as less than 4 per cent of China's 1.3 billion people have coverage. The sector is expanding fast as Beijing dismantles a cradle-to-grave welfare system.

Foreign players, including U.S. giant AIG, have dived into China's insurance markets in the last decade, attracted by the pool of personal savings totalling over $2-trillion in the world's fourth-largest economy.

Mr. Lee said Manulife will focus on the retail insurance market in China, but the life insurance joint venture has been in talks with its Chinese partner SinoChem Corp., for the possibility of some sort of corporate insurance.

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Sun Life's MFS Sale Could Enrich Management

Financial Post, Duncan Mavin, 7 October 2006

Executives at MFS Investment Management could find themselves a lot richer if the asset manager is sold off by Canadian parent Sun Life Financial Inc., which has admitted to searching for "strategic alternatives" for its Boston-based subsidiary.

Sun Life currently owns 98% of MFS's shares, leaving about 2% for MFS's management.

However, management is entitled to hold up to 22% of the company "through some form of ownership," said a spokesman for Sun Life yesterday.

Analysts estimate MFS would be valued at between $4.5-billion and $5.4-billion if Sun Life can find a buyer -- management's share would therefore grow from an estimate of about $100-million to about $1-billion, as a result of the share transfer.

Toronto-based Sun Life has not disclosed exactly what would trigger the distribution of additional shares to MFS's management.

"Sun Life Financial has a compensation structure at MFS to create a meaningful ownership stake for MFS management," the company said in regulatory filings last year.

A spokesman for the company would not give further details of the obligation.

But speculation in the U.S. media this week suggests Sun Life would be contractually obliged to distribute the shares if it agrees to sell the asset management company, an outcome Sun Life is believed to be considering.

MFS has been the main drag on performance at Sun Life, where results have otherwise been very strong in recent quarters.

Several industry analysts have said that getting rid of MFS would give a boost to Sun Life's share price -- whose stock trades at a discount to its Canadian peers --and improve performance.

In September, the life insurance giant revealed it has engaged investment bankers to consider options for MFS, which are thought to include a possible sale of the company.

Meanwhile, some industry observers said yesterday that Sun Life's obligation to give shares to MFS's management is "nothing new" and that it has been factored in to valuations of MFS.

However, that this issue has surfaced now may be an indication that MFS's management is flexing its muscles prior to Sun Life completing any deal in order to ensure they receive due consideration in a transaction.

"This is a business where the assets are the people and it would be naive to think you could do a deal without significant buy-in from those individuals even without the [share distribution obligations,]" said UBS Investment Research analyst Jason Bilodeau.

"People are one of the biggest challenges in getting a deal done like this," Mr. Bilodeau said. "Making sure you have a deal that the employees and executive management are supportive of is important," he said.

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Moody's on Banks' Risk Management Practices

Investment Executive, James Langton, 6 October 2006

Risk management practices at the major Canadian banks position them well to manage through stress situations that could emerge from either internal or external factors, says Moody’s Investors Service.

The report focuses on the six largest Canadian banks. It identifies and discusses several credit strengths in risk management practices at the Canadian banks, including strong risk governance practices overall, an appreciation of the need for risk management input at senior management levels, and a complete toolbox of risk measures at most banks.

Moody’s also identifies several areas of concern. The rating agency observes that some banks’ approach to risk management issues is somewhat reactive and that some institutions have had difficulty in converting their risk-taking activities into stable earnings. Moody’s ties both of these issues, in particular, to the 2001-2003 period in which several banks suffered large losses in their wholesale banking operations.

In the report, Moody’s also identifies the systemic risk resulting from a transfer of credit risk from traditional banks to hedge funds as an area of concern, noting that this is a global, not strictly Canadian, phenomenon. Moody’s believes that Canadian banks’ exposure to these funds is manageable, with individual lending limits and collateral requirements strictly enforced. In the interests of greater transparency, however, Moody’s supports increased disclosure by the banking sector about the size and nature of their exposures to hedge funds and the revenue and earnings they generate.

“Despite a few continuing concerns over specific risk management practices at some institutions,” says vice president and senior analyst Peter Routledge, “we view risk management disciplines at the major Canadian banks as a credit strength overall and as consistent with our expectations for highly-rated banking institutions.”

“Although we see some economic uncertainties when looking forward in time,” Routledge adds, “we remain comfortable that the Canadian system is well positioned to endure stress.”

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Banc of America Cuts TD Ameritrade to Neutral

TD Ameritrade Holding Corp. was downgraded from 'buy' to 'neutral' by analyst Michael Hecht at Banc of America. The 12-month price target is $20.00 per share.

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Scotiabank Hikes Risk with Total Mortgage Financing

Financial Post, Barbara Shecter, 6 October 2006

Bank of Nova Scotia became the first Canadian bank to offer no-money-down mortgages yesterday, entering a market previously occupied by riskier lenders like Xceed Mortgage Corp.

The program lets people with solid credit histories buy homes even if they don't have enough cash to make the standard 5% minimum down payment. Scotia is teaming up with Genworth Financial Canada to offer the program. Genworth will insure the loans and take on the additional risk.

Tanya Azarchs, who oversees the credit rating of North American banks at Standard & Poor's in New York, said there is a reputational risk for Scotia.

"Can a Canadian bank do the kinds of things you need to do without getting named in the headlines as the bad guy? Like kicking some guy out of his house, those sort of techniques. You've really got to be willing to manage a different way from your ordinary loans," she said.

Offering a mortgage with no down payment is inherently risky, because it leaves the issuer vulnerable to declines in housing prices or the economy. If home prices drop or unemployment rises, consumers could choose to walk away from mortgages without paying more than the monthly interest fee.

Charles Lambert, managing director of mortgages at Scotiabank, said the company is confident enough about the economy and housing market that this isn't a major concern.

"The economy is going well and we work very closely with our customers. If there are any issues or financial difficulties, I go back to our basic principle: We're in the business of keeping our customers in their homes once they get them and managing through that," he said.

