Veritas Investment on Life Insurance Cos

Financial Post, Jonathan Ratner, 21 November 2006

It comes as little surprise that the Conservative government's Halloween decision to tax income trust distributions drove more investors into quality blue-chip financials.

While the announcement may have trust-holders feeling tricked, it appears to have been a treat for dividend-paying stocks such as some of Canada's largest insurance companies.

Ohad Lederer at Veritas Investment Research thinks quality financial services companies Manulife Financial Corp. and Sun Life Financial, both near their 52-week highs, stand to make further gains. His price targets are $44.50 for Manulife and $51.35 for Sun Life. Both company's shares jumped on the Federal government's announcement and have continued to move up since.

In a research note, Mr. Lederer also points out some relevant facts for these companies: As the first Baby Boomers turn 60, these life insurers-turned-wealth managers continue to be in the midst of a growth period. And "over the long-run, we're also all dead."

Mr. Lederer expects both companies will continue to increase earnings and dividends by complementing their core businesses with further investment in more complex wealth management offerings in North America and basic financial products in rapidly developing Asian markets.

Veritas expects Manulife to trade at a premium to Sun Life, and as a result, suggests investors who own both insurers overweight Manulife due to its superior prospects for new business growth.

While Manulife did rise following the government's announcement, "these levels are not 'expensive' given the robust growth and experience gains the company delivers on a regular basis," Mr. Lederer wrote.

Nevertheless, he doesn't consider Manulife invincible, citing the potential of possible blips such as a slowdown in sales or increased competition.

Veritas is also clear about Sun Life shares: they are not cheap. But nor are they considered excessively expensive, since dividend increases are expected to come "at a measured pace" and investment in developing markets could emerge as something significant in the future.

The only other financial institutions with equally-compelling international strategies for Mr. Lederer are Scotiabank and Great West Lifeco.

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TD Bank to Take TD Banknorth Private

Scotia Capital, 21 November 2006

TD Bank to Acquire Remaining 41% of TD Banknorth - Shift in Strategy

• TD Bank announced that it will buy the remaining 41% stake in TD Banknorth for US$32.33 per BNK share or US$3.2 Billion (C$3.6 billion) in an all cash offer. The purchase price represents 15.8x 2007 EPS of US$2.05 per share and 6.5% premium to the closing price on November 17, 2006.

• Closing of the transaction is expected for March or April 2007. This transaction is expected to be accretive to TD by C$0.05 per share in 2007 and C$0.16 per share in 2008.

• TD's Tier 1 capital will decline to 9.8% from 12.1% and tangible common equity ratio will decline to 7.0% from 9.1%. The transaction will be financed by C$3.0 billion primarily of subordinated debt.

Shift in Strategy

• The 100% ownership of TD Banknorth we believe increases TD's strategic flexibility in terms of restructuring, sale, or vending it into a larger entity in the U.S. This buy-in represents a major shift in strategy as TD Banknorth was not the currency for U.S. expansion that the bank had initially anticipated. This step we view as necessary in an attempt to maximize returns from this investment over the next two to three years.

Shareholder Approval

• TD indicated that two large shareholders with discretion over 26 million of the total 99 million shares to be bought in have indicated that they view the transaction favourably.

• Private Capital Management (PCM), which owns 18.2 million BNK shares, and Aerial Capital Management (ACM) which owns approximately 8 million BNK shares, have indicated that they will vote in favour of the transaction.

Total Investment in TD Banknorth US$8.5 Billion

• Upon privatization of BNK, TD will have spent a total of US$8.5 billion or an average of US$35.21 per BNK share for 100% ownership in TD Banknorth. TD paid US$40 per share for its original 51% ownership in BNK.

• Pro-forma, BNK earnings will represent 13% of TD's earnings, versus the current 7% (YTD as at Q3/06).

Recommendation

• We view the transaction from a financial perspective as positive given the weak share price performance of TD Banknorth, small premium and accretive nature of the transaction (increased leverage). However, operational challenges at TD Banknorth remain, including competition, earnings pressure and low shareholder returns.

• Maintain 2-Sector Perform rating on shares of TD Bank.

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Financial Post, Theresa Tedesco, 21 November 2006

'The key is admitting what you don't know."

That's how Ed Clark, president and chief executive of Toronto-Dominion Bank, explained his decision not to tamper with the existing management team at Banknorth Group Inc. just after his bank bought a majority stake in Maine's largest retail bank in 2004.

Two years -- and dismal returns on investment capital -- later, Clark has clearly decided he knows better.

The chief pinstripe most likely to win the award for best executive micro-manager on Bay Street announced that TD, Canada's second-largest by assets, plans to spend US$3.2-billion to buy out the 43% of TD Banknorth it doesn't already own.

The plan is to privatize the U.S. consumer bank, one of the largest in the northeastern United States. And to smooth that along, Clark shoved over William Ryan, TD Banknorth's current CEO and president, and installed his trusted lieutenant, Bharat Masrani, to be his eyes and ears in Portland, Me.

In fact, all of TD Banknorth's existing senior team but Ryan will likely be gone by March, 2008, while Ryan is committed to stay at least until 2010.

"Two years ago we didn't know them and they didn't know us, so certainly I thought it would take a few years [before TD bought 100%]," Ryan said yesterday in an interview. "Working with them in the last couple of years, both parties have gained a lot of respect for each other. We like each other."

With TD's U.S. partnership experiment now officially dead -- and Ryan relegated to wistfully eyeing potential acquisitions he admits he can't buy -- what else could a demoted executive say?

"You have to really be blowing smoke to believe that," said a Bay Street denizen.

Intellectually driven to know how everything works -- just ask his senior executive team about the number of calls they get from the corner office -- Clark's DNA is about control.

"There was no chance that he was ever going to let TD Banknorth do what it wanted. That was never going to happen because it's not in it for Ed to do anything without his approval," said a senior banker familiar with TD's chief executive.

Even so, Clark's Type-A personality aside, TD has discovered that the balance of maintaining local expertise and transplanting the culture and ideas from head office is tricky to achieve.

Perhaps TD's head honcho has figured it's better for the bank's balance sheet for it to be the sole shareholder of TD Banknorth and accrue all the appreciation and earnings flow that go with it, than merely collecting dividends as majority shareholder.

More importantly, TD's decision to maintain a wholly owned subsidiary in the U.S. represents an important strategic statement about the Canadian bank's long-term strategy south of the border.

Its partnership experiment with TD Banknorth is officially dead. In its place, TD has decided to maintain a beachhead in the United States -- TD Banknorth is the largest consumer bank in Maine, New Hampshire and Vermont, and has 600 branches in Massachusetts, Connecticut and New Jersey -- to develop a growth strategy similar to Royal Bank and Bank of Montreal.

So far, TD has found the massive U.S. market a difficult beast to tame. Return on investment capital from TD Banknorth is 4.8% for the first three quarters of 2006, compared with 24.3% for TD Canada Trust and Domestic Wealth Management.

That drag is expected to continue. "It's fair to say we are facing a challenging environment in the U.S.," Clark said yesterday. "We are well aware it may get worse before it gets better."

By privatizing TD Banknorth, Clark can shield the worsening results and alleviate the incessant pressure of delivering quarterly results demanded by the marketplace. That breathing space should provide TD the freedom to pursue a long-term vision even though the short-term prospects are not good.

For now, it looks as if Clark is throwing good money after bad when some say it would be easier to cut and run. That's not Clark's style. He's betting TD's future prosperity is in the United States - and the returns be damned.

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The Globe and Mail, Derek DeCloet, 21 November 2006

Ed Clark's brilliant. Really, he is.

It's not that Ed Clark's deal to double his bet in the United States is a great move; it is far too early to know that. But the way he gets the Street to buy his rationale without a lot of skepticism -- that's the brilliant part. Maybe he is the smartest banker in Canada, maybe not, but he is unquestionably a damn fine salesman.

That's why he can do a part-reversal of his most important strategy, weaken the balance sheet, yet investors implicitly trust him, and Toronto-Dominion's stock price barely moves.

Trivia question: Who said the following? "The reality is, in America today, I would still say TD Bank stock is not their stock of choice. They tend to want to use local currency." If you said, "Ed Clark," give yourself 10 bonus points. He said it in July, 2005 -- all of 16 months ago.

The "local currency" angle was supposedly the bit of genius in TD's U.S. banking play. By controlling TD Banknorth, but leaving it a New York-traded public company, Mr. Clark could enjoy the best of both worlds. He could get a sizable piece of profits from a U.S. retail bank, something that's been extremely tough for a Canadian bank to do. Yet he could also use Banknorth shares in acquisitions. Local management, local stock, local bank, all steered via remote control by a benevolent owner in Toronto: Like we said, it looked brilliant.

And now? Last month, TD effectively gave Banknorth chief Bill Ryan, who'd just turned 63, the early boot upstairs and installed Bharat Masrani, a Toronto-educated TD veteran, as the new boss in Maine. And yesterday, it offered to buy out Banknorth's minority owners for about $3.2-billion (U.S.) and get rid of the NYSE listing.

Perhaps all that local stuff wasn't so important after all. Or at least, it became less important than some other factors, like price. Yesterday's offer for the 43 per cent of Banknorth that TD doesn't already own values the U.S. bank at roughly $7.4-billion. In effect, TD is paying less now than it did to acquire its majority stake in the summer of 2004, a creeping takeover without a big premium attached. Not bad.

But the real insight of this deal is that when it comes to U.S. banking, you are either in or you are out, and there is not much point in going halfway. And Mr. Clark has decided he is absolutely, positively in, with both feet. Banknorth's financial performance under TD's ownership has been uninspired. Return on equity (ROE), a key measure in banking, is south of 5 per cent for Banknorth, and the prospects for profit growth next year are minimal. Large U.S. regionals like M&T Bank, Fifth Third and SunTrust tend to have ROEs in the low to mid-teens.

The safe thing for Mr. Clark to do would be to stop putting money in, stop funding Mr. Ryan's endless acquisition schemes -- just hold everything, as Royal Bank did when it encountered some trouble at its own U.S. regional bank in North Carolina. Perhaps that's the route he would have chosen, too, if not for the restless Banknorth minority asking to be bought out. That he stepped up and wrote a cheque is a signal that he's willing to be more contrarian than a lot of other bankers (and that's probably wise -- why, after all, wait for a turnaround that makes Banknorth more expensive to privatize?).

