08 June 2007

Hedge Funds Push for TD Ameritrade to Merge with Rivals

  
Bloomberg, Bradley Keoun, 8 June 2007

TD Ameritrade Holding Corp. received a demand from Jana Partners LLC and SAC Capital Advisors LLC for records of board discussions, a week after the hedge funds began pushing the third-biggest online broker to find a merger partner.

The records will let shareholders ``judge for themselves the board's conduct and whether each director has honored his fiduciary duties,'' Jana Managing Partner Barry Rosenstein and SAC Chief Executive Officer Steven A. Cohen wrote in a letter dated today.

The fund managers said in a May 29 letter they'd taken a combined 8.4 percent stake in the Omaha, Nebraska-based company, and they accused Toronto-Dominion Bank, TD Ameritrade's largest shareholder, of blocking a merger for its own benefit. They said the Canadian bank, which owns 40 percent of TD Ameritrade and appoints five of the 12 board members, uses the brokerage's resources to boost Toronto-Dominion's expansion in the U.S.

``We find it astounding that the independent members of the board have not done more to cleanse the board's review of strategic combinations of influence by Toronto-Dominion,'' the fund managers wrote. A request for documents under the laws of Delaware, where TD Ameritrade is incorporated, will be sent ``shortly,'' their letter said.

Shares of TD Ameritrade rose 93 cents, or 4.7 percent, to $20.93 at 4 p.m. New York time in Nasdaq Stock Market trading. They've gained 29 percent this year.

A merger with Charles Schwab Corp., the biggest online broker, could produce annual benefits of $800 million, while a deal with E*Trade Financial Corp., the fourth-largest, could produce $600 million, the hedge funds said today. The funds also produced a 21-page analysis of potential combinations.

TD Ameritrade said June 5 in response to the funds' first letter that it was open to a transaction at the right time with the right partner.

``We fail to see how an unbiased review could leave any doubt that the `right time' to pursue such a combination is now,'' the hedge funds wrote today. ``The currently favorable industry environment for transactions will most assuredly not last forever, creating the real risk that if the board continues to wait, it will have permanently squandered this opportunity.''

TD Ameritrade spokeswoman Katrina Becker confirmed the company received the letter.

``We are always talking with our peers in the industry about consolidation,'' Becker said in response to a question about whether there are any current merger discussions. ``We have been and will continue to talk.''

Schwab, based in San Francisco, said this week it's not interested in TD Ameritrade, and New York-based E*Trade didn't comment. Schwab shares rose 2.4 percent to $21.73, while E*Trade rose 4.3 percent to $25.21.

At an investment conference in New York yesterday, CEO Joseph Moglia said Cohen and Rosenstein had created a ``media- type of distraction'' that ``takes more of my effort'' away from running the company.

``They're doing their job, they're doing what they feel they have to do,'' he said of the two fund managers. ``Whether or not that may be beneficial for all shareholders, I think that's a question mark.''

Toronto-Dominion spokesman Neil Parmenter said today that the bank's ``position hasn't changed, which is that anything's on the table, anything's possible.''

The hedge funds' letter said Toronto-Dominion's representatives may have set preconditions for any merger, including keeping a minimum stake and board representation in the resulting company.

``We're not going to debate them line by line,'' Parmenter said. ``The bottom-line message is that our interests are aligned with those of the other TD Ameritrade shareholders.''

The demand for records is ``a shot across the bow at the directors, saying, you better pay attention to everybody, not just the one who put you on board,'' said Larry Hamermesh, a professor at Widener University School of Law in Wilmington, Delaware.

The request is unlikely to succeed without more specific allegations of misconduct, Hamermesh said.

Jana's Rosenstein, 48, a former Merrill Lynch & Co. investment banker, is known for taking stakes in companies alongside billionaire investor Carl Icahn and pressing managers and directors to boost their stock prices. Targets have included Time Warner Inc. and Kerr-McGee Corp. Last month Rosenstein urged aluminum maker Alcoa Inc. to drop a planned takeover of Alcan Inc. and consider putting itself up for sale.

SAC's Cohen, 50, founded his firm in 1992 and also took part in Icahn's Time Warner campaign. Alpha magazine reported Cohen earned $900 million last year, and last month he bought an Andy Warhol image of Marilyn Monroe, ``Turquoise Marilyn'' for an estimated $80 million. His fund manages about $12 billion.
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Bloomberg, Sean B. Pasternak, 7 June 2007

TD Ameritrade Holding Corp., the third-largest online brokerage, signaled that Fredric Tomczyk, the new chief operating officer, will probably succeed Joseph Moglia once he steps down as the top executive.

Tomczyk, appointed COO this week, will receive $3.2 million in salary and bonuses if he isn't named chief executive officer within six months of Moglia leaving, according to a June 5 filing with U.S. regulators. Moglia, 58, hasn't indicated when he plans to retire, and signed a five-year contract about a year ago.

``He does appear to be the heir apparent,'' Matt Snowling, an analyst at Friedman Billings Ramsey in Arlington, Virginia, said today in a telephone interview. Tomczyk was an executive for seven years at Toronto-Dominion Bank, TD Ameritrade's biggest shareholder.

Tomczyk's appointment was announced the same day that hedge funds Jana Partners LLC and SAC Capital Advisors LLC urged the Omaha, Nebraska-based firm to merge with a rival, such as E*Trade Financial Corp. The funds said that Toronto-Dominion is blocking a merger to preserve its own U.S. strategy.

Tomczyk, 51, a former vice chairman at Toronto-Dominion, signed a five-year contract that takes effect July 2, the filing showed. Toronto-Dominion, Canada's third-biggest lender, owns 40 percent of TD Ameritrade.

The contract states that if he doesn't become CEO, Tomcyzk will receive a base salary of $500,000 a year for two years, a cash incentive of $1.1 million a year for two years, and vesting of all equity grants, according to the filing.

Tomczyk is a ``strong internal candidate'' to succeed Moglia, although the board would determine his successor, TD Ameritrade spokeswoman Katrina Becker said. He is the only executive at TD Ameritrade with this stipulation in his contract, she said.

Moglia has said that consolidation is good for the industry and that he'd consider all possibilities for mergers. He declined today to comment on the merits of the hedge funds' proposal.

Becker said that Moglia had a private meeting with representatives of Jana and SAC at a conference today in New York hosted by the investment bank Sandler O'Neill & Partners.

The hedge funds claim that Toronto-Dominion's directors on TD Ameritrade's board have a conflict of interest, and are ``putting Toronto-Dominion's strategic desires'' above the needs of TD Ameritrade shareholders.