According to analysts, Scotia's entry into no-money-down mortgages gives it a unique product in the ultra-competitive mortgage market -- although the other banks could quickly follow its lead. For Genworth, this is a chance to seize market share on the insurance side, which for years was dominated by a single player: the government-owned Canada Mortgage and Housing Corporation.

By adding Scotia's name and large cross-country branch network, Genworth will have more heft against CMHC, said one Toronto-based analyst who spoke on condition that he not be named. "CMHC's profitability is going to go down, there's no question about that," the analyst said.

Xceed Mortgage could also be affected if homebuyers opt for Scotia's new mortgage, he said. Xceed, a Toronto-based sub-prime lender, has billed itself as an alternative to the banks for homebuyers seeking 100% financing.

Scotia and Genworth first experimented with no-money-down mortgages in 2003, when they offered a free down payment mortgage. The bank provided the 5% down and Genworth charged a higher insurance rate. Under the current 100% mortgage program, Genworth's insurance rate on a standard 25-year amortization mortgage is 3.75%, compared with 2.75% on a 95% mortgage.

"There's no question about it. This is a higher-risk product than what's currently being offered, hence the higher price," said Peter Vukanovich, president of Genworth Financial Canada. "[But] We're very comfortable given the price we're charging, with the risk we're taking."

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RBC, TD Could Get Chance to Challenge Fastow's Statements

Financial Post, Theresa Tedesco, 6 October 2006

A Houston judge has agreed to allow Enron Corp.'s former chief executive to be released from U.S. federal prison to provide 75 hours of testimony to lawyers involved in a multi-billion-dollar class-action lawsuit.

Judge Melinda Harmon ruled that Andrew Fastow, 44, can give a detailed deposition expanding on the testimony he filed last week in a 24-page declaration in which he claimed that a group of 10 banks, including Royal Bank of Canada and Toronto-Dominion Bank, had participated in the manipulation of Enron's reported financial statements.

Mr. Fastow, who began serving a reduced six-year prison sentence last week, will be available to lawyers representing the banks and The Regents of the University of California, who launched the US$45-billion shareholder civil claim against the financial institutions, over a 10-day period, commencing Oct. 16.

The deposition will be given behind closed doors in Houston and sources say he will be cross-examined by a lawyer representing the 10 banks implicated by Fastow.

The banks wanted access to Fastow after he claimed the group of financial institutions acted as "problem solvers" and helped him create accounting structures that allowed the energy trader to hide its debt and artificially boost its financial results before it collapsed in 2001, wiping out about US$60-billion in shareholder value.

Officials at Royal and TD said the banks would vigorously defend themselves against the allegations made by. Fastow. As tier-two banks, they say they are not among the main institutions, including Royal Bank of Scotland, Merrill Lynch, Credit Suisse First Boston and Barclay's, that conducted business with Enron.

As well, they questioned the merits of Fastow's "evidence" because it was filed at a time when he was attempting to secure a more lenient prison sentence.

Both Canadian banks had attempted to have their names dropped from the class-action suit. Royal's attempt at dismissal was rejected by the court last year, but the bank has since filed a new request asking for a summary judgment. In doing so, Royal filed a statement of defense and asked the judge to throw out the case against Canada's largest bank based on the merits of its position.

In the case of TD, its motion for dismissal is pending.

Some banking sources say the lawyers representing the class-action plaintiffs encouraged Fastow's testimony because they are desperately trying to hang onto their lawsuit in the wake of the judge's dismissal of Barclay's from the class-action lawsuit.

Since then, William Lerach, the U.S. attorney spearheading the class-action, filed a motion requesting the court allow his clients to amend its allegations to include more details of Barclay's alleged involvement.

Enron investors have received more than US$7.3-billion as a result of settlements with four banks, including US$2.4-billion from Canadian Imperial Bank of Commerce, named in the class-action claim.

The six hold-out banks are waiting for the outcome of the appeal filed by Mr. Lerach. If he does not succeed in overturning the judge's decision, the Canadian banks will undoubtedly use the same legal arguments to have their names dropped from the civil lawsuit.

"They [class-action lawyers] are trying to extract settlements before any decision on Barclay's appeal is rendered," said a source close to the Canadian banks who asked not to be named. "They are desperately trying to keep their case together."

But Mr. Lerach said Royal and TD are in "denial." In an interview, Mr. Lerach described Fastow as a "highly credible witness" who's testimony will be "corroborated" by the banks' own documents.

"Fastow has come to grips with what he did, unlike the banks, Fastow has accepted responsibility for his conduct even though he is going to pay a heavy price for it," Mr. Lerach said.

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Bloomberg, Laurel Brubaker Calkins, 6 October 2006

Andrew Fastow, the former Enron Corp. finance chief who began a six-year prison sentence last week for his role in the fraud that destroyed the company, will receive day passes to give depositions in Enron investor lawsuits.

David Gerger, Fastow's lawyer, said U.S. District Judge Melinda Harmon in Houston, who presides over the civil class action cases brought by Enron investors, has agreed to release Fastow for several days this month to give depositions.

"He will be out for the depositions," Gerger said in a telephone interview late yesterday. "He isn't being released, and he'll be escorted back each day when he's done."

Fastow, 44, began serving his sentence Sept. 26 at a maximum-security federal prison in downtown Houston. He must remain in the custody of U.S. marshals while outside the prison and cannot go anywhere except the deposition center, which is located several blocks from the prison, Gerger said. He declined to say when Fastow's day passes will begin or how long the process will take.

Lawyers representing Enron investors asked Fastow's sentencing judge to delay sending him to prison until he could give depositions fully describing the role some of the nation's largest banks played in helping Enron distort its financial statements through bogus transactions. Fastow gave the court a 24-page declaration that outlined the banks' role in Enron's fraud before he was sentenced.