And yet, it is probably more of a gamble than you'd think if you looked only at the market's blasé reaction (TD fell 0.44 per cent to $67.45). Even for a bank of its size, a $3.2-billion, all-cash deal is a lot to swallow. The bank entered this deal with well more than $1-billion in excess common equity; now it will lose all of that cushion and then some.

That means no more big deals for at least a year, and dividend increases will likely be modest, too, as the bank rebuilds its capital. Mr. Clark knows this, knows that Banknorth's numbers won't look so great in 2007, and knows that if he's wrong in the long run, it's going to harm his legacy at TD. Somehow, he manages to not let any of that bother him. When you've got the aura, why worry?

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The Globe and Mail, Andrew Willis, 21 November 2006

Toronto-Dominion Bank put further U.S. expansion on ice yesterday by offering to take its TD Banknorth Inc. subsidiary private for $3.6-billion, a takeover that would eliminate the Canadian bank's best currency for American acquisitions.

TD is offering to buy the 43-per-cent of TD Banknorth it doesn't own at the request of directors and major shareholders in the Portland, Me.-based bank, which is struggling in the face of intense competition and a slowing economy in the northeastern United States.

The Canadian bank is offering $32.33 (U.S.) for each TD Banknorth share, after buying its initial stake back in 2004 for $40 a share. The offer is a thin 6.5-per-cent premium to TD Banknorth's closing price on Friday. Two U.S. money managers that together hold 11 per cent of TD Banknorth have already agreed to sell.

"It has been and will continue to be a very difficult banking environment," said Bill Ryan, chief executive officer at TD Banknorth. He said: "Our investors were asking when TD would buy the rest of Banknorth, and saying they would like to see it sooner rather than later."

TD Bank CEO Ed Clark said the decision to buy 100 per cent of the U.S. unit now, rather than wait in hopes of a cheaper deal, reflects motivated sellers with short-term outlooks and a deep-pocketed buyer that takes a long-term view of its U.S. operations.

"These privatizations are difficult to do, and we found ourselves with the support of directors and two of the biggest shareholders," said Mr. Clark, pointing to the troubles that companies such as Sears Holdings Corp. have encountered when trying to buy out minority shareholders.

He added: "We were setting aside capital to buy TD Banknorth anyway, so from our point of view, there's no extra cost to buying now."

But Mr. Clark agreed that there is no quick turnaround in sight at TD Banknorth, which has seen profit decline in five of the past six quarters. The outlook for U.S. retail banking is bleak, with the housing market in freefall and a recession possible in 2007.

TD Banknorth used its shares to buy two New Jersey banks in the two years since TD bought in. But Mr. Clark said further U.S. branch acquisitions are on hold until TD Banknorth's profitability improves.

TD rivals such Royal Bank of Canada and Bank of Montreal have also struggled to bring profit levels at U.S. retail operations to anything close to those of their Canadian parents, and both these banks own 100 per cent of the American subsidiaries.

TD's turnaround plans are focused on grassroots marketing and in-branch initiatives aimed at attracting more clients to basic services such as chequing accounts. Owning all of the U.S. bank will make it easier to blend operations between the U.S. bank and its Canadian parent. "It makes sense. Accounting-wise, you can then consolidate it into the overall operation, as opposed to having it hanging out there," said David Rea, chairman of Toronto-based Davis-Rea Ltd., which owns TD shares.

While Mr. Clark expects the offer to be accepted -- it needs the approval of TD Banknorth shareholders and state regulators -- Mr. Clark said: "It's not the end of the world if [TD Banknorth] shareholders say no to this transaction."

If accepted, the deal is expected to close by April, 2007. Not all TD Banknorth shareholders were thrilled with the terms. Bloomberg News reported shareholder Helene Hutt sued the bank yesterday, claiming the $32.33 a share offer is "grossly unfair."

Analysts agreed that TD appears to be offering a discount price. Mario Mendonca of Genuity Capital Markets said he was "positively predisposed" to a buyout that will play out at 16 times TD Banknorth's forecast earnings, compared with multiples of up to 21 times earnings paid for similar-sized U.S. regional banks. "While we thought this move would be several years off, the deal appears to be struck at a reasonable valuation and reduces some potential near-term uncertainty," said analyst Jason Bilodeau at UBS Securities Canada.

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Bloomberg, Sophia Pearson, 20 November 2006

TD Banknorth Inc., Maine's biggest bank, was sued by shareholders over a $3.2 billion buyout agreement with parent company Toronto-Dominion Bank.

Toronto-Dominion, Canada's second-biggest lender, today disclosed plans to buy the 43 percent of TD Banknorth it doesn't already own to boost earnings from U.S. consumer banking. The price of $32.33 a share is ``grossly unfair,'' shareholder Helene Hutt said in a lawsuit filed in Delaware Chancery Court.

``The intrinsic value of TD Banknorth's common stock is materially in excess of the amount offered,'' Hutt said in the suit, one of at least three filed in the court today that seek to block the transaction. The bid is 6.5 percent higher than TD Banknorth's Nov. 17 closing price.

Independent directors of TD Banknorth invited Toronto- Dominion to bid for the shares. Toronto-Dominion intends to turn around TD Banknorth's declining profits in three or four years by making fewer acquisitions and focusing on internal growth, Toronto-Dominion Chief Executive Officer Edmund Clark said on a conference call with investors.

More than a dozen TD Banknorth board members are named in Hutt's lawsuit, including Chairman and CEO William Ryan. Board members breached their duties to stockholders by forcing the sale at an ``unfair'' price and are obligated to ``explore all alternatives to maximize shareholder value,'' the suit said.

Ryan said in a telephone interview that he hadn't seen Hutt's suit and couldn't comment. Hutt's attorney is former Milberg Weiss partner Seth Rigrodsky, who left the firm this year to start his own practice.

Albert Goldstein, who owns 8,000 shares of TD Banknorth, claimed in a separate suit that board members ``misleadingly'' portrayed the offer price as a premium.

The market price of Banknorth's stock has been ``artificially depressed'' in recent months by restructuring charges and other impairments, Goldstein said in his suit.

TD Banknorth shares rose $1.83 to $32.18 in New York Stock Exchange composite trading at 4:16 p.m., giving the Portland, Maine-based company a market value of $7.35 billion.

Hutt's suit is Helene Hutt v. TD Banknorth Inc. et al, 2556-N, Delaware Chancery Court (Wilmington).

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Bloomberg, Sean B. Pasternak, 20 November 2006

Toronto-Dominion Bank, Canada's second-biggest lender, agreed to buy the 43 percent of TD Banknorth Inc. it doesn't already own for $3.2 billion as it tries to revive earnings at its slumping U.S. consumer bank.

Toronto-Dominion offered $32.33 per share in cash for TD Banknorth stock, the Toronto-based company said in a statement today. That's 6.5 percent higher than TD Banknorth's closing price on Nov. 17.

Toronto-Dominion Chief Executive Officer Edmund Clark is trying to turn around TD Banknorth, whose profit has declined in five of the last six quarters. He said that Maine's biggest bank will make fewer acquisitions and focus on internal growth.

``There's simply no question that owning 100 percent will facilitate us driving even harder to do the things you have to do in Banknorth for it to be competitive three or four years from now,'' Clark said on a conference call with investors.

The transaction will add 2 cents to Toronto-Dominion's earnings per share in the year that began Nov. 1, and 12 cents a share in fiscal 2008, Chief Financial Officer Colleen Johnston said. Although TD Banknorth's earnings have declined, Clark said Toronto-Dominion earnings growth this year may top 10 percent. He said TD Banknorth's rate of return of about 6.5 percent is ``not acceptable.''

Toronto-Dominion is taking advantage of a slumping TD Banknorth stock price to buy out remaining shareholders. TD Banknorth shares had risen just 1 percent since March 2005, when Toronto-Dominion completed the purchase of a 51 percent stake. The offer today is 19 percent below Toronto-Dominion's original purchase price of $40 a share in stock and cash.

``TD Banknorth is an average bank that hasn't done anything at all clever,'' said Christopher Lowe, who helps manage the equivalent of $7.4 billion at Burlington, Ontario-based AIC Ltd., including 7.5 million Toronto-Dominion Bank shares. ``That's given TD an opportunity to buy it at a fair price.''

TD Banknorth profit has declined on rising costs for acquisitions and advertising, and as demand for loans slows. The Portland, Maine-based bank said last week that earnings in 2007 will be little changed from this year, or between $2.05 and $2.15 a share.

``This has been, and will continue to be, a very difficult banking environment,'' said TD Banknorth CEO William Ryan. ``We think it's a very fair price, knowing that this market is not going to get better in the near future.''

The bank said independent directors of TD Banknorth invited Toronto-Dominion to make a bid for the shares it doesn't own. The bid was backed by the TD Banknorth board, and the purchase is expected to close in March or April, the banks said in the statement. Private Capital Management and Ariel Capital Management, which own a combined 26.2 million shares, are expected to support the bid, the bank said.

TD Banknorth shareholders saw ``more downside risk than upside potential,'' Clark said on the call.

Shares of Toronto-Dominion fell 30 cents to C$67.45 at 4:10 p.m. trading on the Toronto Stock Exchange. TD Banknorth shares rose $1.83, or 6 percent, to $32.18 in New York Stock Exchange composite trading, for a market value of $7.35 billion.

TD Banknorth has about 600 branches in states including Connecticut, Massachusetts and New Jersey. Since Toronto- Dominion took control of TD Banknorth, the firm has purchased Hudson United Bancorp and agreed to buy Interchange Financial Services Corp., both based in New Jersey.

Toronto-Dominion bought a 51 percent stake of TD Banknorth in March 2005 for about $3.51 billion as its first entry into U.S. consumer banking. The total investment in the bank will be $8.5 billion if this bid is approved. TD Banknorth may be taken private after the purchase.

Standard & Poor's credit analyst Lidia Parfeniuk said TD Banknorth's earnings trends and the erosion of capital sparked by this purchase will delay a possible debt upgrade for Toronto- Dominion.