Tomczyk wouldn't be the first Toronto-Dominion executive to move to one of the bank's U.S. businesses. The bank named former Vice Chairman Bharat Masrani CEO of the Portland, Maine-based TD Banknorth consumer bank.
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Financial Post, David Pett, 7 June 2007

Toronto-Dominion Bank shares took a hit Wednesday after two U.S. hedge funds stirred the pot at TD Ameritrade, asking the company's board to consider strategic options that would create more value for shareholders

S.A.C. Capital Advisors and JANA Partners LLC, who together have an 8.4% stake in TD Ameritrade, want the U.S. brokerage to merge with a rival and said TD Bank, which holds a 40% ownership stake in TD Ameritrade, is blocking any such deal.

For Toronto Dominion, the potential outcome is far from ideal, Blackmont analyst Brad Smith said in a note to clients.

He sees four possibilities arising from the request. TD Bank could participate in a combination transaction that would bring TD Ameritrade together with a competitor like eTrade or Charles Schwab, which would reduce TD Bank's interest and improve operating prospects.

The company could also decide to sell TD Ameritrade outright into a bid that Mr. Smith expects would yield approximately US$1-billion plus a pre-tax gain. Wowever, it would also leave its U.S. strategy at a loss.

Or, TD Bank could decide to bid for the remaining TD Ameritrade shares. This option would cost about $9-billion and force about $3-billion to $4-billion in equity issuance, deflating capital costs ratios in the process.

In Mr. Smith's opinion, the option probably most preferred by TD Bank, at least for the time being, is to do nothing.

They'd like to be given some time to execute their plan, he said in an interview, but added that it is unlikely they can withstand the pressure for change very long.

He maintained his "hold" recommendation and $73 price target on the TD Bank shares.
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The Globe and Mail, Tara Perkins, 7 June 2007

TD Ameritrade Holding Corp. has been, and will continue, talking to rivals about potential deals, the company said yesterday after two powerful activist hedge funds began agitating for a merger or acquisition.

"M&A is a part of what we do on a daily basis," spokeswoman Katrina Becker said.

"You should assume we've been talking to people in the industry all along and we would continue to do that," chief executive officer Joe Moglia said in an interview with CNBC yesterday.

TD Ameritrade revealed this week that Jana Partners LLC and SAC Capital Advisors LLC have built up an 8.4-per-cent stake in the online brokerage, and are pushing it to combine with E*Trade Group Inc. or Charles Schwab Corp.

In a letter to TD Ameritrade's board, the hedge funds accused TD Bank of "glaring and untenable conflicts of interest" that might be causing the Canadian bank to stand in the way of a deal.

The letter was signed by Jana's managing partner, Barry Rosenstein, and SAC's Steven Cohen.

"This letter increased significantly the chances that a deal takes place," James Ellman, president of Seacliff Capital in San Francisco, told Bloomberg News.

But at least one of the potential partners, Charles Schwab, says it's not interested.

"As we have said before, we don't see any significant strategic advantage that such an acquisition would provide - either in terms of new capabilities or long-term growth," spokesman Glen Mathison said in an e-mail.

E*Trade Financial spokeswoman Pam Erickson declined to comment.

In their letter, the hedge funds said a combination of TD Ameritrade and E*Trade could generate annual cost savings of $450-million to $500-million by combining assets into one platform and cutting duplicate costs. They further estimated that annual revenue synergies could top $100-million.

The funds alleged that Toronto-Dominion's strategic interests conflict with those of TD Ameritrade's shareholders, and that the only solution was for the TD directors to step aside and allow the brokerage to pursue a strategic combination, or for the bank to buy TD Ameritrade outright.

But TD is unlikely to make an offer for the brokerage at this point, observers said. It is barred from increasing its ownership beyond 39.9 per cent until January 2009, and beyond 45 per cent for another six years after that.

"We believe that TD has little motivation to respond to these developments by paying a premium for an increased stake," UBS Investment Research analyst Jason Bilodeau wrote in a note to clients yesterday.
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The Globe and Mail, Derek DeCloet, 7 June 2007

Activist hedge funds are a wonder of capitalism. They bring new life to businesses once given up for dead, light a spark underneath complacent executives, and expose incompetence in the boardroom. They do all this, with generally positive results, knowing that other investors will get a free ride as a result of their labours.

They don't mind. They're good Samaritans that way. Except when they're being bullies, or advancing silly arguments, or telling half-truths in pursuit of a quick profit - or when they're going after companies that are doing just fine without their help.

On which side does the TD Ameritrade case fall? Stock prices don't tell you everything, but in the long run they're a decent measure of management and the board. Including dividends, TD Ameritrade shareholders have made 38 per cent, compounded annually, over the past five years, 37 per cent over the past 10 (to May 31). Long-term results like that usually shield a company from hedgies bearing unsolicited advice. Not any longer.

No one has ever accused SAC Capital, Ameritrade's new antagonist, of thinking long-term or, for that matter, being able to spell it. Dollar-store pantyhose last longer than a typical SAC investment. Last year, in an interview with The Wall Street Journal, founder Steve Cohen admitted that competition from other hedge funds made it harder to execute rapid-trading strategies, forcing the firm to hold stocks for longer - six months, sometimes even a whole year. Warren Buffett, they're not.

Even so, rare is the company that can escape without bruises when standing up to Mr. Cohen's group. Ameritrade and its largest shareholder, Toronto-Dominion Bank, are going to try. SAC and New York hedge fund Jana Partners think Ameritrade should merge with one of its two main rivals and say TD Bank and Ed Clark, its CEO, are standing in the way. Mr. Clark's strategy is to politely tell the hedge funds to go pound sand. It might work.

Round 1 went to the hedgies, if only for the way the press overstated their power and their investment. One newspaper reported that the funds had "quickly acquired 8.4 per cent of the shares" in Ameritrade. Uh, not quite. If they really owned that much, they'd have filed a 13D, a mandatory disclosure for activist shareholders who own 5 per cent or more of a U.S. stock. They haven't, because they don't.

Their 8.4-per-cent "economic interest" is, in large part, derivatives. This is a favourite tactic now of some hedge funds. You acquire a bunch of call options, then bluster your way into making people think you're a major shareholder, without having to pay the price of admission. Put up or shut up? The modern hedge fund manager does neither.

No matter: The fact is that Jana and SAC could acquire that 8.4-per-cent stake if they wanted to. What's less clear is where that would get them. TD Bank owns 40 per cent of Ameritrade and the founding Ricketts family has another 21 per cent. They control the board legitimately, through majority ownership. So a proxy battle seems impossible.