Fastow pleaded guilty to two counts of conspiracy to commit wire fraud. In addition to his prison sentence, he forfeited almost $24 million in cash and property. With time off for good behavior and for completion of a drug-dependency program, Fastow could be released in less than five years.

"This is the largest securities case in history," said Paul Howes, who represents approximately 1.6 million Enron investors in the civil class action, or group, lawsuits, in an emergency petition to Harmon for Fastow's temporary release filed last week. "The testimony of Enron's former CFO, who was the principal contact for the company's banks in structuring, designing and executing transactions that were done solely to manipulate reported financial statements, is crucial evidence that should be taken."

A Houston appellate lawyer who has followed the case said it makes sense to let Fastow participate in the civil depositions.

"At this point, why hamstring the civil lawyers?" said attorney Brian Wice. "If the object is to recover as much money as possible, why not let him out?"

The case is U.S. v. Fastow, H-02-665, in the U.S. District Court, Southern District of Texas (Houston).

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Financial Post, Theresa Tedesco, 5 October 2006

Lawyers representing two Canadian banks implicated last week by Andrew Fastow in the accounting fraud that led to the collapse of Enron Corp. could get their chance to challenge his explosive testimony as early as next week.

U.S. District Judge Kenneth Hoyt held a conference call late yesterday to debate whether to allow Fastow be released daily from U.S. federal prison, where he is serving a six-year sentence, to provide detailed testimony to lawyers representing a multi-billion-dollar class-action lawsuit against Enron and its bankers.

The conference call, which included lawyers representing six major banks, including Toronto Dominion Bank and Royal Bank of Canada, was held in response to an emergency request filed this week by The Regents of the University of California, the lead plaintiff in the US$45-billion shareholder claim.

Attorneys for the class-action asked the court that Fastow, 44, be given temporary leave from the Houston-based federal detention centre over a period of two weeks, beginning on Oct. 9. They want Fastow to provide a lengthy deposition expanding on the testimony he provided last week in a 24-page statement in which he claimed that a group of 10 banks, including TD and Royal, participated in the manipulation of Enron's reported finances.

According to Enron's former chief financial officer, the group of banks acted as "problem solvers" and helped him create accounting structures that allowed the energy trader to hide its debt and artificially boost its financial results before it cratered in 2001, wiping out about US$60-billion in shareholder value.

"I and others, including certain Enron banks, worked together, intentionally and knowingly, to engage in transactions that would affect Enron's financial statements," Fastow declared in his submission to the court last week.

Officials at Royal bank and TD said the banks would "vigorously defend" themselves against the allegations, but declined to comment on Fastow's statements, saying the matter is still before the courts. Privately, they questioned the veracity of his comments because they were made at the time he was securing a lenient prison term of six years instead of the 10 years he agreed to when he entered into a plea agreement with U.S. prosecutors.

As well, both TD and Royal have filed motions asking the court to dismiss the class-action allegations against them.

Yesterday, Barbara Stymiest, chief operations officer at Royal, downplayed Fastow's "evidence" during a conference in Montreal, saying "we were not considered one of the main banks that did business with Enron."

In his declaration last week, Fastow made short references to TD and Royal, calling them "tier-2" banks. In the case of TD, the former Enron executive said the Canadian bank had engaged in "six prepay transactions" with Enron between 1998 and 2001.

In the case of Royal, Fastow said "I believe that they knew what I expected of RBC, and that they structured transactions at RBC that contributed to causing Enron to manage its balance sheet and generate funds flow from operations."

William Lerach, the U.S. attorney spearheading the class-action litigation, said in an interview that "I think [Royal and TD] are in denial." Although he would not comment on whether he has had discussions with representatives of the Canadian banks, Mr. Lerach said, "If I was [the banks], I'd be trying to downplay it too because it's devastating to them."

Meanwhile, Craig Smyser, Fastow's civil lawyer, said yesterday he has been in discussions with a number of lawyers representing the banks named by his client in his declaration last week.

"The financial institutions have been in contact asking for various favours and questions about my client's position," Mr. Smyser said in an interview. He said lawyers representing the banks will be given "expansive access" to cross-examine Mr. Fastow during his oral deposition to class-action lawyers.

In recent days, lawyers in the U.S. class-action litigation have spent dozens of hours interviewing Fastow in preparation of his testimony.

Mr. Lerach described Fastow's statement last week as the "tip of an iceberg" compared to what he expected to testify during his deposition in the weeks ahead.

"The things that Andy Fastow is going to be testifying are corroborated by the banks' own internal documents. The banks will never be be able to refute his testimony," Mr. Lerach said.

Enron investors have already received more than US$7.3-billion as a result of settlements with four banks, including US$2.4-billion from Canadian Imperial Bank of Commerce last year.

However, TD, Royal, Merrill Lynch, Credit Suisse First Boston, Royal Bank of Scotland and Barclays, have refused to settle and a trial is scheduled for April, 2007.

Three months ago, the hold-out banks won an important victory when a U.S. District Court judge in Houston dismissed Barclays from the class-action lawsuit.

Mr. Lerach has since filed a motion requesting the court allow his clients to amend their allegations to include more details of Barclay's alleged involvement.

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HSBC Stumbles in Bid to Become Global Deal Maker

The Wall Street Journal, Carrick Mollenkamp, 5 October 2006

Just before Christmas 2004, John Studzinski, the co-head of HSBC Holdings PLC's new investment bank, warned his bankers how intensely they needed to chase big deals to transform the company into a top global player.

"There has to be an element of urgency, an element of guilt, an element of competition, an element of 'I'm responsible,'" said the banker, known in London financial circles as Studs, according to a video recording of the event.

Less than two years later, HSBC has pulled back its ambitions dramatically. Mr. Studzinski and some senior bankers he hired are gone, and HSBC remains in the lower tier of investment banking. Meanwhile, top investment banks increasingly threaten to steal business from HSBC and other conventional banks.