``The acquisition of TD Banknorth is proving to be somewhat of a disappointment,'' Parfeniuk said in a statement.

The bank may also delay its planned share buyback to later this fiscal year as a result of the investment, Johnston said.

Toronto-Dominion's investment trumps its Canadian rivals. Royal Bank of Canada, the biggest lender, has spent more than $6 billion since 2000 on U.S. banks and brokerages such as RBC Centura, while Bank of Montreal has spent about $2.8 billion since 1984, mostly to expand Harris Bank in the Chicago area.

In the fiscal third quarter, TD Banknorth's contribution to Toronto-Dominion's earnings was C$68 million, or 8.5 percent of overall profit. The bank expects the U.S. unit to contribute about 13 percent of earnings once the deal is completed. Toronto-Dominion reports fourth-quarter results on Dec. 8.

Separately, TD Banknorth shareholder Helene Hutt sued the bank today, saying the $32.33 a share offer is ``grossly unfair.''

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Financial Post, Duncan Mavin, 20 November 2006

Dominion Bank agreed Monday to buy the 43% of Portland, Maine-based TD Banknorth it does not already own for US$32.33 a share, in a move that was widely praised by banking industry analysts.

But the US$3.2-billion acquisition was not popular with some TD Banknorth shareholders and one investor has launched a lawsuit claiming the Canadian bank’s offer is "grossly unfair."

"The intrinsic value of TD Banknorth’s common stock is materially in excess of the amount offered," said lawyers for a TD Banknorth shareholder who filed a suit in Delaware Chancery Court.

The lawyers said they are seeking to block the transaction.

A U.S.-based institutional investor who holds TD Banknorth stocks also said the price is "a little bit low.

"You could argue that its a fair price, but its at the low end of the range of fair," he said.

TD’s offer is 6.5% higher than the closing price of TD Banknorth stock on Friday.

TD chief executive Ed Clark said the offer represented a "fair" price for the remaining shares. Also, TD was invited to bid for the shares by independent directors of TD Banknorth.

The current valuation of Banknorth’s outstanding shares is a reflection of several quarters of weak performance, said Theodore Kovaleff an analyst at New York-based Sky Capital LLC.

"The problems may well have made the price what it is," Mr. Kovaleff said.

TD is taking advantage of a slumping TD Banknorth stock price. TD Banknorth shares had risen just 1% since TD acquired a majority stake. The latest offer is 19% below TD’s original purchase price of $40 a share in stock and cash.

TD Banknorth has seen its margins squeezed by intense competition in the banking sector in the U.S. northeast. The bank has also been unable to integrate acquisitions as smoothly as some observers had hoped; TD Banknorth spent US$2.5-billion to buy two banks this year, including US$1.9-billion on Hudson United Bancorp, described by Mr. Clark as "a fixer upper."

TD Banknorth delivered a return on capital of only 4.8% in the first three quarters of 2006. During that same period, TD’s domestic retail banking and wealth management businesses had return on capital of 24.3%.

Most bank analysts agreed that the deal is positive for TD.

Genuity Capital Markets analyst Mario Mendonca said the transaction simplifies the reporting structure at TD and signals that U.S. acquisitions are on hold for now.

UBS Investment Research analyst Jason Bilodeau called the deal "a reasonable move" that reduces "near-term uncertainty."

TD’s Mr. Clark said Canada’s second-largest lender will focus on improving customer service at TD Banknorth. "There’s simply no question that owning 100% will facilitate us driving even harder to do the things you have to do in Banknorth for it to be competitive three or four years from now," said Mr. Clark.

He said the sought-after improvements will rolled out in the next 18 months and will include "a lot [of measures] that are not that costly."

Mr. Clark also said further acquisitions at TD Banknorth will be on hold until the end of 2007.

Mr. Clark reaffirmed that TD Banknorth chief executive Bill Ryan will be staying with the bank until 2010. Mr. Ryan is stepping down as CEO in March, 2007, and will be replaced by TD veteran Bharat Masrani.

Mr. Clark said Mr. Ryan will focus on potential acquisitions and dealing with the bank’s commercial clients.

Shareholders still have to approve TD’s purchase of the remaining TD Banknorth shares in a vote.

However, it is unlikely shareholders will oppose the deal or that TD will sweeten their offer given the low potential for a rival bidder when TD already owns 53% of the shares.

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RBC Centura's Now in 6 US States

News & Observer, The (Raleigh, NC), 21 November 2006

With two acquisitions already this year, RBC Centura might be on the prowl for more.

The Raleigh bank is emboldened by two years of encouraging quarterly performance and a still-surging economy in many parts of the Southeast.

RBC announced its second deal in four months Nov. 1, when it agreed to pay an undisclosed sum for 39 AmSouth Bancorp branches in Alabama. In August, it paid $456 million for Flag Financial, which operates 17 branches in the metro Atlanta area.

Despite these moves, some analysts think that the company needs to make bigger plays to start producing larger returns for shareholders. RBC is owned by Toronto-based Royal Bank of Canada, for which it still contributes less than 10 percent of revenue.

"We're now in six states and that's where we want to continue to grow," said Scott Custer, president and CEO of RBC Centura. "But we don't have dominant share in any market we're in, so there is still a lot of opportunity."

Custer said that no deals are planned, but that the company would not pass on opportunities to expand its reach. The bank is now in Virginia, the Carolinas, Georgia and Florida. The AmSouth deal is expected to close in March.

Custer said he would eventually like to complement the AmSouth purchase -- which gives RBC strongholds in Huntsville, Mobile and Montgomery, Ala. -- with a banking presence in Birmingham, the state capital.

"Birmingham is an interesting and attractive market, and we will try to figure that out at some point down the road," Custer said. "Right now, our job and focus is to get in the markets where we bought banks and focus our execution there."

Custer declined to comment on merger speculation or possible acquisition targets. RBC will have a little more than $26 billion in assets once both deals close.

Custer said the company will add branches in Florida, Georgia and coastal South Carolina in the next 12 months.

It could be the right time to grow by acquisition, as well.

Small and regional banks are struggling with narrow lending margins, lower mortgage income and early signs of deteriorating credit quality, which many in the industry think will worsen next year.

"It is an extremely difficult operating environment for banks right now, so we believe more mergers and acquisitions are on the way," said Mark Muth, an analyst with FTN Midwest Research in Nashville.

That could mean opportunities for Royal Bank to use its soaring stock price to help RBC buy U.S. companies. Royal Bank's stock is up 30 percent from a year ago. It closed down 6 cents to $46.67 Monday.

Royal Bank could also be helped by weak U.S. currency. With the dollar down about 5 percent against the Canadian dollar, any deal would be less expensive for Royal Bank.

Possible targets being bandied about by stock analysts include Birmingham-based Superior Bancorp; Greenville, S.C.-based South Financial Group and BB&T, which is based in Winston-Salem. Last week, BB&T's CEO, John Allison, said the bank was ready to discuss a "merger of equals" with another bank, securities firm or insurance company.

"I think it's [a BB&T and RBC merger] a low likelihood, but I wouldn't rule it out," said Christopher Marinac, president of Fig Partners, an Atlanta-based investment bank.

BB&T is the fifth-largest bank in the Southeast, with a market value of $23.6 billion and assets of about $119 billion. Royal Bank has market value of $60 billion.

"That doesn't sound like a merger of equals," said Bob Denham, who heads corporate communications for BB&T. "The whole strategy behind a merger of equals is to remain independent. For John [Allison], that means keeping the culture, the BB&T way, the values."

Purchasing Superior Bank would give RBC a strong presence in Birmingham and boost its position in Alabama and Florida, said Garry Tenner, an analyst with SunTrust in Atlanta.

Superior has 57 branches from Huntsville, Ala., to Tampa, Fla. Its size matches RBC's traditional targets -- companies with $1 billion to $2 billion in assets. Superior has about $1.8 billion in assets.

South Financial group would give RBC 107 branches in the Carolinas and 65 in Florida, where RBC is eager to expand.

"It would be a great complement," Marinac said. "The question is whether RBC is willing to pay a lot more than $30 per share, which is what South Financial's board would want."

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Life Insurance Cos Excess Capital Position

Scotia Capital, 20 November 2006

What It Means

• In terms of excess capital as a percentage of BV, we estimate MFC has the most (at 14% of BV), followed by SLF at 11%, IAG at 7% and GWO at 6%.

• In Q3/06 we estimate excess capital positions grew the fastest for GWO and IAG, where buybacks have been limited. GWO's business is the least capital intensive, IAG's is the most.

• We forecast GWO's excess capital position to grow the fastest through 2008 year-end (from currently 6% of BV to 18%, excluding any acquisitions), followed by IAG (from 7% to 14% of BV), then SLF (from 11% to 12%) with a modest decrease in excess capital as a percentage of BV for MFC (from 14% to 12%). MFC and SLF we expect will continue to use between 35% and 50% of EPS to buy-back stock.

• We expect GWO to be most active in deploying its rapidly growing excess capital position, largely through continued "tuck-in" acquisitions in Europe and/or the United States.

Less capital intensive business - means more and more excess capital

• Business is now less capital intensive – which means excess capital positions continue to grow. While traditionally a capital intensive business, the foray into more wealth management type businesses, combined with the off-loading of investment risk (and its associated capital) by way of newer market-based return (i.e., variable and some universal life) type products, has resulted in a situation where less and less capital is needed to support the business. Hence, excess capital positions continue to grow, leaving more and more room to make acquisitions, increase dividends, and buy back stock.

• GWO's business is the least capital intensive of the group, IAG's is the most. In Exhibit 1 we outline our estimates of the components of earnings of the four Canadian lifecos, with buybacks reflecting recent levels.

• GWO's excess capital expected to grow the fastest. Exhibit 2 details the current and projected excess capital positions.

We make the following observations about each company:

• Great-West Lifeco – rapidly rebuild excess capital and continue to make “tuck-in” acquisitions in Europe and/or the United States. We expect the company to maintain its payout ratio in the 40% range, and with little in the way of buyback (other than for management stock options) and a book of business that is somewhat less capital intensive than the other lifecos, we look for the company to rapidly build excess capital, to levels of over $2 billion by the end of 2008. We believe the company will use the excess capital to continue to make “tuck-in” acquisitions, similar to the three it has made over the past year (two U.K. payout annuity blocks and the U.S. 401(k) block, which we believe will add $0.04-$0.06 to EPS in 2007). Great-West Lifeco’s diversified earnings base, strong market position in several niche businesses outside Canada, and good integration track record, all speak well of its ability to continue to make these “tuck-in” type acquisitions. In our opinion, these types of acquisitions are the most effective use of excess capital, and are much more accretive than share buybacks.