That doesn't absolve Mr. Clark of his responsibility to act in the interests of all Ameritrade shareholders, though. SAC and Jana's allegation is that the brokerage firm won't talk merger with E*Trade Financial or Charles Schwab because TD Bank doesn't want to dilute its large minority stake, lest it lose influence. TD provides some banking services to TD Ameritrade customers; the latter also gives the TD name some added recognition in the U.S., which can't hurt the parent bank's retail banking operation. Schwab isn't interested, but could Mr. Clark be obstructing a marriage with E*Trade to preserve those side benefits? The proof, says a source at Jana, is that such a merger hasn't happened yet despite the "indisputable" benefits, like $450-million (U.S.) in cost savings.

No one, certainly not Mr. Clark, is dopey enough to claim that there aren't huge gains from brokerage mergers. But scratch a little harder and the idea of an E*Trade deal gets less compelling, at least right now. Perhaps you have read an article or 50 on the U.S. housing market. One of E*Trade's strategies for growth has been to do some higher-risk lending - mortgages, for instance, in places like California. In the most recent quarter, the company reported $111-million in bad real estate loans, up 66 per cent, according to Citigroup.

If that continues, Ameritrade should soon enjoy a much better valuation in the market than its rival. That would be a good time to pursue a deal, but can you blame management for wanting to wait? The hedge funds' outburst says a lot more about their need to find fresh targets than it does about Ameritrade, TD or Mr. Clark.
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BMO Capital Markets, 6 June 2007

In an SEC filing released yesterday, TD Ameritrade included a copy of a letter it had received from two U.S. hedge funds - JANA Partners and S.A.C Capital Advisors (the hedge funds) - who together own 50 million shares of the company (representing 8.4% of the outstanding shares). In the letter, the hedge funds indicated their belief that AMTD shareholder value could be increased through a strategic combination within the industry. The hedge funds urged AMTD to set up a committee to oversee the pursuit of a combination with either E*Trade Financial or Charles Schwab. Both JANA and S.A.C. are currently seeking regulatory approval to acquire over $600 million more shares of AMTD.

The hedge funds also highlighted their belief that TD Bank, as the largest shareholder in TD AMTD (with a 40% stake), has been actively impeding the company's ability to pursue these opportunities due to conflicts of interest between the bank and the remaining shareholders of AMTD. The hedge funds indicated that TD Bank should allow AMTD to pursue these strategic combinations or make a bid for the remaining equity in the company.

Ameritrade's response to the letter stated it regularly reviews options within the industry. Furthermore, AMTD indicated that it is in favour of combinations, but 'at the right time and if it can reach agreement for the right strategic fit.' AMTD also indicated that it reviews the decision making process of the Board, in conjunction with its independent counsel, and always operates 'in good faith and in the best interest of shareholders.' AMTD also has a second large shareholder - the Ricketts family who own more than 20% of AMTD and have a shareholder agreement with TD. The exact position of the Ricketts family is somewhat unclear.

Yesterday, TD Ameritrade indicated that Fred Tomczyk will resign from the Board of Ameritrade to become the Chief Operating Officer of AMTD. To replace Mr Tomczyk on the Board, another TD designee, Thomas Mullins, was elected to the Board. This also occurred yesterday. It is hard not to view these moves as a sign that TD Bank is intent on moving at its own pace.

Having said that, this move by JANA and SAC clearly raises the pressure on TD Ameritrade to enter into a deal with either Charles Schwab or E*Trade. We agree with the hedge funds that the economic rationale for a union of any of these entities is good. In the largely stock-based acquisition of TD Waterhouse by Ameritrade, AMTD shares rallied roughly from US$12 to US$22. Clearly, the synergies from a merger of two online brokers ensure that deals are compelling for both acquirer and target.

There are, however, some realities. AMTD has only completed the system conversion of the Waterhouse accounts to the Ameritrade platform three weeks ago. This is a complex process fraught with risk. If there are problems with customer accounts during a conversion, there is real potential for negative impact on the franchise. Furthermore, it takes 'two to tango' and so far neither Schwab nor E*Trade have offered to do a deal with AMTD.

We are confident that TD's stake in AMTD is worth well above the US$20 level in a merger scenario - in virtually any merger scenario. Cost savings in historical transactions are very large relative to operating earnings. We believe that an all-stock merger of AMTD and E*Trade has the potential to be additive to AMTD forecast earnings by over 30%. This could add up to US$8 to the value of AMTD.

Having said that, TD Bank as a bona fide shareholder, has a right to vote for or against any potential transaction. We do not believe that it has any responsibilities to maximize share price in the short term. Given its 39.9% voting power, it will have a material say in what transpires at AMTD. One issue that we believe would be meaningful for TD Bank is that it would not want to have a small stake in a bigger brokerage, if it did not have material say in the running of the broker. We are raising our target price to $78 from $76. There are 0.35 shares of AMTD for every TD Bank share. A US$8 move in AMTD share price adds $3 to value for TD. We are reluctant to add this total amount to our TD Bank target price because of the risks that TD cannot find a deal that is acceptable to it.

We continue to recommend TD shares. Having said that, it is possible that various parties were purchasers of TD shares in anticipation of these developments. TD shares trade at a minor premium P/E (12.6x 2008 forecasts) relative to the bank group, despite the fact that it has one of the leading retail banking franchises in Canada, and two avenues for growth in the U.S. While TD clearly wants to grow these two franchises, both of these assets have values that are well over 12.6x forecast earnings.
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Dow Jones Newswires, Gaston F. Ceron, 5 June 2007

Two hedge funds that own stakes in TD Ameritrade Holding Corp. are pushing the online-brokerage firm to seek a large merger, saying that Ameritrade could boost shareholder value by joining forces with either E*Trade Financial Corp. or Charles Schwab Corp..

Such a deal would deliver large expense and revenue benefits, the funds, managed by Jana Partners and S.A.C. Capital Advisors, said in a letter sent last week to Ameritrade's board. The call for an Ameritrade merger comes at a time when the online-brokerage industry faces questions about growth and its exposure to the swings of the market.

The two funds own a combined 8.4% stake in Ameritrade and are seeking to substantially increase their position. The news came out after the end of Tuesday's regular-trading session; Ameritrade shares were recently up 9.6% in after-hours trading.

Jana and S.A.C. told Ameritrade, which is based in Omaha, Neb., that the Ameritrade board should set up a special committee "to oversee the immediate pursuit of a strategic combination."

Such a panel should be free of interference by directors selected by Canada's Toronto-Dominion Bank, which owns a big stake in Ameritrade and which S.A.C. and Jana criticized as a hurdle to an Ameritrade deal. The two hedge funds said Ed Clark, TD's chief executive and an Ameritrade director, has said the board "is unanimous in its opposition to a combination with E*Trade," but that Jana and S.A.C., taking into account the benefits of such a deal, "can only conclude that Toronto-Dominion's self-serving strategic views have distorted the board's analysis."