HSBC's struggle illustrates the upheavals in global banking, as the big-money, high-risk culture of Wall Street forces traditional banks to compete on new ground. Big bank mergers have created multinational institutions able to provide plain-vanilla banking such as corporate and consumer loans and cash management. Those services are now so commonplace that they command only the slimmest of profits. So traditional banks like HSBC are scouting for new sources of revenue, often investment banking.

Meanwhile investment banks Morgan Stanley, Merrill Lynch & Co., Credit Suisse Group and Goldman Sachs Group are expanding into some lucrative overseas markets, such as Brazil, Russia, India and China. "A lot of our competitors, European and American banks, have moved into effectively what has been the homeland of HSBC," Stuart Gulliver, then co-head of HSBC's investment-banking and capital-markets division with Mr. Studzinski, told investors in May. "They've built up in the Middle East, they've built up in Asia-Pacific, they've got China fever."

Also in the December 2004 presentation, John Studzinski and Stuart Gulliver, co-heads of HSBC's investment-banking business, talked about strategy.

HSBC stumbled as it tried to catch up to big investment banks by aggressively seeking major deals all across the globe, while hesitating to loosen its tight lending standards and or bust budgets hiring new personnel. The bank's new platoon of merger advisers were stymied because HSBC balked at services that deal customers demanded, such as riskier financing. When costs soared but merger and advisory business didn't follow, the bank started scaling back.

For most of HSBC's 141-year history, its international reach was enough. Founded in Hong Kong by Scottish shipping superintendent Thomas Sutherland in 1865 to finance trade between Europe, China and India, HSBC's banking business paralleled the British Empire and then kept growing. It now offers loans and money-management services to companies and branch-banking, loans and credit cards to consumers in 76 countries.

But in 2003, with its global advantage shrinking, then-chairman Sir John Bond began to push HSBC into investment banking -- advising on mergers, underwriting stocks and bonds, and issuing more complex derivatives. Sir John, whose 45 years in HSBC banking and mane of white hair gave him a patrician presence, signed off on a bold departure: a five-year investment-banking expansion plan and a budget of at least $800 million for the first two years.

To lead the charge, he turned to Mr. Studzinski, an American banker who had helped lead Morgan Stanley's European investment bank. Announcing the move, Sir John acknowledged that HSBC rarely hired for such a senior position from the outside. He called Mr. Studzinski, who was born in Boston, a "very natural fit." Mr. Studzinski, 50 years old, was paired at the helm with Mr. Gulliver, a 26-year HSBC veteran steeped in the bank's culture of cost-control, who had managed the bank's trading operation in Asia.

It wasn't an obvious match. Mr. Studzinski, active in London society and U.K. charities, earlier this year held a 50th birthday party for himself at Salzburg's Leopoldskron Palace, which was used as the von Trapp family residence in "The Sound of Music." The celebration included a choral work commissioned by an arts foundation Mr. Studzinski founded. It describes the choral piece, performed at a nearby church, as "a contemplation about the universal presence of angels in all our lives."

The 47-year-old Mr. Gulliver, who is partial to the rock bands U2 and Santana, carries the tough-guy demeanor of a lifelong trader. His recent reading included a book by a British army officer titled, "Rules of Engagement: A Life in Conflict."

Mr. Studzinski was in charge of the merger and advisory business and the business of helping companies sell stock and debt. Mr. Gulliver was responsible for expanding sales and trading, and for beefing up the bank's ability to offer derivatives and other specialized financial products to corporate clients.

At the outset, they both spent lavishly, especially Mr. Studzinski as he raided competitors to build a team from scratch. In March 2004, Mr. Studzinski hired a European technology banker from Credit Suisse. The next month he raided Credit Suisse and Goldman Sachs for consumer and retail bankers. In July, he hired a health-care banker from Lazard Frères.

In some cases, Mr. Studzinski offered bankers guaranteed bonuses for two years, an unusual step in an industry where annual bonuses typically are determined by financial performance the same year. In all, he and Mr. Gulliver hired some 2,000 people in a little more than a year.

At the end of 2004, Messrs. Studzinski, Gulliver and Sir John were upbeat at a gathering for their investment bankers. Sir John clinked his glass to hush the room and told the bankers of his "absolute conviction" that they were building "the premier investment-banking and markets business in the world," according to the video. He added, "I don't care how fast we get there as long as we do it right."

Mr. Gulliver brashly suggested HSBC could benefit because of regulatory problems that a big competitor, Citigroup Inc., was facing. He joked Citigroup might have problems paying staff, "given the extent to which it hasn't got any money because of the fines it's paid."

But HSBC's bankers struggled to win deals, and the bank stood at 16th in the 2004 global merger-advisory rankings by deal value, compiled by the markets data provider Dealogic. Meanwhile, the aggressive hiring pushed the investment bank's costs up 32% from the year before, to $5.8 billion.

Mr. Gulliver, despite his initial spending, grew increasingly unhappy about the escalating expenses, people familiar with the matter say. He privately complained to others about Mr. Studzinski's strategy and the amount of spending, according to a former senior HSBC employee. Messrs. Gulliver and Studzinski declined to comment. On his side of the business, Mr. Gulliver began pulling back on costs. For instance, consulting firm A.T. Kearney had delivered a 200-page plan for expanding HSBC's equities business. Mr. Gulliver called for scaling the plan back by about 30%.

Meanwhile, HSBC lacked heft in other areas crucial to winning merger business. Leveraged finance -- loans accompanied by high-yield or "junk" bonds -- was in high demand amid a surge of private-equity investment. But the bank didn't quickly hire a team to handle that. The bank was concerned about risky debt and wanted an experienced team, but worries about costs delayed hiring decisions, said people familiar with the situation. When HSBC bankers asked for help arranging leveraged-finance deals, they were told to be patient. This spring, HSBC finally hired two leveraged-finance bankers from Morgan Stanley.