• Industrial-Alliance – rebuild excess capital and look to the United States for acquisitions. Industrial-Alliance saw its excess capital position significantly decline due to the Clarington acquisition, and given that its business is more capital intensive than the other Canadian lifecos, we believe the company will likely keep its payout ratio in the 25% to 30% range (the company notes it will approach 28% of trailing EPS in the next 18 months). Given that, and virtually nothing in the way of buybacks, we project the company will grow its excess capital position back to pre-Clarington acquisition levels by the end of 2008. While the company continues to look for acquisition opportunities in the United States, we remain sceptical for several reasons. One, the company has virtually no experience in the U.S. market. Two, we are somewhat doubtful the company will be able to find anything attractive enough at a price less than $500 million, a level that would be accretive without significantly diluting its stock.

• Manulife – begin to chip away at excess capital position now through increased buyback levels and gradually increased payout ratio – why wait until excess capital hits $5 billion? Manulife has significantly stepped up its buyback level in 2006, reflecting a decision, in our opinion, to stop the growth of its large excess capital position, and to do so in an accretive way. Earnings on excess capital generally don’t hit the company hurdle rate (16% in Manulife’s case), so why continue to let it grow? The buyback level in the first nine months of 2006 was more than we expected, and if the company continues at this pace (about 50% of EPS going to buybacks) we believe there should be an additional $0.04 EPS in our 2007 estimate (not in our estimates as of now). We also believe the increased level of buyback activity suggests that, given acquisitions are currently on the expensive side in our opinion; the company is possibly more content to sit on the sidelines for now and wait until a more opportunistic time presents itself. Furthermore, with a stock price at a 15% premium (on a forward P/E multiple basis) to U.S. players, Manulife already has a powerful acquisition currency, and likely little in the way of flow-back risk, as was proven in the John Hancock acquisition. In addition to an increase in buyback levels, we expect a modest increase in the payout ratio, approaching the upper-end of the company’s 25%-35% targeted range.

• Sun Life – still look for acquisitions to improve scale in the United States, with slight increase in buyback and payout ratio. We expect Sun Life, with a slight uptick in its payout ratio and buyback level in 2006, will likely look to modestly increase its excess capital level going forward, as it continues to look for deals in the $1 billion range. The problem is, in our opinion, good deals of this size just aren’t out there in the businesses in which Sun Life needs to build scale (namely U.S. variable annuity, and U.S. individual and group insurance). As such, we believe there is a chance the company could make a “big splash” largely equity acquisition in the United States and with a forward P/E multiple in line with U.S. players, the company has little in the way of an exceptionally strong currency. Thus the dilemma for Sun Life will continue – if you can’t grow organically to get into the top 10 in the United States do you need to make a big acquisition, and if so, how are you going to finance it? Nevertheless, good buyback and dividend support should continue to be a positive for the stock. and we get the impression that right now, in this environment, that is exactly what shareholders want from Sun Life.

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Bank Analysts Foresee Dividend Boost

The Toronto Star, Tara Perkins, 20 November 2006

Most of Canada's big banks will be boosting their dividends, analysts say, after investors flocked to bank stocks when they fled income trusts.

"The banks have considerable capacity to increase dividends," CIBC World Markets analyst Darko Mihelic said in a research note this week.

On average, banks could raise their current dividend by 10 per cent and still sit comfortably within their targeted payout ratios, he wrote.

"With the recent demoralization faced by income trust investors and BMO's move to a higher targeted payout ratio last quarter, we believe it may tempt other banks to push their dividends higher — maybe even their target payout ratios," he added.

In May, the Bank of Montreal announced it was raising its target dividend payout range to 45 to 55 per cent of profits available to shareholders, up from 35 to 45 per cent.

After Ottawa announced on Halloween that it would be curtailing the income trust sector, many investors bought bank stocks, hoping their dividends would replace some of the income trust distributions they would be missing out on in the future.

The S&P/TSX Bank Index rose four per cent in the 10 trading days after Ottawa announced it was curtailing the income trust sector, Genuity Capital Markets analyst Mario Mendonca said in a recent research report.

The bank stocks have enjoyed a strong recovery — from 15 per cent to more than 20 per cent — from their spring lows, due in part to a more favourable interest rate environment, UBS Investment Research analyst Jason Bilodeau said in a note.

The recent increase in the demand for yield should have a marginally positive impact on dividend hikes at the banks, he said. Dividend payout ratios should drift higher through 2007 as the banks accumulate capital and growth slows, he said.

The banks will be releasing their fourth quarter earnings beginning Nov. 28 and going into the second week of December.

Analysts expect the Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce and National Bank of Canada to announce increases to their quarterly dividends this earnings season.

Both Bilodeau and Mendonca are looking for those four banks to raise their dividends by between three and eight per cent from the previous quarter.

CIBC's Mihelic said the fourth quarter could see "materially better-than-forecast dividend hikes" because the banks are currently paying out less than their targets.

"If each bank simply decided to raise the current dividend up to its own maximum targeted payout ratio (of 2006 earnings), it would result in an average increase of 11 per cent," he wrote.

CIBC World Markets believes the market has not fully priced in the effect of Ottawa's new tax on income trusts.

"As most income trusts continue to suffer over time, we suspect the banks will further benefit," Mihelic wrote. "Valuations have improved dramatically and virtually overnight with the government's actions on income trusts being the catalyst." The bank's valuations would be further supported if they grew dividends per share more quickly than earnings grow, he wrote.

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RBC Back on Prowl in US Following Probes

The Globe and Mail, Andrew Willis, 19 November 2006

Royal Bank of Canada expects to close its first U.S. retail bank purchase in three years with next month's U$456-million acquisition of Atlanta-based Flag Financial Corp.

The long hiatus from deal-making in the United States reflects the bank's move to improve operations at its 270-branch RBC Centura division. But the delay can also be traced to the bank's brush with tough new anti-money laundering provisions contained in the USA Patriot Act.

The past year saw RBC Centura, based in Raleigh, face a probe from North Carolina's Commissioner of Banks and the U.S. Federal Reserve Board.

The two regulators did a joint “informal investigation” into Centura's compliance with the Patriot Act, the Bank Secrecy Act and “other anti-money laundering statutes.”

In a note buried in its annual information form last year, Royal Bank explained, “These compliance issues ... may have an impact on our operations in the United States with respect to expansion and the powers otherwise exercisable as a financial holding company.”

In simple terms, regulators wouldn't let RBC Centura buy more US. banks until it sorted out the compliance problems. A spokeswoman acknowledged the bank had been working with regulators, but she said the decision to stop acquisitions was driven more by the need to improve profitability at RBC Centura than compliance issues.

RBC Centura's acquisition of 17-branch Flag Financial, which was approved by regulators last week, marks a return to U.S. retail expansion for Canada's second-largest bank. “RBC Centura is a well-run firm that has taken exemplary steps to deal with regulatory concerns,” Joseph Smith, commissioner of banks for North Carolina, said in an interview. The state has 45 staff keeping an eye on 90 banking companies, along with savings and loans and other financial institutions.

“RBC Centura has hired a number of strong people to deal with regulatory and supervisory issues,” said Mr. Smith, who recently spoke at a conference on the USA Patriot Act co-sponsored by RBC Centura. He declined to comment on specifics of the recent investigation.

Like many U.S. regional banks, RBC Centura was built rapidly through consolidation of a number of small community banks. Analysts and sources familiar with U.S. banking said these newly acquired branches use different technology and internal audit systems, which leads to internal compliance problems. Many of these banks ran into regulatory problems following passage of the Patriot Act shortly after the Sept. 11 terrorist attacks.

The Patriot Act raised the compliance threshold by strengthening the Bank Secrecy Act, requiring financial institutions, including banks, creditors and even casinos, to inform the U.S. Treasury Department of transactions they find to be out of the ordinary.

The Patriot Act has caused enormous headaches in U.S. financial circles. In one incident, a Florida church had its chequing privileges shut down because a nun with signing authority on the account didn't have an identification card on file.

While RBC Centura solved its regulatory problems by beefing up staff and systems, other banks have been sanctioned. AmSouth Bank of Birmingham, Ala., recently paid a $10-million fine to state and federal regulators over its violations of the Bank Secrecy Act.

RBC Centura's purchase of Flag Financial is expected to close on Dec. 8. This month saw RBC Centura offer to buy 39 branches in Alabama formerly owned by AmSouth. No price was disclosed on that deal.

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Dundee Securities' Analyst on Banks

Financial Post, Duncan Mavin, 17 November 2006

Annual bank earnings season starts in less than two weeks and anything less than a series of gargantuan profits will be a major disappointment.

"We expect that the banks' string of profitability will remain unbroken in the fourth quarter of 2006, with respectable levels of earnings to be reported by all institutions," said Dundee Securities Corporation analyst Susan Cohen.

But with that performance already built into bank stock prices, how do you pick which one gives the best return?

Ms. Cohen has narrowed down the choice for the year ahead, based on the assumption that earnings growth will slow to less than 10% for all the banks, but to around 5% for some.

"[Previously] we had mentioned that we expect only Toronto-Dominion Bank, National Bank and Royal Bank of Canada to provide investors with double-digit return over the next 12 months," she said in a note.

However, with RBC's stock outperforming most of its major rivals last week, jumping 2%, compared to 0.6% for the sector, the number of banks likely to provide investors with returns of more than 10% in the next year has fallen, said Ms. Cohen.

"The list is getting thinner, with only TD and National Bank filling this criterion," she said.

Meanwhile, notes Ms. Cohen, four banks could hike their dividends this quarter. The government's clampdown on trusts has sent cash scuttling to the banks where steady dividend payouts are perhaps the closest proximity for investors to the trust's distributable income. And some bank dividends are set to become even more attractive.