"The conflicts arise primarily from the disconnect between the interests of Toronto-Dominion, which views its significant ownership and influence on the company as being critical to its U.S. strategy and necessary to maintain favorable accounting treatment, and the best interests of the majority of shareholders, who seek maximum value for their shares," the two hedge funds said in their letter. The funds said TD also has the option to buy out other investors "for full and fair value."

Toronto-Dominion spokesman Neil Parmenter said the bank disagrees with the funds as far as TD's role in Ameritrade. "TD cannot block a transaction," he said. "There's 12 board seats - we only have five." TD has a stake of about 40% in Ameritrade; other important shareholders include the chairman and founder of Ameritrade, J. Joe Ricketts, and his family, which hold about 21%.

A spokeswoman for E*Trade, Connie Dotson, declined to comment. In the past, the New York-based company has said it's interested in deal-making. But a Schwab spokesman, Greg Gable, dismissed the notion of buying Ameritrade. "As we have said before, we don't see any significant strategic advantage that such an acquisition would provide, either in terms of new capabilities or long-term growth," said the spokesman for San Francisco-based Schwab.

Ameritrade said in a regulatory filing that Jana and S.A.C. have sought regulatory approval to acquire additional shares in excess of $600 million. Ameritrade said it "has a long history of growing through successful acquisitions and organic growth." The company said it's interested in doing deals "at the right time and if it can reach agreement for the right strategic fit."

Katrina Becker, a spokeswoman for Ameritrade, said the company's directors and managers "are committed to creating long-term value for all shareholders." She added: "We have been and will continue on a course that demonstrates that commitment." Ameritrade said its board regularly reviews its strategy in consultation with its financial advisor, Merrill Lynch & Co.

"TD Ameritrade has had and expects to continue to have discussions with its peers in the industry regarding mergers and acquisitions and believes that to be successful they must occur at the right time and be consistent with TD Ameritrade's business strategy," the company said. Ameritrade said it has a standing mergers and acquisitions committee, staffed by three outside independent directors, one director chosen by TD and one chosen by the Ricketts.

Earlier, Ameritrade shares slipped 7 cents, or 0.3%, to close the regular session at $19.95 amid a general market drop. In after-hours action, the shares were recently changing hands at $21.86.

The online-brokerage business has seen a number of mergers in recent years, as firms sought the savings and scale that could be reaped by joining forces. Ameritrade and E*Trade have done their share of deals - Ameritrade acquired TD Waterhouse in January 2006, while E*Trade bought BrownCo and Harrisdirect in 2005.

But many of the smaller firms that could be easily swallowed up now are gone and that has some on Wall Street hoping for a bigger deal, this time between Ameritrade and E*Trade. Some analysts have made the case for the merits of such a combination. David Trone, of Fox-Pitt Kelton, said in a report in April that the two firms face problems such as continued pressure on trading fees - an important revenue source - no growth in recreational stock trading and their lack of significant success in luring more-stable buy-and-hold investors as customers.

In their letter, Jana and S.A.C. said "synergies" form a merger with E*Trade could yield as much as $500 million in annual cost savings, from moves such as combining assets on one platform, and more than $100 million in yearly revenue benefits.

However, one potentially stumbling block to an Ameritrade-E*Trade combination could be the fact that the two firms are led by strong-willed management teams used to running the show. It remains to be seen how the pressure from the two hedge funds will affect the situation.

"TD does to some extent seem to have the public Ameritrade shareholders captive," said Trone, the Fox-Pitt analyst. An E*Trade-Ameritrade deal "should happen because it's so likely to create shareholder value through huge cost synergies," Trone said. "With activism, the probability obviously increases," but "it takes two to tango."

Separately, Ameritrade named Fred Tomczyk, a TD official who has been sitting on Ameritrade's board, to the vacant position of chief operating officer. Tomczyk will leave TD to join Ameritrade in July, Ameritrade said, and also has resigned as an Ameritrade director. He is being replaced as an Ameritrade director by Thomas Mullin, general counsel of Constellation Brands Inc., as a TD representative on the board.
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Bloomberg, Bradley Keoun, 5 June 2007

TD Ameritrade Holding Corp., the third-largest online brokerage, should consider a combination with E*Trade Financial Corp. or Charles Schwab Corp., said hedge funds Jana Partners LLC and SAC Capital Advisors LLC.

A merger would ``dramatically increase long-term shareholder value,'' the two funds wrote in a May 29 letter to the board of directors of Omaha, Nebraska-based TD Ameritrade. They also said Toronto-Dominion Bank, the company's largest shareholder with a 40 percent stake, is ``standing in the way'' of a merger. The funds said they represent about 8.4 percent of TD Ameritrade's outstanding shares.

Combining with Schwab or E*Trade would produce ``cost and revenue synergies, strategic benefits and the opportunity to take advantage of industry dynamics favoring consolidation,'' Jana Managing Partner Barry Rosenstein and SAC Chief Executive Officer Steven A. Cohen said in the letter. The benefit with E*Trade may be as much as $600 million a year, they wrote, or $1 billion over the ``medium-term'' with Schwab.

Shares of TD Ameritrade surged in April and May on speculation it might combine with San Francisco-based Schwab, the biggest online brokerage, or New York-based E*Trade, the fourth- largest. Analysts including Matt Snowling of Friedman, Billings, Ramsey Group Inc. have said the industry is ripe for consolidation and any cost savings would speed earnings growth.

TD Ameritrade responded in a securities filing today that it has ``publicly stated that it is interested in growing via combination, at the right time and if it can reach agreement for the right strategic fit.''

The company's board of directors and its financial adviser, Merrill Lynch & Co., ``regularly review whether possible mergers and acquisitions could augment this strategy to create greater value,'' TD Ameritrade said in the filing. The company has done nine merger and acquisition transactions since 2002, spokeswoman Katrina Becker said in an interview.

TD Ameritrade was created in January 2006 when the former Ameritrade Holding Corp. bought Toronto-Dominion Bank's network of independent advisers, TD Waterhouse. In exchange, the Toronto- based bank received 196.3 million TD Ameritrade shares.

Toronto-Dominion's representatives on the board have ``untenable conflicts of interest'' because the Canadian bank views its stake in TD Ameritrade as ``critical to its U.S. strategy and necessary to maintain favorable accounting treatment,'' the letter said.

Toronto-Dominion disagrees with the funds' assertions, spokesman Neil Parmenter said. The bank supports industry consolidation, he said, declining to comment on deals with specific companies.