Some of the newly hired merger bankers found the bank's lending process also slowed them down and put them at a disadvantage. At HSBC, bankers had to fill out a form and send it to the credit department at headquarters in London's Canary Wharf financial district, according to one former executive. Typically, in arranging financing for deals, investment bankers make their case in person to a credit committee that understands the investment-banking business and can make a quick decision. Pierre Goad, an HSBC spokesman, said, "We regard our independent credit department as a strength, not a weakness."

Some of the new investment bankers chafed because they worked from cramped cubicles or desk areas, as was usual at HSBC, rather than individual offices. Bankers making millions had to go to a conference room to have a private phone call.

Meanwhile, cooperation suffered between HSBC's new investment bankers and its traditional bankers in each country, who could provide on-the-ground intelligence and valuable introductions for the investment bankers. A former banker said officials observed tensions between Mr. Studzinski and Mike Smith, the CEO of HSBC's Asia-Pacific operations. This person said Mr. Smith felt Mr. Studzinski was encroaching on his turf. A bank spokesman declined to comment on behalf of Mr. Smith. Through a spokesman, Mr. Studzinski also declined to comment.

HSBC struggled to add research to its offerings. Mr. Studzinski wanted to do it, but Mr. Gulliver and others found it problematic because it is an expense that they didn't think would produce revenue.

In one case, an investment banker sought to influence an HSBC researcher's investment analysis, something U.S. banks had agreed to stop in 2003 as part of their settlement with New York Attorney General Eliot Spitzer and U.S. regulators. (HSBC wasn't part of that agreement because it had virtually no equity research at the time.) In August 2005, an HSBC banker emailed a research analyst, instructing him to not publish an opinion critical of an important banking client, Emirates Airline, according to a copy of the email reviewed by The Wall Street Journal. "I am aware of the concerns that the note has raised within [Emirates] and wish to avoid creating relationship damage," the email said.

HSBC's Mr. Goad said the analyst's opinion was published and the email was brought to the attention of HSBC's compliance department. Mr. Goad said the sender of the email was told it was inappropriate but no disciplinary action was taken.

By mid-2005, concern over the unit's ever-rising expenses was forcing the bank's hand. In the first half of the year, total operating income for the business rose just 3.6% from the year-earlier period, but costs rose another 24% to $3.32 billion. Pre-tax profit at the unit fell by 18%.

HSBC's chief executive Stephen Green began taking a hard line on new spending. He started vetting investment-banking hires himself and some job offers were put on hold, according to a person familiar with the situation. Through a spokesman, Mr. Green declined to comment.

On Aug. 1, 2005, Sir John and Mr. Green unexpectedly announced that most of the expenditures to build up the investment bank had been made. "Future cost growth will consequently be lower," Sir John wrote in a report to investors. It was two years into what the bank had flagged as a five-year plan. The 2005 budget for the research department was sliced by about $35 million, or 17%, to $165 million. Sir John declined to comment.

In November, Sir John announced he would retire the following May, shortly before he turned 65. The move was long-planned, but it removed Mr. Studzinski's chief supporter among senior management. Sir John's successor as chairman was Mr. Green.

In February, Mr. Studzinski was relieved of many of his responsibilities, which were given to Mr. Gulliver. In May, Mr. Studzinski announced he would leave in September to become a mergers and acquisitions adviser at New York-based private-equity firm Blackstone Group. There was no dramatic ending or "Arthur Miller" moment, he said in an interview at the time. "This was not 'Death of a Salesman.'"

Last month, Mr. Studzinski organized his going-away party, attended by HSBC executives, at the 175-year-old London theatrical club called The Garrick Club, once the scene of a famous quarrel between Charles Dickens and William Makepeace Thackeray. This week, his 20th-floor office became a meeting room.

Others hired by Mr. Studzinski have headed for the exits. Bankers for telecommunications, retail, and technology -- all of them hired as part of the investment-banking push -- have left. The bank calls the turnover normal. "During the same period, how many people left Goldman? How many people left Morgan Stanley?" says Mr. Gulliver. "'Tis the nature of the business."

HSBC has been an adviser on a number of big acquisitions recently, but mostly in a secondary role providing extra financing. For example, it is one of six banks advising Mittal Steel Co. NV in its acquisition of Arcelor SA, valued at about $30 billion, helping boost its place in Dealogic's investment-banking rankings by deal value to 13th for the first nine months of this year. But Goldman Sachs is the lead adviser on that deal, and those lower down the pecking order get paid far less.

The unit's most-recent results, pre-tax profits for the first half of 2006, rose 37% compared to the first half of 2005, to $3.14 billion, helped by the sale of derivatives. Mr. Gulliver says that shows that as the sole head of the division, he's going in the right direction. "My job has been to build something that works for HSBC," he says.

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BMO May Be Hurt by Drop in Gas Prices

Bloomberg, Doug Alexander and Sean B. Pasternak, 4 October 2006

Bank of Montreal may be the hardest- hit Canadian bank as natural-gas prices decline and the collapse of hedge fund Amaranth Advisors LLC cuts into trading revenue.

The country's No. 4 bank by assets has more at stake in commodity and foreign-exchange trading than any of its Canadian rivals, according to Genuity Capital Markets. Currencies and commodities such as gas futures generated C$250 million ($223 million), or 44 percent, of Bank of Montreal's trading revenue in the first nine months of this fiscal year, Genuity estimates.

That compares with 30 percent at Bank of Nova Scotia and 18 percent at Canadian Imperial Bank of Commerce and TD Bank. Royal Bank of Canada, the country's largest bank, got only 15 percent of its trading revenue from commodities and foreign exchange over the same period, according to Genuity, a Toronto-based securities firm.

"We think some of the gains that BMO had in that segment are going to start to dissipate," Genuity analyst Sumit Malhotra said in a telephone interview. "They've ridden that wave all through 2006."