"We anticipate Canadian Imperial Bank of Commerce, Bank of Montreal, Bank of Nova Scotia and National Bank will announce dividend increases in conjunction with fourth quarter 2006 earnings releases," said Ms. Cohen.

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Scotia Capital Preview of Banks' Q4 2006 Earnings

Scotia Capital, 16 November 2006

Overview

Banks begin reporting fourth quarter earnings November 28th. We are looking for continued earnings resilience with growth expected at 14%. We are upgrading our bank share price targets, reflecting low level of interest rates, dividend and earnings growth and profitability. Seasonality and the flow of funds as a result of the Income Trust tax changes are assisting bank share price performance. RY is our 1-Sector Outperform recommendation. Maintain Overweight Recommendation

Banks Begin Reporting November 28

• Banks begin reporting fourth quarter earnings with Bank of Montreal (BMO) on November 28, followed by National Bank (NA) and Royal Bank (RY) November 30, Canadian Imperial Bank (CM) and Canadian Western (CWB) December 7, Toronto-Dominion Bank (TD) and Bank of Nova Scotia (BNS) December 8 and Laurentian Bank (LB) closing out reporting December 12. Scotia Capital's earnings estimates are highlighted in Exhibit 2, Consensus Earnings Estimates/Target Prices Exhibit 6, Conference call information Exhibit 7, and Dividend Increases and Trends Exhibit 8.

Q4 Earnings Growth Forecast 14%

• We expect fourth quarter earnings for the bank group to increase 14% year over year and 1% sequentially. Earnings growth is expected to be driven by wealth management with solid earnings from retail and wholesale. RY is expected to lead in earnings growth at 17% each, respectively. RY earnings growth is expected to be driven by the strength of retail and wealth management platforms.

• Bank group profitability is expected to continue to run at historical highs on very large capital positions with return on equity of 20.8%.

• Wealth management earnings are expected to continue to be strong, although only three banks disclose these earnings on a separate basis. Bank average mutual fund assets are up 14% from a year earlier and 2.3% sequentially. The banks continue to dominate mutual fund sales; particularly RY and TD with market share of long-term asset net sales an astonishing 40% and 37% respectively during the quarter.

• Retail banking earnings are expected to remain solid, although we expect some slowing in earnings growth in 2007 and 2008 as loan growth slows due to the weakening real estate markets. The major question is to what degree net interest margin expansion may offset the lower volume growth. The prime rate has increased 175 basis points or 41% in the past two years. The increase in prime rate has stalled margin compression as the retail net interest margin has been stabilizing over the past year, reaccelerating retail bank earnings growth. Last quarter the retail net interest margin actually increased modestly.

• This quarter, Q4/06, prime rate was unchanged, the first quarter in over a year (Q3/05) where the prime rate did not increase, which we believe bodes well for further retail margin improvement. This could be a source of positive earnings surprise this quarter. The rapid rise in prime has made margin expansion difficult. However, a stable prime rate going forward may allow the benefits of margin compression reversal to flow through to the net interest margin and may be a source of further bank earnings resilience in 2007 and 2008.

• Wholesale banking earnings are expected to remain solid with the revenue picture mixed, supported by cost containment. On the revenue side, underwriting is expected to be weaker, partially offset by continued strong M&A revenue with equity trading volume up. TSX IPO's $ value declined 59% in Q4 sequentially with the number of deals down 7%. Canadian M&A Deals closed by Value increased 43% sequentially. Equity markets were relatively strong in the quarter, with S&P/TSX increasing 4.3%, TSX trading volume up 7% and trading value up 5%. In terms of fixed income, bond yields in both Canada and US declined by 29 bps and 38 bps, respectively, during the quarter. The wholesale net interest spread was positive in the quarter, improving 4 bps with prime - BA spread averaging 167 bps. Loan loss provisions are expected to remain extremely low.

• Other earnings factors in the quarter are that stock based compensation is expected to be up due to the 9% increase in bank share prices during the quarter. The C$ weakened slightly in the quarter against the US$ and 2.6% against the Peso.

Dividend Increase Candidates BMO, CM and NA

• Dividend increase candidates this quarter are BMO, CM and NA, with dividend increases expected to be in the 4% to 8% range (Exhibit 8). This follows dividend increases announced in the previous quarter by RY and TD of 11% and 9%, respectively.

• The bank group's dividend payout ratio on our 2006 earnings estimates is 44% and 40% on our 2007 earnings estimates, with BMO at a high of 49% and NA and TD the low at 40% and 41% respectively. We continue to expect bank dividend payout ratios to drift towards 50%.

Stock Split Candidates CM, BMO, TD and NA

• CM, BMO, TD and NA are stock split candidates given their respective share price levels, with CM the most likely. This follows stock splits by RY and BNS in March 2006 and March 2004. Fiscal 2006 Earnings Growth Forecast 14.6% - Fourth Straight Year of Growth Averaging 17%

• Banks are expected to wrap up another very strong year in 2006 with earnings growth of nearly 15%, the fourth year of high growth. Bank earnings growth was 22%, 16%, and 16% in 2003, 2004 and 2005 respectively. Profitability is expected to be a record with return on equity of 21.4%. The leader in earnings growth in 2006 is expected to be RY for the second straight year at 19% with NA and BMO growth lagging at 9% and 12% respectively.

Upgrading Bank Share Price Targets

• We are upgrading our bank share price targets 7% based on a target P/E multiple of 16.1x on our 2007 earnings estimate versus our previous P/E multiple target of 15.1x. The increase in our target multiple is consistent with our long term forecast multiple supported by the continued low level of interest rates. Our long term 16x P/E multiple target is based on a 5% government bond yield, not the current 4% and is based on bank fundamentals including level of profitability, balance sheet strength, revenue mix, low earnings volatility and solid long term earnings growth rates.

• In addition to banks having compelling valuations on a yield basis versus bond yields, pipes & utilities, income trusts and overall equity markets, banks should benefit from flow of funds. We expect the difficulties in the income trust market to create increased investor demand for bank stocks. In addition, enhancements to the dividend tax credit should be beneficial to bank share prices as the tax benefits work through the system over the next few years. Banks should also benefit if there is sector rotation away from the resource sector to more defensive stocks. The banks' one year beta is at historic low levels at 0.39.

• We are increasing our bank index target 7% to 28,800 for total expected return of 24%. Bank dividends yields of 3%, return on equity of 20% and low betas are expected to attract significant investor interest. Our individual bank share price target increases are highlighted in Exhibit 1.

Strong Fundamentals – Remain Overweight

• We believe bank fundamentals remain strong, with low balance sheet risk, high capital levels, strong asset quality, record profitability, and historically low earnings volatility.

• Bank stocks are outperforming the TSX year-to-date with the bank index up 14% versus 10% for the overall market. The bank index is also outperforming the market thus far in the fourth calendar quarter, up 6.4% versus the market at 5.6%. If this outperformance holds, this will represent outperformance in 23 out of 27 years in calendar fourth quarter.

• Banks are trading at a low 13.3x our 2007 earnings estimates, with bank dividend yields relative to bonds (Exhibit 13), equity markets (Exhibit 14), income trusts (Exhibit 16), and pipelines and utilities (Exhibit 15) all in the Strong Buy range. Reversion to the mean would result in the bank index increasing on a relative basis by 44%, 31%, 14% and 27% versus the bonds, equity markets, income trusts and pipes & utilities.

• Canadian Banks' are trading at a 9% premium to the major U.S. banks and 13% discount to U.S. Regional Banks. The Canadian Banks premium, we believe, is fully supported by the respective government bond yields and lower earnings risk in the Canadian Banks, higher profitability and stronger capital positions.

• We reiterate our Overweight Banks recommendation, based on attractive valuation, strong fundamentals, and low relative risk.

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

• We continue to have no sells in the bank group on an absolute return basis.

Fourth Quarter Highlights

• Bank of Montreal is expected to report $1.29 per share, a modest 5% YOY increase and a decline of 1% sequentially. Security gains have a low level of sustainability ($0.02 per share in the previous quarter) given minimal unrealized security surplus. We expect the bank might be challenged to repeat the level of trading revenue that it recorded in the previous quarter. A dividend increase of 6.5% to $2.64 per share is expected.

• Canadian Imperial Bank is expected to report $1.65 per share, an increase of 14% YOY and a decline of 3% sequentially. CIBC has been very successful at cost reduction, with revenue and market share weakness its biggest challenge. A dividend increase of 4.3% to $2.92 per share is expected.

• National Bank is expected to report $1.23 per share in the fourth quarter, an increase of 12% YOY. Wealth management earnings should remain solid; however the bank has been very reliant on security gains over the last few quarters for earnings growth. A dividend increase of 8.0% to $2.16 is expected.

• Royal Bank is expected to report $0.95 per share, an increase of 17% YOY and 4% QOQ. Retail and wealth management earnings are expected to remain solid with overall earnings quality high.

• Toronto-Dominion Bank is expected to report $1.22 per share, an increase of 15% YOY. Retail earnings are expected to continue to be the earnings driver, with the U.S. platforms a drag on earnings growth. TD Ameritrade earnings contributions for Q4 are estimated at $0.07 per share versus $0.08 per share in the previous quarter with TD Banknorth earnings of $0.09 per share, unchanged from the previous quarter.

Recent Events

BMO – Acquisition of First National Bank & Trust

• On September 27, BMO announced that its U.S. subsidiary, Harris Financial Corp., agreed to acquire First National Bank & Trust (FNBT) for US$290 million. The transaction is expected to close in January 2007. Excluding one-time items, the transaction is expected to be accretive to BMO's cash EPS in year one. FNBT has 32 branches and 33 ABMs in Indianapolis and the surrounding communities of Kokomo and Terre Haute.

RY – Further Extending Global Exposure

• On September 6, RY announced its intention to acquire American Guaranty & Trust (AG&T) of the National Life Group. The acquisition allows RBC to provide U.S. trust solutions to high net worth clients. AG&T has over 30 employees and holds more than US$1.3 billion in trust and investment accounts. The transaction closed on October 3, 2006.

• On September 19, Goldman Sachs JBWere Asset Management announced that it had selected RBC Dexia Investor Services to provide fund administration and transfer agency services for its AUD$8 billion portfolio of funds in Australia.