``Everyone on TD Ameritrade's board acts in the best interests of all their shareholders,'' Parmenter said. ``TD Bank directors are a part of that, they're certainly a part of the board, but we don't have control of the board. There's 12 seats on the board and TD has five of those.''

Separately, TD Ameritrade today named Fred Tomczyk chief operating officer to replace Randy MacDonald. Tomczyk was vice chairman of corporate operations for TD Bank Financial Group and a member of TD Ameritrade's board of directors, said a company statement.

Schwab CEO and founder Charles Schwab said last month a combination of his two smaller rivals would be ``a healthy thing for the industry.'' Spokesman Greg Gable said today Schwab isn't interested in buying TD Ameritrade.

``We don't see any strategic advantage that such an acquisition would provide, either in terms of new capabilities or long-term growth,'' Gable said.

E*Trade spokeswoman Pam Erickson said, ``We don't comment on the acts of competitors.'' Jonathan Gasthalter, a spokesman for Cohen, declined to comment, and Rosenstein didn't return a call.

``To get more scale in this business is important,'' said Peter Goldman, who helps manage $600 million at Chicago Asset Management. ``There's a tremendous fixed-cost base, so a merger always brings cost savings.''

Revenue gains, though, ``aren't a sure thing,'' and TD Ameritrade still hasn't completed integrating computer systems it acquired, said Goldman, who follows the discount brokers and doesn't currently own shares.

The stock of TD Ameritrade fell 67.5 cents to $19.9525 at 4:30 p.m. New York time in Nasdaq Stock Market trading before the letter was disclosed. In late trading, the shares rose as high as $21.45.

TD Ameritrade's shares have gained 23 percent this year, second-best in the 12-member Amex Securities Broker/Dealer Index. The only stock that did better was A.G. Edwards Inc. -- which agreed May 31 to be acquired by Wachovia Corp.
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UBS Analyst Cautious on Financial Sector

  
Financial Post, David Pett, 9 June 2007

Given the current valuations in the Canadian financials sector, investors can hardly be blamed for considering the purchase of a bank or Lifeco's stock these days. But with higher interest rates looming alongside a red-hot loonie, UBS analyst Jason Bilodeau is cautioning investors to be selective in their choices.

Of course, what's tempting investors is the sector's attractive valuations which have only improved based on the financial sector's recent stock weakness. Year to date, the banks are down 0.8% while the Lifecos are up only 0.1% . That compares to the S&P/TSX which has advanced 6.2% over the same period.

Mr. Bilodeau is the first to admit that the present valuations could offer opportunities for investors, especially when you throw in the fact that fundamentals across the sector, particularly regarding the banks, have been sound through the last quarter.

That said, he maintained his neutral stance on the sector believing it still faces near-term pressure. As such he is focusing on key names to invest in with a 12-month view.

Those pressures, specifically, are the rising Canadian dollar and the increasing likelihood of an interest rate hike in Canada and in the United States.

“Lifecos tend to do better than banks with higher interest rates,” Mr. Bilodeau said, but any company in the sector, bank or Lifeco, he added, who has foreign operations, could be dragged down by the continued strengthening of the Canadian dollar.

Nonetheless, the analyst did mention a few companies for his clients to consider.

He highlighted Toronto Dominion Bank for its strong domestic platform, reduced uncertainties regarding TD BankNorth and its operating upside at TD Ameritrade.

He also said he likes Bank of Nova Scotia because of its improving domestic trends and superior mid-term growth prospects from its international operations.

On the Lifeco side, he considers Manulife Financial Corp. top of class.

"We believe Manulife offers one of the better operating outlooks in the industry with considerable excess capital to make acquisitions or grow dividends/buybacks.
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07 June 2007

TD Bank Extends Branch Banking Hours

  
The Globe and Mail, Rob Carrick, 7 June 2007

The Royal Scotia Toronto-Dominion National Commerce Bank of Montreal stands ready to serve you.

We have six major banking institutions in this country, but to customers they're simply a monolith known as "the banks." How challenging it must be, then, for each of the six to reach out to people and explain why it above all others deserves their business.

At Toronto-Dominion Bank's TD Canada Trust division, the pitch to customers is all about customer service. "You have to focus on the few things that make a difference, and we think that's mostly about service and convenience," Tim Hockey, TD's head of personal banking, said in a recent interview after sitting in on some consumer focus groups in Ottawa. "It's superb execution of things like delivering great service, screwing up less often, having great locations, having great hours, not charging as many fees. It's no one thing."

Yesterday, TD moved ahead with its service-first strategy by saying it will start opening more than 800 branches at 8 a.m. on Monday through Saturday instead of 9 a.m., starting Nov. 1.

Other banks are trying different approaches to connect with customers. For example, Bank of Montreal announced last week it will offer Air Miles reward points to customers who make debit transactions using their BMO client cards. The bank used unusually direct language in a press release about its intentions for this new program.

"Our No. 1 priority is to attract new customers and build lasting relationships with them," Lynne Kilpatrick, BMO's senior vice-president of personal banking, was quoted as saying. "The introduction of this exciting new program will set BMO apart from our competition."

Royal Bank of Canada has focused on products and fees in trying to build customer loyalty. RBC recently introduced a high-rate, no-fee savings account similar to the one ING Direct has popularized, and last month it began offering a multi-product rebate that reduces or even eliminates your monthly banking fees if you have several products with the bank.

It may sound as if TD is focusing on a nebulous ideal of good service, while BMO and RBC have taken a more tangible, money-in-your hand approach. But BMO and RBC are essentially trying to buy loyalty, an approach where the value to customers is highly subjective.

You get a single Air Miles point at BMO for every $40 in debit card transactions, although you can step up the pace if you use a BMO Air Miles MasterCard and have multiple lines of business at the bank.

RBC will lower the $12 monthly fee of its Signature No Limit Banking plan to $8 if you have two or more of a product list that comprises mortgages, home-equity credit lines, Visa cards and registered or non-registered investments held at RBC (not one of its brokerage subsidiaries). If you opt for a stripped-down version of the No Limit Account that offers unlimited use of electronic banking, then you can eliminate the charge altogether through the multi-product rebate.

TD's Mr. Hockey said the bank's extensive customer polling has told it that people don't distinguish between banks much on the basis of products, while the effect of fees is tough to gauge. He said he hasn't seen much anger at all about bank fees in focus groups, but people do indicate they're willing to make certain tradeoffs for lower fees. One tradeoff they won't make, according to Mr. Hockey, is to get lower fees in exchange for giving up better service.

Banks are big on consumer research and they always have data to back up whatever direction they take or point they make. Sometimes, you have to wonder if the results are authentic, or if they've been manufactured through questions designed to produce answers the banks want to hear.