Toronto-based Bank of Montreal's trading revenue more than doubled in the first nine months of fiscal 2006 to C$564 million, outpacing gains at all of its rivals. That growth may slow now that Amaranth, the Greenwich, Connecticut-based firm whose two main hedge funds lost $6.5 billion last month, has exited energy trading and natural-gas prices have dropped 28 percent since Aug. 1, Genuity analysts Malhotra and Mario Mendonca said in a research note published Sept. 21.

Amaranth, whose Calgary-based trader Brian Hunter sank the funds with wrong-way bets on natural-gas prices, was a Bank of Montreal client, the analysts said. Amaranth sold its energy- trading bets to JPMorgan Chase & Co. and Citadel Investment Group LLC, a Chicago-based hedge fund. Bank of Montreal spokesman Ralph Marranca declined to comment on Amaranth.

Bank of Montreal shares have gained about 3.8 percent since Amaranth first disclosed its losses on Sept. 18, on pace with other Canadian banks.

A year ago, Bank of Montreal "kind of introduced themselves to the world as being a commodity trader, natural gas specifically," said Malhotra, who rates the bank's shares a "hold." "Now the comparisons become a lot tougher."

Bank of Montreal, which held its annual meeting this year in Calgary and bases its energy group in the Alberta city, doesn't expect the decline in gas prices to cause a drop in trading revenue, Chief Operating Officer William Downe said in an interview. He declined to comment on Amaranth. Steve Bruce, a spokesman for Amaranth, also declined to comment.

"Our business is really built around the flows of our clients," Downe said. They "continue to be active in the markets, so I really don't anticipate that it will slow the market particularly and we don't anticipate it will have an effect on us."

Michael Goldberg, an analyst at Desjardins Securities in Toronto, said he contacted Bank of Montreal after trouble first surfaced at Amaranth in mid-September. He doesn't expect a "sharp" decline in the bank's trading revenue this quarter.

"But I'm just not sure that at some other time in the future that the trading revenue might possibly be a problem."

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RBC, Scotiabank to Add Branches

Bloomberg, Doug Alexander and Sean B. Pasternak, 4 October 2006

Royal Bank of Canada and Bank of Nova Scotia, two of Canada's biggest banks, plan to open more branches in the next few years to add deposits and expand their asset-management businesses.

Royal Bank, the country's largest bank by assets, may build as many as 112 branches in the next four years, Chief Operating Officer Barbara Stymiest said today at a CIBC World Markets investor conference in Montreal. Scotiabank, the third-biggest bank, plans to open 30 branches next year, Chief Executive Officer Richard Waugh said at the same conference.

Canadian banks are adding branches to increase deposits, investment accounts and win new customers. Canadian Imperial Bank of Commerce, the fifth-largest bank, said last month that it plans to open or expand 70 branches in the next five years.

"We are focusing now on the investment business -- our customers' investment business," Waugh said. "We know where the money is, and now we have to go after it."

Stymiest said the bank will open about 50 branches in the Toronto area by 2008 and "we suspect that by 2010 we'll be opening another 62 nationally." An expansion would reverse a trend at Royal Bank, which has reduced its number of branches in recent years, according to its latest annual report.

The bank had 1,109 locations in Canada as of July 31, down from 1,125 at the fiscal end of 2001. Royal Bank added six branches last year, and will renovate almost half its offices to better serve customers, Stymiest said.

Bank of Nova Scotia added 20 branches in Canada this year, the first expansion since 1998. The 30 scheduled to open next year will be in "high-growth demographic areas," Waugh said. The new branches will be across all Canadian regions, with a "concentration" in Alberta, British Columbia and the Toronto area, Scotiabank spokesman Frank Switzer said.

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Life Insurance Cos: Why Int Rates & Oil Prices Matter

Scotia Capital, 4 October 2006

Event

• The Scotia Capital Insurance Weekly Update, released yesterday, contains a piece entitled "Lifecos versus the market? Versus the banks? It boils down to an oil call and an interest rate call".

What It Means

• In a market where sector rotation is increasingly important, in particular as it relates to Canadian lifecos versus the market and versus the Canadian banks, our answer is a simple one, and history proves it. If you think oil prices are going to fall, then overweight financials, and if you think long-term interest rates are going to fall, then overweight the banks versus the lifecos.

• As oil prices have fallen so have long term interest rates, not necessarily a good thing for Canadian lifecos. With Scotia Economics forecasting further declines in Canadian and U.S. 10-yr bond yields we remain somewhat cautious, despite the sector's inherent defensive characteristics.

• At a 10% premium to the U.S. lifecos (on a forward P/E basis, above its 5% mean) and a 3% premium to the banks (above its 1%-2% mean), we remain market weight, and would not advocate overweight unless the sector fell significantly below its mean relative to other financials, and/or long term interest rates started to climb.

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Manulife Targets 15% Yearly Profit Growth

Bloomberg, Patricia Cheng, 3 October 2006

Manulife Financial Corp. said it expects profit to grow 15 percent a year, driven mainly by Asia, the fastest-growing region for Canada's biggest insurer.

"Our growth is sustainable because we are in a bunch of economies that are growing themselves very quickly and in these countries we are expanding," said Chief Executive Officer Dominic D'Alessandro in an interview in Hong Kong yesterday. The Toronto-based company is targeting a 16 percent return on equity a year, he said.

D'Alessandro, 59, seeks to raise earnings by expanding in Asia, where its profit surged 51 percent in the second quarter. Rising income of the region's 3.7 billion people is helping Manulife and rivals sell more protection and investment products. Total premiums in Asia excluding Japan went up 16 percent last year, exceeding the 3.6 percent gain in North America, according to data from Swiss Reinsurance Co.

Manulife is introducing new products in Japan and Hong Kong such as variable annuities, which give policyholders periodic payments, as retirement needs increase, D'Alessandro said. The company will also broaden its sales channels by linking up with more banks and brokers, he said.

In China, the insurer's 51 percent-owned venture is awaiting regulatory approval to open four to five more branches, D'Alessandro said. Manulife-Sinochem Life Insurance Co. sells policies in 17 cities including Beijing and Shanghai.