• On October 17, it was announced that RY is among four banks to lead a multi-billion pounds infrastructure loan backing Australian investment bank Macquarie's 8.0 billion pounds bid for Thames Water. Other banks include Barclay's Bank, Dresdner Kleinwort and HSBC.

• On October 25, RBC Capital Markets entered into an agreement to acquire the broker-dealer business and certain of assets of Carlin Financial Group (CFG). The transaction is expected to close in the first quarter of 2007. Terms of the transaction were not disclosed.

• On October 30, RY entered into a joint venture with China Minsheng Banking Corp. to launch a new Chinese joint venture fund management company. The joint venture will create, manage and sell mutual funds in local currency to retail and institutional investors in China. Under the agreement, RY will hold a 30% interest, China Minsheng Bank will hold 60% interest and Three Gorges Finance Co. will hold the remaining 10% interest.

• On November 1, RBC Centura Bank agreed to acquire 39 branches in Alabama from AmSouth Bancorporation (ASO.N). This transaction will make RBC Centura the state's 7th largest financial institution by deposits. As at July 31, 2006, ASO had US$1.5 billion in loans and US$2.0 billion in deposits. Terms of the transaction were not disclosed and expected closing is March 2007. This transaction is not expected to have a material impact on RY earnings.

TD – TD Ameritrade and TD Banknorth Earnings Weak

• TD Ameritrade (AMTD) reported Q4/06 cash earnings of US$0.21 per share, versus IBES estimate of US$0.23 per share. At its current ownership level of 39.5%, the contribution to TD would be C$53 million or C$0.07 per share.

• TD Banknorth (BNK) reported Q3/06 cash earnings of US$0.51 per share, versus US$0.56 per share in the previous quarter and US$0.63 per share a year earlier. Consensus was US$0.52 per share for the quarter. TD Bank (TD) indicated that BNK's contribution this quarter would be C$63 million or C$0.09 per share versus C$0.09 per share last quarter and C$0.10 per share a year earlier.

• On September 28, AMTD announced the realignment of its management team, effective September 30. Bill Gerber took on the role of Chief Financial Officer, with Randy MacDonald the new Chief Operating Officer, Chris Armstrong the new Chief Strategy Officer and Asiff Hirji the new President of the Client Group.

• On October 23, BNK announced that Bharat Masrani will assume the role of Chief Executive Officer effective March 1, 2007 in addition to his current role of President to which he was appointed on June 23, 2006.

• Between October 26 and October 30, TD purchased 233,000 shares of BNK at an average cost of US$29.86 per share, bringing its total ownership level of BNK to 130.1 million shares or 57.0%.

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Motley Fool on Manulife

Motley Fool, Will Frankenhoff, 16 November 2006

Life has been good for investors in Manulife Financial, as shares of Canada's largest life insurance company have advanced some 22% over the past year. That outpaces the average 17% return posted by peers such as Sun Life Financial and MetLife, while trouncing the anemic 4% gain managed by once-mighty American International Group.

Thanks to this strong performance, shares of Manulife currently hover near all-time highs, trading at roughly 13 times fiscal 2007 estimates and 2.5 times book value. That's not exactly inexpensive relative to the above-mentioned competitors, who trade at an average 11 times forward estimates and 1.7 times book value.

Does this mean that Manulife is overvalued and that it's time for prudent investors to cash in their chips? In my Foolish opinion, the answer would be an emphatic "no." In fact, I believe that this premium -- no pun intended -- is well deserved and that further upside remains in the shares. Simply put, I like Manulife because of the company's leadership positions in both the Canadian and U.S. life insurance markets, the growth potential of its expanding Asian businesses, and the likelihood that the company will continue to grow earnings more quickly than its competitors.

Manulife goes on

Maunlife Financial, which merged with John Hancock Financial back in April of 2004, is the largest insurance company in Canada, the second-largest in North America, and the fourth-largest in the world, based on market capitalization. In addition to offering general life insurance products such as individual life insurance, group and health insurance, and long-term health, Manulife also provides mutual fund products through Elliot & Page Ltd., and wealth- and asset-management services through Seamark Asset Management. As of Dec. 31, 2005, insurance premium income accounted for 60% of its total revenue, investment income provided 29%, and other items contributed 11%.

Manulife segments its operations into five divisions: U.S. Insurance, U.S. Wealth Management, Asia & Japan, Reinsurance, and Canada. The company conducts business under the Manulife Financial brand in Canada and Asia, and as John Hancock in the United States. As of Sept. 30, 2006, the company had a record $341 billion (U.S.) in total funds under management, with more than 20,000 employees serving customers in 19 countries and territories globally.

Well, I don't know about you, but that generic description of Manulife's business has certainly cured my insomnia. Let's get to the reasons so why investors might be interested in this Canadian behemoth.

Leadership positions in the U.S. and Canadian markets

As I stated previously, Manulife holds leadership positions in both the U.S. and Canadian life insurance markets, markets that -- according to a survey conducted by insurance giant Swiss Re -- generated gross premiums of $517 billion and roughly $60 billion, respectively, in 2005.

Based on a variety of independent market surveys, including LIMRA, Tillinghast, and Fraser, Manulife's core life businesses in the United States were ranked (as of March 31, 2006) in terms of sales as follows: No. 1 in group long-term care, No. 2 in individual long-term care, No. 2 in universal life, and No. 3 in variable life. The company also didn't do too badly in terms of wealth-management products, either.

In the land of our northern neighbor, the company holds the No. 1 position in sales of group life, the No. 2 place in individual life, and the No. 3 spot in group health insurance. Manulife's position in offering wealth- and-asset management services to Canadians is equally notable, ranking No. 1 in group pensions, No. 2 in individual fixed annuities, and No. 4 in sales of individual segregated funds

The combination of these strong market positions, along with new product introductions, allowed Manulife to grow net income from its North American operations by some 25% in dollar terms in the most recent quarter ended Sept. 30.

Well, while the North American operations will remain the backbone of Manulife's business for the foreseeable future – and a highly profitable one at that – its business in Asia and Japan should be a main contributor to future growth.

Asia & Japan

According to Swiss Re, Asia boasts the fastest-growing insurance markets in the world (10.5% premium growth in 2005), and Japan is the world's second-largest life insurance market, with $376 billion in premiums. Manulife is poised to benefit from both of these trends, as evidenced by its positioning in various markets. It's got the No. 3 position in Vietnam, No. 4 in Shanghai, No. 5 in Hong Kong, No. 5 in Indonesia, No. 5 in Japan (in variable annuities), and No. 7 in Singapore, among others.

One area that shows exceptional promise is -- surprise, surprise -- China. The company's 51%-owned joint venture, Manulife-SinoChem Life Insurance, is currently the third-largest life insurance venture in a country where less than 4% of the population has coverage. According to Emil Lee, CFO of the venture, total premiums in this venture are estimated to reach roughly $106 million, up 20% over last year. The company is aggressively tackling this "final frontier" with plans to double its China sales outlets by the end of the decade, increase its direct sales force by 40% in 2006, and launch an asset-management joint venture with an appropriate partner.

To make a long story short, I believe that simple demographics and the rapid emergence of a consumer-oriented middle-class will make Asia the economic powerhouse of the 21st century. Manulife is in an excellent position to capitalize on this development.

Valuation

As I stated previously, Manulife trades at a premium to its peers, at roughly 13 times fiscal 2007 estimates and 2.5 times book value. That said, Manulife trades at a slight discount to its projected long-term growth rate (not counting the 2% yield), while Sun Life, MetLife and American International Group either trade in line with or at a premium to their estimated growth rates. Furthermore, while Manulife boasts a return on equity of 14% over the past 12 months, its peers average around 11%. That gap is widening, since Manulife has actually managed to raise its ROE to 16.6% in the most recent quarter, up from a mere 12% back in the third quarter of 2004.

All in all, I believe that Manulife is a premium way for long-term investors to play both the strength of the North American life insurance and wealth management markets, as well as the burgeoning growth of Asia.

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TD Banknorth May Shut Branches Amid Profit Woes

Reuters, Jonathan Stempel, 16 November 2006

TD Banknorth Inc., the U.S. retail banking arm of Canada's Toronto-Dominion Bank, on Thursday said it may close branches to cut costs as "aggressive" competition weighs on profitability.

Chief Operating Officer Peter Verrill also projected fourth-quarter profit around the low end of the bank's prior forecast, and estimated 2007 profit below analysts' forecasts. He spoke at a Merrill Lynch & Co. financial services conference.

Verrill said TD Banknorth, long one of the fastest-growing eastern U.S. banks, may close or consolidate some of its roughly 600 branches, as loan growth slows and customers shift to costlier, higher-yielding deposit accounts.

Portland, Maine-based TD Banknorth operates in eight states from Maine to Pennsylvania.

Noting that TD Banknorth earned 51 cents per share before items in the third quarter, Verrill said that is "probably a good benchmark and barometer for what we think the fourth quarter would provide."

He also projected 2007 profit of $2.05 to $2.15 per share. Verrill characterized the forecasts as "not changed" from last month, when TD Banknorth had projected fourth-quarter profit of 51 cents to 54 cents per share.

Analysts polled by Reuters Estimates on average forecast profit per share of 51 cents for the fourth quarter, $2.14 for 2006, and $2.17 for 2007.

Verrill said this year might be the first since the early 1990s that earnings per share will fall. "We're not happy about that," he said.

Like many banks, TD Banknorth is being hurt by converging long- and short-term interest rates, creating an "inverted" yield curve that narrows the gap between what the bank can earn on loans and must pay on deposits.

"We are still being negatively impacted by the inverted yield curve (as) deposit customers continue to strive for higher levels of interest rates, but also by the increased competition (as) banks fight to maintain their piece of a shrinking deposit and loan base," Verrill said.

TD Banknorth paid $1.9 billion for Mahwah, New Jersey's Hudson United Bancorp in January. It expects add 30 branches in early 2007 when it pays $481 million for Saddle Brook, New Jersey's Interchange Financial Services Corp.

TD Bank last year paid $4 billion for a majority stake in TD Banknorth, and now owns about 57 percent.

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Canadian Banks Looking Pricey

Report on Business Television, 15 November 2006

Click here for the ROBTv video clip, of Darko Mihelic, Financial Services Analyst, CIBC World Markets.