And yet, Mr. Hockey's conviction that service is the key is obviously sincere and successful to the extent that TD has been ranked No. 1 on customer satisfaction by the respected consumer research firm J.D. Power. It's also worth noting that TD's stock is the second-best performer of the Big Six over the past three years (RBC is in front by a fair bit) and the top performer year to date.

This brings us back to the question of what's the best way for a bank to distinguish itself. Mr. Hockey argues strongly for service. "This is the winning strategy in the long term," he said. "Price can be matched in six seconds, while products can be matched in six-weeks to six-months. Service is difficult to match. It takes lots of energy."

If you value good service at your bank branch, TD is committed to giving you what you want. For innovative products and lower fees, check out BMO and RBC.

The harder you look these days, the more it seems the Royal Scotia Toronto-Dominion National Commerce Bank of Montreal is history.
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Two Banks, Two Pitches

Bank of Montreal and Royal Bank of Canada have recently introduced a couple of novel pitches to attract and keep customers. Here are some details.

BMO: The concept: Offer Air Miles travel reward points to customers when using BMO client cards, and bump up the earnable miles for people who have various other products at the bank.

Who wins: Avid Air Miles collectors, of which there are many.

RBC: The concept: Give customers a discount on their monthly account fees if they have multiple lines of business with the bank.

Who wins: Loyal RBC customers.
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The Globe and Mail, David George-Cosh, 6 June 2007

Toronto-Dominion Bank announced Wednesday that it will extend its branch hours across the country.

Starting Nov. 1, more than 800 branches of TD Canada Trust will be open 8 a.m. to 6 p.m. Monday to Wednesday, and 8 a.m. to 8 p.m. Thursdays and Fridays. Additionally, more than 900 branches will now be open every Saturday 8 a.m. to 4 p.m. Branches remain closed on Sundays.

“Longer hours have been a very popular feature of the service we offer to customers,” said Tim Hockey, co-chairman of TD Canada Trust.

TD Canada Trust already has the longest branch hours in Canada. Branches will now be open a total of 62 hours a week, an increase of 50 per cent across the branch network.

“We try to give our customers more of what they love, so we decided to make our service even more convenient for them,” added Mr. Hockey.

TD says the extra branch hours will also help to create new job opportunities in communities.

TD branches currently open 9 a.m. Monday to Saturday and close at 4 p.m. Monday to Wednesday, 8 p.m. Thursdays and Fridays, and 3 p.m. on Saturday.
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CIBC Faces Class-Action on Unpaid Worker Overtime

  
The Globe and Mail, Tara Perkins & Virginia Galt, 7 June 2007

Canada's big banks defended their overtime practices yesterday after Canadian Imperial Bank of Commerce has been walloped by a potential $600-million class-action lawsuit related to allegations of unpaid overtime worked by tellers.

And the case is shining a spotlight on tellers - or customer service representatives, as they are called in the banks. The rise of bank machines and online banking has meant a dramatic change in the day-to-day operations of the army of tellers who staff this country's branches. It was not so long ago that customers stood in snaking lines to deposit cash and have bank-books stamped.

Today, some branch managers are more likely to be looking for the same skills that apply at a burger chain or clothing outlet. That's because today, the job is all about sales. "There's no doubt that that job and role has changed over time," said Frank Techar, CEO of Bank of Montreal's Canadian banking operations.

It's morphed from an operational role to a "customer conversation" role, he said.

"We want them to have conversations with our customers, we want them to engage in a bit of simple needs-based analysis, and try to do a warm hand-off or a triage to our bankers, who can have a longer conversation with them, and try to develop business," he said. Tellers today are examining their screens to determine whether the customer they're talking to has a mortgage, loan or maybe some mutual funds, at another bank - and how they can bring that business over.

The face of the class-action claim against CIBC is Dara Fresco, 34, a teller at CIBC for nearly 10 years who makes an annual salary of $30,715. She believes she is owed $50,000 in unpaid overtime over the decade.

Her salary appears to be consistent with industry norms. Royal Bank of Canada, this country's biggest bank, has about 10,000 customer service representatives who are paid average annual cash compensation of about $32,000. That can range up to $42,000, depending on the location and employee's skills, and there are other benefits.

At BMO, "I view the role, and I think our employees view the role, as a great entry-level position to the company," Mr. Techar said. He believes "that's really what the big draw is for that role."

Toronto-Dominion Bank is about to hire a few hundred extra tellers, adding to its roster of about 10,000, after announcing yesterday that it is lengthening the hours at the majority of its branches beginning in November.

While the big banks have expanded their operations in recent times, it's the staff in branches that keep their core Canadian operations humming. In a note to clients yesterday about the banks' second-quarter earnings, Credit Suisse analyst Jim Bantis said that "domestic retail banking continues to underpin the earnings growth story."

Tim Hockey, TD's group head of personal banking, said, "The number one reason that customers decide where to bank is still based on the proximity of their branch to either work or home," he said.

"The vast majority of sales in all banks still go on through the branch, face to face."

He said he's confident that the claim against CIBC will not extend to TD.

"We have a very clear policy ... that anybody who works overtime gets paid for overtime," he said. "Not only are we very clear on the policy, we're very clear on our expectation that our managers follow it."

One of the lawyers involved in the legal action, Louis Sokolov of Toronto-based Sack Goldblatt Mitchell LLP, said yesterday that his firm has been inundated with calls from employees who work at other banks, as well as from employees who work for CIBC.

At BMO, Mr. Techar said that "with a large business, where you've got 15- or 20,000 people across the country, it's hard to understand and appreciate what's going on everywhere. But, our policies are pretty clear about it and I'm pretty confident that we're acting that way."

Like all of the banks, Bank of Nova Scotia said it has policies in place that require tellers to be paid for overtime.

It's now checking that they're being followed.

"When something like this comes to light, you always want to make sure that you're following through to take a look to ensure that the policy is being properly applied," spokesman Frank Switzer said.

RBC spokeswoman Beja Rodeck said she could not say unequivocally that the bank has not had issues with overtime. "We've got 1,100 branches across the country. Obviously, managers know the policy and they're obligated to apply it at all times, but are there isolated instances out there? I'm not sure," she said.

The banks emphasized that they have processes in place for employees to complain.

She added the class-action claim "really seems to be an extreme and unnecessary reaction, prompted by similar types of actions in the United States."
Financial Post, Jim Middlemiss, 6 June 2007

A $600-million overtime class-action lawsuit against Canadian Imperial Bank of Commerce could easily spread to other financial institutions, warns a management-side labour lawyer.

"I am sure this bank and other banks are going to be a little bit nervous for the next while," said Jamie Knight, a partner in the labour law firm Filion Wakely Thorup & Angelleti in Toronto.