Profit from Asia was C$199 million ($177 million) in the second quarter, increasing more than three times as fast as the 14 percent for the group overall. The region represented 21 percent of Manulife's total profit in the three months ended June 30, up from 16 percent a year earlier.

D'Alessandro also said Manulife has no plans to enter the European market because it's already well served by domestic insurers.

"We feel the opportunities available to us in Asia are very attractive. We don't want to get distracted and take our focus away," he said. "Down the road, if some terrific opportunity presents itself to acquire some business, we would look at it. But it's not our top priority."

The company, which had C$370 billion of assets under management as of June 30, a year ago exited all investments in hedge funds, totaling "many millions of dollars," D'Alessandro said.

"The hedge-fund space was very crowded," he said. "Our managers felt we could better manage the money ourselves."

Of its alternative assets, Manulife prefers infrastructure, energy, wind power, timber, oil and gas, real estate and private finance, D'Alessandro said.

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CIBC Ex-Employees' Lawsuit Seeks Dissolution of Fund

Bloomberg, Phil Milford, 3 October 2006

Canadian Imperial Bank of Commerce, Canada's fifth-largest bank by assets, was sued by two former employees who asked a judge to dissolve a money-losing company investment fund and distribute its assets.

In an amended complaint made public today in Delaware Chancery Court following scrutiny of company records, James Forsythe and Alan Tesche contend CIBC failed to properly oversee the $561 million CIBC Employee Private Equity Fund (U.S.) Inc.

'The fund has suffered the waste of millions of dollars of its assets' because of 'willful and wanton lack of supervision of the fund's management,' Forsythe and Tesche say in the complaint.

Toronto-based CIBC had a third-quarter profit of C$662 million ($597 million), reversing a year-earlier loss, after consumer banking profit rose. The bank agreed in August 2005 to pay investors $2.4 billion to settle claims it helped Enron Corp. inflate revenue by hiding debt.

The Delaware lawsuit contends 'CIBC misused the fund's assets to its own benefit in order to artificially inflate its own financials, including off-loading non performing investments which it would otherwise have had to write off.'

The fund started out in 2000 with $561 million in investment commitments from 490 investors, and promised returns of up to 25 percent, court papers say. The complaint says the fund had 'significant losses,' and in early 2002, 'CIBC ceased disclosing the market value' of the investments.

'CIBC believes the action to be without merit,' said Rob McLeod, senior public affairs director for the company, in an e- mailed statement.

The suit was originally filed in February 2005, McLeod said.

The case is Forsythe, et al, v. CIBC, CA1091-N, Delaware Chancery Court (Wilmington).

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Dundee Cuts TD Bank to Neutral

TD Bank was downgraded from 'market outperform' to 'market neutral' by analyst Susan Cohen of Dundee Securities Corp. The price target is C$73.00 per share.

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RBC CM on Manulife's New Product

RBC Capital Markets, 3 October 2006

Event

Manulife just announced the domestic launch of its Guaranteed Minimum Withdrawal Benefit (GMWB) variable annuity (VA).

Investment Opinion

• GMWB Variable Annuity Available October 23rd. This is another first-to-market for Manulife, with which it has already had success in both the U.S. and Japan. The product provides investors with: (i) a predictable minimum guaranteed income; (ii) upside potential based on investment performance, and (iii) withdrawal flexibility. The product balances capital preservation, return and liquidity for both pre-retirement or early retirement life phases.

• GMWB Market Expected to be $50B by 2011. Investor Economics forecasts a bright future for this product, estimating that the GMWB market will range from $5.5B to $8.4B in 2007, and grow 5-10 fold in four years to a range of $28.5B to $53.6B by 2011. The GMWB VA has been extremely popular in the U.S. and in Japan, accounting for 50%+ of U.S. VA sales and 30% of Japanese VA sales for Manulife in 2006.

• Banks and Other Lifeco’s May be Impacted. Sources of funds for this product may include: (i) transfers from existing segregated funds; (ii) employees retiring/terminating from defined contribution (DC) plans; (iii) RRIF transfers from RRSPs and, and; (iv) transfers from GICs. Transfers from both segregated funds and from DC plans may come at the expense of Great-West Lifeco and Sun Life, as they hold the #1/2 market positions in each of these markets. Transfers from RRSPs and GICs may adversely impact bank deposits.

• Timing Prime for 2007 RRSP Season. The launch of the product should position MFC well for the 2007 RRSP season as distributors will have had ~2 months of sales experience leading into Q107. We do expect this product to be replicated eventually by the other lifecos since the main constraint for product launch is back-office system development. However, based on MFC’s experience in the US and Japan and because they are the first-to-market in Canada, we expect MFC to be the market leader in this product.

• Valuation. Our $43 (unchanged) price target reflects a 16x forward P/E now at $2.71 for MFC, above our Canadian lifeco target average of 14.5x to reflect excellent operating performance, strong capitalization and a leading global market position, with particularly strong growth prospects in the U.S. and Asia. For 2006, we estimate $2.50 cash EPS (3¢ above consensus) and for 2007, our $2.89 estimate is 8¢ above consensus. In both cases, we have more aggressive operating margin expectations, reflecting continued excellent execution, positive interest rate EPS torque, and favourable share buyback activity. Risk centres on foreign exchange translation, as nearly two-thirds of earnings are USD-based and unhedged. Also, Manulife could be susceptible to a downturn in claims experience or an unusually bad credit market.

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CIBC Recommends Banks & Bonds Over Energy

The Globe and Mail, Tavia Grant, 3 October 2006

Jeffrey Rubin, one of the most bullish voices on Bay Street, has changed tack and now recommends banks and bonds over energy as a slowing U.S. economy puts the brakes on consumer spending.

That drop-off in demand will likely prompt interest-rate cuts on both sides of the border, Canadian Imperial Bank of Commerce chief strategist Mr. Rubin said in a note late Monday. He expects the Bank of Canada will slash its key lending rate by 1 percentage point over the next year.