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Recap of Insurance Cos Q3 2006 Earnings

Scotia Capital, 15 November 2006

Life Insurance Companies

• Buoyant U.S. equity markets contribute to stronger-than-expected quarter. On average, the 11% YOY EPS growth in Q3/06 was 2% better than our 9% expectation, in part due to strong equity markets in the U.S. and in part due to better-than-expected claims experience. After “misses” in Q1/06 and Q2/06, largely due to the weight of a rapidly appreciating CAD versus USD in Q1/06, and weak U.S. equity markets in Q2/06, the “beat” in Q3/06 was much needed.

• Strong U.S. markets, a weakening CAD versus the USD, and stable long-term rates – all suggest there is a good chance the lifeco group could continue to exceed estimates. Assuming the U.S. dollar continues to appreciate, U.S. equity markets (up 8% since June 30, 2006) continue to be strong, and long-term interest rates, especially in the U.S., remain in the 4.50% range, we expect the Canadian lifecos could exceed our expected average EPS growth estimates of 13% in 2007 and 11% in 2008.

• Earnings are becoming increasingly sensitive to equity markets – additional volatility is a slight negative in our opinion. Not only is nearly half the earnings of the lifecos related to wealth management businesses, and hence susceptible to changes in equity markets, reserves for guarantees on segregated fund and variable annuity business, which are effectively “marked to market” at each quarter-end, add an additional element of equity market volatility. We estimate that each 10% move in equity markets is worth about 9% of EPS for Industrial-Alliance, 6% for Sun Life and Manulife, and 5% for Great-West Lifeco. Finally, we expect that, in the new accounting regime, beginning Q1/07, when assets supporting company surplus are “marked to market”, and realized gains and losses on assets supporting surplus are immediately recognized into income, earnings will be even more susceptible to changes in equity markets, with Manulife the most volatile.

• Up 6% in the last two weeks primarily fund flow-related – we believe the Canadian lifeco valuations are currently somewhat stretched. The October 31, 2006, proposal to tax income trusts has been the primary catalyst in the group’s recent 6% run, along with the banks’ similar 6% run over the same time period, flat Canadian and U.S. markets and flat U.S. lifecos and U.S. banks. As the beneficiary of income trust funds flow, the Canadian lifeco forward P/E multiple increased nearly 5%, to 13.6x, significantly higher than the 12.5x average (since the beginning of 2002). Furthermore, versus the U.S. lifecos, which reported a similarly stronger-than-expected Q3/06, the Canadian lifecos jumped to a 12% premium (from 7% two weeks ago), well above the 5% mean. Finally, versus the Canadian banks, Canadian lifecos are trading at a 4% premium, in line with their 2% average. We would expect the banks, with significantly higher dividend yields, to be a more logical beneficiary of funds flow out of income trusts. As well, a declining long-term interest rate scenario, similar to what we’re seeing, is generally more punitive to the lifecos.

• U.S. top-line growth slows to a more “normal” level – we expect the trend to continue. While traditionally the slowest quarter for sales, Q3/06 top-line growth was weaker than we expected, with U.S. individual insurance sales flat YOY organically (after increasing into the high teens in the first half of 2006), variable annuity sales up just 10% (after increasing over 20% in the first half of 2006), and U.S. pension premiums and deposits up just 9%, after increasing nearly 20% in the first half of 2006. The fourth quarter will be the tell-tale quarter, but we expect top-line growth to continue to rein in toward more long-term mid-single digit growth for individual insurance and high single to low double digit growth for variable annuity business.

• Mature Canadian market has a stronger-than-expected quarter in individual insurance sales, primarily due to a resurgence of Manulife. After losing market share in the first half of 2006, Manulife, with 13% growth in sales in Q3/06, likely picked up share at the expense of Industrial-Alliance, which was forced to increase premiums (perhaps later than others) due in part to declining long-term Canadian interest rates. That said we do not look to the Canadian market as a catalyst for growth. It is too mature, in our opinion, with declining penetration rates. Furthermore, despite being an oligopoly, the market does not behave like one, in our opinion.

P & C

• Canadian personal auto continues to be very favourable. ING Canada’s combined ratio in Q3/06, at 85%, showed no change from the exceptionally strong Q2/06 (at 84%) and little change from the significantly reserve release aided 80% in 2005 and 83% in 2004. Just how long this trend continues is the question. History seems to suggest that in this cyclical market, where government has a say in rate regulation, exceptionally strong underwriting results cannot last forever. That said, the trend in the direction of premium rates is starting to turn from negative to positive, and markets remain rational. We remind investors that ING Canada’s “miss” in Q3/06 was primarily due to poor results in personal property, and not in the all-important personal auto, as storm-related claims were higher than normal.

• U.S. non-standard auto shows signs of improvement. The U.S. non-standard, an important part of the Kingsway story, showed signs of improvement in Q3/06, with Kingsway’s U.S. non-standard top line flat once again organically (an improvement from the 10% decline in 2005), and competitors such as Infinity, Direct General, and Bristol West showing 6% topline growth in the quarter, after experiencing declines in the first half of 2006.

• Canadian commercial remains competitive but rational. Excluding Northbridge’s U.S. business, the combined ratio was 86%, in line with 2005, and premiums were down 4%, suggesting that despite the soft landing, the market remains rational.

• Still not an attractive entry point for cyclical P&C market. Overall P&C insurers had an excellent Q3/06, helped by low catastrophe losses and favourable reserve development. Record profit levels continue to boost capital levels, and, going forward, we expect softening prices in the U.S. in particular to put increasing pressure on profitability. Valuations for the U.S. P&C insurers are in line with historical averages, and, more importantly, still slightly above the average levels experienced in a soft market. Unless we see valuations decline 5%-7%, we advocate a below market weight for the P&C group.

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Canadian Banks in China

Investment Executive, Rudy Mezzetta, 14 November 2006

China’s sizzling economic growth and vast pool of untapped savings wealth is spurring Canada’s largest financial firms to establish beachheads in the Asian country, hoping that investments they make today will pay off big tomorrow.

In October, Royal Bank of Canada announced that it had struck a deal with a Chinese bank to launch a mutual fund joint venture in China.

“As China continues to do extremely well, in terms of growth, and as the population ages, as it is doing in other countries, there will be more focus on savings and investments — even more that there is now,” says George Lewis, executive vice president of wealth management for RBC and chairman and CEO of RBC Asset Management Inc. “That is something that we see as an opportunity, particularly because we’ve done very well serving the investment needs of Canadians.”

In our domestic market, RBC Asset Management accounted for almost a quarter of all mutual fund sales in 2005.

Canada’s largest bank is taking a 30% ownership position in the China-based joint venture, valued at about US$25 million, with China Minsheng Banking Corp. Ltd. holding 60% of the firm and Three Gorges Finance Co. Ltd. claiming 10%. The deal, which is still pending regulatory and other approvals, would see the creation of Minsheng Royal Fund Management Co. , to be based in Shanghai.

The Chinese economy grew at a torrid rate of almost 10.9% in the first half of 2006, bettering last year’s growth rate of 10.1% in the same period, according to the Chinese government. The savings pool in the country is estimated by some to be about US$1.7 trillion, with less than 1% of that figure actively invested.

RBC isn’t the first Canadian bank to enter the mutual fund business in China. Bank of Montreal has held a minority interest in Fullgoal Fund Management Co. Ltd. since 2003, when it bought a 17% share in the venture. BMO increased its equity position to 28% the next year to become equal partners with China’s two largest securities firms. A third China-based financial services company holds the remaining 16%.

In fact, four of Canada’s Big Five banks have significant business operations in China, mostly focused on institutional banking rather than retail. TD Bank Financial Group is the exception, electing to concentrate on its U.S. businesses for now.

The joint venture between RBC and China Minsheng Banking, the latter a 10-year-old firm with assets of $78 billion and 240 branches, is in its early days, Lewis says, so specific plans for what kind of funds it will offer have not been determined. Domestic regulations limit mutual funds to investing only in Chinese securities and, as the yuan is not convertible, all funds must be in denominated in the Chinese currency. Foreign financial institutions must also partner with Chinese companies in order to enter the financial services business.

“This is very much a long-term-horizon venture, from our perspective,” says Lewis, suggesting the regulatory approval process might take a while. “We would expect to be in the market in the next one to two years. Hopefully, it will be sooner than that.”

Lewis says that RBC’s role in the joint venture will be to provide guidance and expertise in investment management, multi-channel distribution and in-branch sales to the fund company’s local management and employees. The venture’s funds, he says, will be targeted at individual and commercial clients of China Minsheng Banking, other financial institutions and the institutional market.

“The investment RBC is making here is pretty small. It allows the bank to get in without taking any significant risk,” says Brenda Lum, managing director of the Canadian financial institutions group at Toronto-based Dominion Bond Rating Service Ltd. “It’s an opportunity from RBC to learn and lend some expertise in the Chinese market.”

RBC has had a busy year in China. In October, its investment bank, RBC Capital Markets, participated as co-lead manager in the US$21.9-billion initial public offering of Industrial and Commercial Bank of China, the largest IPO in history. In August, RBC Life Insurance opened a representative office in Beijing. In February, parent RBC received approval from Chinese authorities to upgrade its representative office in Beijing to a branch.

“The mutual fund joint venture should be seen in the context of RBC’s overall strategy in China,” Lewis says. “We are focused on targeted businesses and targeted investment opportunities, not providing across-the-board financial services in China. We’re looking at areas in which we have some unique expertise and in which we can find strong local partners.”

The Beijing branch allows RBC to provide personal banking services to Chinese emigrants headed to Canada, in effect setting them up as customers before they arrive.

Ed Legzdins, president and CEO of BMO Investments Inc. , sees RBC’s entry into the Chinese mutual fund market as a positive: “It’s a terrific market for foreign firms. RBC’s joint venture will hasten the development of the market, which is good for all of us.”

Legzdins says that the Chinese fund market has grown to $65 billion today from about $10 billion in 2001, with the potential to grow to $300 billion by 2011. Today, Fullgoal Fund Management, BMO’s Chinese joint venture, offers 11 funds and has assets of $2.5 billion.