The case, believed to be the largest class action suit filed in Canada, highlights the danger employers face when their non-management employees work beyond their allotted hours and reflects a growing litigation trend in the U.S., where a number of similar class-action suits have been filed against employers.

"This has been going on in the states for a couple of years -- class actions seeking unpaid overtime for unpaid hours of work," said Stewart Saxe, a management lawyer at the international law firm of Baker & McKenzie "It was just a matter of time till they came here."

Dara Fresco, a CIBC teller who has worked at the bank since 1998, claims that over the years, she has been required to work two to five hours a week of overtime for which she hasn't been paid. A sum that amounts to more than $45,000. She is being held out as the representative plaintiff in the suit filed by Doug Elliott, a lawyer at noted class action law firm Roy Elliott Kim O'Connor LLP, in conjunction with Sack Goldblatt Mitchell LLP, a leading union-side labour law firm.

"I wouldn't be surprised if there were similar problems at other banks, said Mr. Elliott, who still faces the hurdle of getting the litigation certified as a class action. "I've heard rumours but I have no proof."

According to the Canadian bankers Association, Canadian banks had 249,000 employees in 2006, exposing them to potentially hundreds of millions of dollars of damages for overtime claims if this action spreads to other banks.

Under federal labour law, which governs banks, employees who are exempt from management are limited to working eight hours a day or 40 hours a week. If an employee is "required or permitted to work" above that, then they must be paid overtime.

The lawsuit alleges that after cutting back its workforce by 20% , CIBC instituted a new performance management system that resulted in employees working longer hours.

Mr. Elliott said the unpaid overtime is a problem throughout federally regulated industries, especially in non-unionized sectors. "There's a system of passive enforcement that relies on people complaining." He added that in recent years employers have been "squeezing" employees to "extract more productivity out of them," with the result that many are working beyond the normal hours.

Although the case involves federal labour law, companies that fall under provincial laws could face similar lawsuits. That's because the labour legislation across the country has similar restrictions on the length of a workday.

"Employers have to be careful to ensure that non-management employees work according to their schedule and they don't hang around doing additional stuff because they can't get their work done in the regular hours," Mr. Knight said.

CIBC is reviewing the lawsuit and said in a statement: "We have a clearly defined policy as to how we compensate our frontline retail branch employees that exceeds legislative requirements in Canada."

The management labour lawyers say the suit faces the challenge of getting certified as a class action. Mr. Knight said there is "probably going to be quite a fight." Part of it will hinge on whether employees who come forward in the class actually worked the extra hours they claim. Employers could be forced to find former managers who worked for the bank many years ago to dispute those claims.

"Any management employment lawyer has come across situations from time to time in which employers have not expressly authorized overtime, but have turned a blind eye," Mr. Knight said.
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The Globe and Mail, Virginia Galt & Janet McFarland, 6 June 2007

Dara Fresco took a day off from her job as head teller at a Toronto branch of the Canadian Imperial Bank of Commerce yesterday, dropped her toddler at daycare, and launched a $600-million class-action lawsuit against her employer.

Her action has the potential to affect tens of thousands of Canadians who routinely work hours of unpaid overtime and "should be of concern to all employers," according to a lawyer who has tracked the trend of multimillion-dollar settlements in the United States.

"It was only a matter of time before the trend moved into Canada," said employment lawyer Adrian Miedema, a Toronto-based partner with Fraser Milner Casgrain LLP. He made the observation after Ms. Fresco launched her legal action with the assistance of two other Toronto law firms.

Ms. Fresco, 34, has worked as a personal banker and teller at the CIBC for the past 10 years and is paid an annual salary of $30,715. She has recently been recognized by the bank for outstanding customer service, and she says she loves her job.

However, she said at a news conference, she and roughly 10,000 of her colleagues in front-line positions at CIBC branches across the country regularly work overtime for which they do not get paid.

"What is unfair is that my colleagues and I are rarely being paid for the overtime that we are working, and that's just not right," said Ms. Fresco, who calculates that she is owed $50,000 for unpaid overtime over the past decade.

Yesterday, as representative plaintiff, she filed a statement of claim with the Ontario Superior Court of Justice, alleging that the bank actively discourages employees from submitting claims for the overtime they are required to work.

If the court agrees to certify the case as a class action, it will be the largest lawsuit of its kind ever launched in Canada.

The bank, which has 30 days to file a statement of defence, issued a brief written statement yesterday.

"With respect to overtime, we have a clearly defined policy as to how we compensate our front-line retail branch employees that exceeds legislative requirements in Canada," the bank said, adding that it has only just received the lawsuit and will review it in detail before responding further.

"We believe it may establish a very important class-action precedent [in Canada]," said Douglas Elliott, a partner with Roy Elliott Kim O'Connor LLP, who is representing the CIBC employees along with Louis Sokolov of Sack Goldblatt Mitchell LLP.

Statistics Canada reports that more than 1.6 million Canadians worked unpaid overtime in April.

Lawyers representing Ms. Fresco said that while managers are excluded from overtime pay requirements in Canada, most other employees are protected by employment standards laws. CIBC employees are covered by the federal labour code.

Mr. Sokolov said the purpose of the law "is to prevent employers from using subtle, or not so subtle, pressure on their employees to volunteer their time in hopes of advancement ... or fear of reprisal.

"We believe that unpaid overtime is widespread in many industries in this country ... including financial services," Mr. Sokolov said.

Ms. Fresco said she is currently required to work an average of two to five hours a week in unpaid overtime. When she was a personal banker, she sometimes worked up to 15 hours in unpaid overtime a week, she added.

Overtime work is routine throughout the banking sector, former bank employees say, and demands to work unpaid time are exacerbated if individual bank managers try to keep costs low because their own performance bonuses are based on branch profitability.

David Soulis, a retired Royal Bank of Canada branch manager in Port Hawkesbury, N.S., said many factors lead to frequent requirements for overtime work in banking, including possible discrepancies in cash balances that require after-hours recounts, or unscheduled cash counts for security purposes.

He said there are also frequent sales and staff meetings to explain new products or procedures, which must be held outside branch hours so all staff can attend. "That's all extra time that is outside what the customer sees," he said.

He said during his career he saw some managers who were "gluttons" who wanted to reap the largest possible annual bonuses - and branch profits are usually one factor in earning those bonuses.

"I went through 35 years of it, and I know there were times when management said, 'You can't have any overtime. You can get off an hour early some time or whatever.' But that 'some time' thing never happened."

Mr. Miedema notes that several major employers in the United States - including Wal-Mart, Starbucks, Taco Bell and Radio Shack - have been forced to pay massive retroactive overtime to employees.