As the bank loads up on financial stocks and bonds, it is “significantly” cutting its exposure to natural gas shares by slashing the overweight portion of its energy position by half.

“Given the recent string of record warm winters in North America, we do not want to be making what is essentially a weather bet,” said Mr. Rubin, who is also the bank's chief economist.

The stance is a bit of a reversal for Mr. Rubin, who earlier this year predicted record natural gas prices in 2006 and oil prices at $78 (U.S.) a barrel. Natural gas futures have instead lost roughly two-thirds of their value from their record in December while oil prices are currently trading at below $60 a barrel.

Mr. Rubin suggested last month that it might be the time to switch into bonds and protect stock portfolios from an increasingly vulnerable U.S. economy. It's only now, however, that the bank is cutting its energy exposure.

Broadly speaking, “we are continuing to orient our portfolio toward a falling interest rate environment, in both our overall asset allocation and sector selections within the TSX and trust market,” Mr. Rubin said.

The Canadian bank has made other changes to its portfolio recommendations, including:

– adding another 2 percentage points of weighting to bonds from stocks, while remaining overweight in its bond portfolio

– adding 3 percentage points of weighting to financial stocks, as well as 1.5 points to telecoms and another 0.5 percentage point to the utilities sector, which tends to pay hefty dividends

– cutting income-trust exposure to 8 per cent from 10 per cent and trimming 6 percentage points from energy trusts weighting on the expectations natural-gas prices will fall

To offset the changes and help rebalance portfolios, the bank suggests now is the time to move into real-estate investment trusts and the power and pipe sectors.

Added together, the moves mean CIBC will now be 4 percentage points overweight in the financial services sector, rivalling the previous overweight position in energy stocks.

CIBC did note, however, that it remains “fundamentally bullish” on both oil and uranium prices and expects to see records in both commodities in the next year.

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Banks Compete to Court Immigrant Clientele

Canadian Press, Rita Trichur, 1 October 2006

Big banks are targeting new immigrants in a bid to access an estimated $3-billion revenue stream.

Some of Canada's biggest banks are aggressively competing this fall to court the country's booming immigrant population, a largely untapped market of new clients worth an estimated $3 billion a year.

With those big bucks up for grabs, many banks are racing win over these deep-pocketed clients - particularly those from Asian countries - before they even set foot in Canada.

For its part, Bank of Montreal plans to hold free seminars in Hong Kong and mainland China in the coming months to brief prospective immigrants about Canadian banking, taxation, education, real estate and culture.

Prior to their departure, new Chinese clients are able to establish personal deposit accounts in Canada while also arranging MasterCards, banking cards and residential mortgages.

"We want to be proactive," said Peggy Sum, BMO's senior vice-president, Asian market. "All those things are important for settlement."

She added: "Our credit policies cater to the needs of the immigrants. That is, we understand that they have no credit history over here, and perhaps they don't have immediate employment, but we will help them buy a house or a condominium using other criteria to adjudicate the loans."

Bank of Montreal extends that same "immigrant friendly" credit policy to other Asian customers by using referrals through five correspondent banks in South Korea. "In India, we are about to sign up with two Indian banks," Sum said.

Canada accepts about 250,000 new immigrants each year with China and India being the top two source countries.

While there is no set limit to the amount of money a new immigrant can bring into the country, sums in excess of $10,000 must be disclosed at the border.

Immigrants, however, are generally encouraged to bring enough to support themselves for at least six months.

That's creating a lucrative opportunity for Canadian banks given the high savings rate in some Asian countries. In China, that number is high as 40 per cent compared to a negative savings rate in Canada.

"It is cultural," Sum said. "It is in their genes that they need to save money."

These savvy clients, she adds, are keen to save for their children's education and often invest heavily in RRSPs, RESPs and mutual funds, while also subscribing to online discount brokerages.

"Competition is always heating up," Sum said. "Everybody is going after that market."

And it's no wonder given the overall market potential, said Dave Ramsumair, director of local area marketing programs and multicultural markets with Scotiabank, which is planning to launch its own immigrant banking website by the end of October.

Conservative estimates peg the total immigrant market to be worth up to $3 billion a year. Skilled workers represent about $1.5 billion of that total, while those arriving under the family class and as investors represent $1 billion and $400 million, respectively.

"This is good for Canada," Ramsumair said, noting this debunks the myth that immigrants are a drain on the system.

"Clearly, people do come with money. They don't just come empty-handed. On average they bring a significant amount of money that gets invested here.

"They need to buy cars, they need to invest in small appliances for their homes, and multiply the effects of all of that, it's an amazing growth for the economy."

Scotiabank, with representation in about 50 countries around the world, plans to leverage its international presence and correspondent banking arrangements to widen the scope of its immigrant banking services down the road.

"In many ways, it's a new frontier in banking," said Ramsumair.

But to really understand the full market potential, Sum suggests taking a longer-term view. She points to research that suggests immigrants' earning power grows rapidly and exceeds the national average by 25 per cent in their fifth year in Canada and by 37 per cent in their tenth year.

Mark Whitmell, national manager, cultural and community markets with RBC Financial Group, said if Canada was able to eliminate age, gender and cultural barriers, it could add about 1.6 million people to the workforce and increase personal incomes by $174 billion.

"In terms of future growth, we expect that newcomers to Canada will actually exceed the number of individuals born in Canada," he added.

"It is quite an obvious opportunity from that perspective. So, if we want to grow, if we want to acquire new clients, we know that we have to play a role in helping newcomers be successful."

In order to reach them, RBC too has set up a multilingual website and can facilitate non-resident account openings online. The site averages about 5,000 hits a month.

"The Chinese version is already about 35 per cent of the traffic," Whitmell said.

"We've launched that so that anybody, anywhere around the globe has the ability to initiate that relationship with RBC - even before they arrive in Canada."

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