BMO has deep roots in China, undertaking its first foreign-exchange transaction in support of trade with the country in 1818. BMO has branches in Beijing, Guangzhou and Hong Kong, as well as a representative office in Shanghai. Investment banking arm BMO Capital Markets has a representative office in Beijing and was one of the co-lead managers of the I&C Bank of China IPO in May.

“We’ve been in China a long time,” Legzdins says. “There has been a tremendous effort on the part of our senior executive to cultivate business relationships in China. The more relationships you develop, the more business you can land, and vice versa. We’ve created a nice spiral.”

Legzdins acknowledges that dealing with the regulatory environment in China is a much different proposition than it is here in Canada. “Whether it’s banking or securities, there are a lot of regulations,” he says. “In Canada, as long as you meet the regulatory requirements, you don’t need to approve a product. In China, you not only have to meet the compliance requirements, but you have to have the product approved. If you want to launch an equity fund, they can say, ‘No, we have enough of those. Why don’t you launch a bond fund instead.’ It’s somewhat paternalistic.”

Bank of Nova Scotia and CIBC have also established business links in China. In September, Scotiabank, which entered the Chinese market in 1982, received approval to upgrade its representative office in Shanghai to a bank branch. It already has branches in Chongquing and Guangzhou and a representative office in Beijing. Two years ago, Scotiabank bought a minority stake in Xi’an City Commercial Bank, which serves a city of seven million.

Although CIBC is active in the Asia-Pacific region, with more than 200 employees in its Asia division, its involvement in China is limited to an office in Hong Kong and a representative office in Beijing.

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Scotiabank Pursues High Net Worth Clients

Investment Executive, Lara Hertel, 14 November 2006

Bank of Nova Scotia is joining the growing throng of financial institutions looking to muscle their way into the high net-worth arena, and it’s counting on James McPhedran to lead the way. The 43-year-old new head of the bank’s private client group has the uneasy task of steering Scotiabank toward primary advisor status among Canada’s millionaire set.

But this won’t be done easily. There are more than 500 investment-counselling firms crowding the same space — not to mention the growing number of boutique and full-service investment dealers. It’s not just a question of whether Scotiabank has what it takes to pull it off; the more pressing question may be: are there enough millionaires to pursue?

“Just because everyone’s going after the high net-worth client doesn’t mean that everyone’s going to win,” says McPhedran. “We’re very proud of our offering. And you can see from our client satisfaction results and by our client loyalty results that we have something special here.”

By “something special,” McPhedran means the four lines of business brought together under the PCG banner: private banking, full-service brokerage advice through ScotiaMcLeod Inc., discretionary investment management through Scotia Cassels Investment Counsel Ltd., and trust and estate planning through Bank of Nova Scotia Trust Co. Tied together in a neat package, McPhedran is hoping they’re enough to persuade millionaire clients — the same ones who typically have three advisor relationships — to bring all their assets under one roof.

Scotiabank’s PCG employs 600 advisors in various disciplines — investment advisors, private bankers, trust officers — scattered across 13 major cities in Canada. What makes Scotiabank unique, McPhedran says, is that these channels aren’t competing with each other for clients. Rather, any internal rivalries are set aside to bring a “cohesive” offering to clients with assets in the $1 million-plus range. Four or five years ago, those businesses might have seen each other as rivals; today, working together is the only way to go.

“If you look at industry trends, particularly among the affluent, there’s a growing trend toward consolidating relationships,” McPhedran says. “Our model is built on becoming the primary advisor. We let clients decide who it’s going to be, whether it’s their banker, their trust officer or their broker. Our model functions well no matter what the case.”

McPhedran speaks with the eager confidence that comes with substantial industry experience. He joined Scotiabank from American Express in 1996 to take a marketing position, and moved to the wealth-management group as it was being formed in 1999. He took on various senior marketing positions before stepping into the role of director of wealth management, products and services group, a role he held for two years. In mid-August, he replaced John Doig as head of the private client group. (Doig has moved on to a marketing position at the bank.)

“I think Scotiabank saw this as a natural progression for me to take this business to the next level,” McPhedran says. “It wanted somebody who would take it on in a very robust, proactive way, with the idea that we have something superior here, so let’s make it grow aggressively.”

Although it’s impossible to control the number of millionaires in the market for private advice, McPhedran is eager to capture the existing ones. According to Toronto-based Investor Economics Inc. , there are about 415,000 millionaire households in Canada. By 2014, this figure is expected to balloon to 780,000. And only 30% of millionaire households actually deal with the PCG of the financial institution with which they bank. The remainder either don’t know what their banks have to offer, or they’re unsure of how the offering would benefit them.

“What this means is that banks have to seek out the business that already exists in their client bases,” says Keith Sjogren, director of strategy consulting at Investor Economics.

To that point, Scotiabank’s six million retail clients make up the built-in referral system on which McPhedran is looking to capitalize. Existing clients are the single biggest source of new clients, he says, and Scotiabank is working to formalize the process of funnelling clients into the channel that would best serve them. Currently, the bank employs 80 financial consultants whose job it is to point clients in the right direction, whether it be to the PCG or another business under the bank’s wealth-management umbrella.

At the same time, McPhedran isn’t ignoring the potential to bring in customers from outside the bank. He says 50% of small-business owners will retire in the next decade, presenting a huge opportunity to scoop up external clients in need of succession planning expertise. Philanthropic giving is also a growing line of business. In 2004, the bank added Malcolm Burrows, former director of gift planning for the Hospital for Sick Children Foundation, to head its gift-planning services.

Although developing new products and services figure heavily in attracting and retaining well-heeled clients, McPhedran is hesitant to drive growth by products alone. “We don’t believe this is going to be won with a product; it’s going to be won by our people,” he says. “And while we’re going to need to have products, the winner — especially in the affluent space — is going to be the one who earns primary advisor status.”

McPhedran is mindful of the challenges in servicing high net-worth clients, particularly those who find themselves in a transition period, such as retirement or selling a business. He knows, too, that those transition periods are when affluent clients are most likely to go shopping for a new advisor: “Those are the times when the client asks, ‘Is this advisor the person I want to share my life with?’ Our advisors really need to manage those transition phases.”

What surprises McPhedran most about the high net-worth space is that most Canadian millionaires don’t see themselves as wealthy. “The ‘millionaire next door’ phenomenon is alive and well in this country, probably more so than it is south of the border,” he says. “Canadians, on the whole, don’t describe themselves as wealthy — even when they are.”

That phenomenon, coupled with growing access to investment information and a rising do-it-yourself mentality, is making the wealth-management job more difficult. What affluent clients want is simplification, McPhedran says: “And I don’t mean simplification in terms of the product, but simplification in terms of the solution. They want someone to quarterback all of that on their behalf.”

Although McPhedran is certain the PCG’s alignment to the bank will work to its advantage, it ultimately depends on clients’ personal preferences.

“Some people find comfort in dealing with a bank,” says Sjogren. “There’s stability, and that ability to get in touch with a wealth of experts. Others feel that independently owned investment-counselling firms act in the clients’ best interest more than the organization’s.”

Whether the Scotiabank brand will be a plus or a minus among high net-worth clients remains to be seen. McPhedran is mum about actual growth figures, but says its PCG has been growing “above market.”

In the meantime, he is looking ahead, not around him. “Sure, we worry about what everybody else is doing,” he says. “But our biggest focus is on what we’re doing.”

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Banks Use Giveaways to Boost Market Share

The Globe and Mail, Keith McArthur, 13 November 2006

The free toaster is back -- with a 21st-century twist.

Banks today are giving away everything from free trips to iPods in an effort to boost market share in the increasingly competitive world of retail banking.

The nineties' focus on long-term brand-building activities led banks to abandon the product giveaway, popularized in the fifties when they passed out toasters and other small appliances to new customers who opened accounts.

But younger consumers are less loyal and unlikely to be swayed by traditional branding techniques, according to Alan Middleton, a marketing professor at York University's Schulich School of Business.

"You've got a new generation coming up that is less susceptible to classical kinds of image strategies and much more prepared to say: 'They're all the same, so I might as well go to the one that gives me something,' " Prof. Middleton said.

Bank of Nova Scotia saw a 300-per-cent increase in the number of new customers opening accounts during its recent "Fly Free" promotion. Customers who opened a Scotia One account received a free round-trip airline ticket.

"I wouldn't necessarily consider it a 'toaster' initiative," said Rick White, the bank's vice-president for brand and marketing programs. "I think it's a lot more sophisticated than that."

The promotion was something of an experiment for Scotiabank, an effort to make a big splash to promote its Scotia One account, which offers unlimited personal banking services for $9.95 a month.

Scotiabank wasn't expecting consumers who were happy with their existing bank to switch for the free flight. Instead, the promotion targeted those who were already looking around.

"There is a lot of churn in the marketplace at any one time. This was about: How do we get people to think about Scotiabank when they're switching banks," Mr. White said.

To qualify for the free flight, consumers either had to have their paycheques deposited directly into the account or use it to make automatic bill payments.

Toronto-Dominion Bank incorporated similar conditions when it gave away iPod shuffles for customers opening new accounts and Nanos for those who also signed up for a TD Gold Visa card.

Dom Mercuri, TD's chief marketing officer, said the conditions are important to protect against "low-value, low-profit relationships," since the price TD pays for the iPods is not heavily discounted. TD also gives away portable DVD players to lure customers into new branches.

Mr. Mercuri said Canada Trust used free product promotions regularly in the eighties, giving away teddy bears and other merchandise. "Those ideas had become a little dormant for some period of time and some of those ideas have been dusted off," he said.

Until recently, most banks favoured draws as the preferred method of promotional marketing. Today, consumers appear to respond better to promotions where everybody wins.

The original toaster giveaway came out of the U.S. in the fifties, when regulated interest rates led banks to look at new ways of differentiating themselves.

Virginia-based Northern Neck State Bank ran a nostalgic, fifties-style marketing campaign last month, where the bank gave away free toasters to consumers opening chequing accounts.

But today's freebies tend to be even more valuable. U.S. banks have given away everything from flat-screen televisions to Sony PlayStations.

In 2004, New York Community Bancorp even gave away free Cadillacs to customers who invested $400,000 (U.S) into a five-year certificate of deposit paying 1-per-cent interest.

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