The CIBC case will likely prompt many other Canadian employees to follow suit.

"People start to pay attention and say, 'Wait a minute. I have been working extra hours. Maybe I should file a claim for overtime,' " said Mr. Miedema, who represents employers in his law practice.

Employers are at risk, he said, if they do not comply with employment standards laws requiring them to pay eligible employees overtime at a rate of time-and-a-half after regular working hours.
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06 June 2007

Review of Banks' Q2 2007 Earnings + Outlook

  
The Globe and Mail, Tara Perkins, 6 June 2007

Banks and insurers could take a bit of a bruising in the coming quarters from the rapid ascension of the Canadian dollar.

"The recent surge in the [Canadian dollar] has been acute and will put some nearer-term earning pressure on the bank group," Scotia Capital Inc. analyst Kevin Choquette wrote in a note to clients yesterday.

The loonie has already risen 8 per cent since the end of the banks' second quarter, which was April 30, he noted.

If it remains at its current level, he estimates that Canadian banks' profits will take a 2.2-per-cent hit in the third quarter. The impact will vary bank by bank, with Bank of Nova Scotia feeling the most pain because of its large international operations.

Mr. Choquette trimmed his estimates for the banks yesterday, and downgraded Scotiabank to "sector perform" from "sector outperform."

His estimates assume that the banks are not hedging against the currency risk.

Toronto-Dominion Bank said yesterday that it does not actively hedge its exposure "because the potential impact to TD is so small."

TD's exposure to fluctuations in the exchange rate is estimated at about 1 cent of annual share earnings for each 1-cent change in the exchange rate, meaning that if the Canadian dollar appreciates from $1.15 to $1.14 per U.S. dollar, about 1 cent will be cut from share earnings, spokesman Nick Petter said in an e-mail.

Royal Bank of Canada said it does not hedge against its own exposure, while Bank of Montreal said it hedges its U.S. earnings one quarter forward.

On a conference call with analysts last month, Scotiabank chief financial officer Luc Vanneste said "obviously, a rise in the Canadian dollar for a bank that earns as much as we do, non-Canadian currency, is a head wind."

He added that "we hedge our foreign currency earnings to a degree ... but it's certainly not enough to offset the full effect."

At Genuity Capital Markets, analyst Mario Mendonca is not changing his bank earnings estimates, saying any reduction by a few pennies could be overshadowed by larger items such as trading revenue.

"Among the large-capitalization banks, we have found that only [Scotiabank's] earnings in the international segment can swing on significant changes in the value of the Canadian dollar," he wrote in a note to clients.

Mr. Mendonca did change his exchange rate model for insurers, to $1.06 (Canadian) for each U.S. dollar from $1.15.

"Over a full year, an 8-per-cent reduction in our currency input reduces our [Sun Life Financial] estimate by 2 to 3 per cent, approximately half the effect for Manulife," he wrote.

He estimates that about 30 to 35 per cent of Sun Life's earnings are denominated in U.S. dollars, compared with 60 to 65 per cent of Manulife's.

"We have found, however, that the Canadian insurers' earnings generally do not adjust [up or down] for the full effect implied by changes in currency," he wrote.
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Scotia Capital, 5 June 2007

C$ Appreciates 8% from Fiscal Q2/07 End

• The rapidly appreciating Canadian dollar has recently caught the market by surprise after languishing in the $0.85 to $0.90 range over the past six quarters. The C$ has appreciated 8% thus far in Q3/07 against the USD (average exchange rate) from the banks second fiscal quarter ending April 30th.

• The magnitude of the spike in the C$ this quarter compares withyearly appreciations (Exhibit 10) in 2002, 2003 and 2004. This rapid rise in the Canadian dollar is expected to negatively impact bank third quarter earnings and put modest pressure on earnings growth rates in 2008.

• Scotia Capital Economics has recently increased its C$ forecast against the US $ to $0.96 by the end of 2008 up from the previous forecast of $0.92.

Bank Earnings Negatively Impacted by C$ Appreciation

• In estimating bank earnings sensitivity to the level of the Canadian dollar we assume no hedging activity has been undertaken to mitigate the earnings impact. We estimate that Canadian bank's earnings will be negatively impacted by 2.2% in Q3/07 assuming no hedging and that the C$ stays at its current level. The individual banks impact varies with BNS being impacted the most and NA the least as highlighted in Exhibit 4.

• If the C$ was to remain at the current level of $0.945 against the US$ bank earnings in 2007 we estimate would be negatively impacted by 1.2% with our 2008 earnings estimate negatively impacted by 2.3% as per Exhibit 2.

• The appreciation in the C$ from 2003 to the end of fiscal 2006 has reduced the various banks book values as highlighted in Exhibit x. The bank group has earned through the major C$ appreciation from $0.60 to $0.90 which represented a 50% increase. The recent surge in the C$ has been acute and will put some nearer term earning pressure on the bank group. The appreciation of the C$ to Par from the $0.90 level would represent a 11% increase, not insignificant but manageable. We expect the bank group to earn through the most recent spike in the C$ in the medium term. However an additional concern is the potential impact to the Canadian economy of a higher C$ particularly the manufacturing base in Ontario and Quebec.

Trimming Bank Earnings Estimates

• As a result of the potential near term negative earnings impact we are trimming modestly our 2007 and 2008 earnings estimates as highlighted in Exhibit 1. Our 2007 earnings estimates are being reduced by $0.05 per share per bank except for NA with no change in earnings. We are reducing our 2008 earnings estimates for the banks in the range of $0.05 to $0.15 per share.

• We are also fine tuning some of our share price targets. We are increasing our 12 month share price target on TD to $90 per share form $85, LB to $39 from $36 and CWB from $27.50 to $30. We are reducing modestly our 12-month share price target on NA to $75 from $77 per share.

BNS Downgrading to 2-Sector Perform

• We are also downgrading BNS to a 2-Sector Perform from a 1-Sector Outperform based on potential slowdown in relative earnings growth in the near term and the balancing of our bank recommendations in light of our May 24, 2007 upgrade on TD Bank to a 1-Sector Outperform.

• In terms of BNS's relative earnings growth in the near term, we are concerned about the higher negative earnings impact from the appreciating C$, the higher potential negative impact from a possible increase in short term interest rates based on the banks funding of its retail loan portfolio (low percentage of demand and notice) and the slower than expected reacceleration of earnings growth from Mexico.

• Exhibit 15 highlights BNS's funding of its retail loan portfolio with only 28% coming from demand and notice the least expensive funding versus TD Bank at a bank group high of 69%. Thus, if we get another round of short term interest rate hikes, BNS's retail margin may be under greater pressure in the near term as the bank is more dependent on short term wholesale funding for its retail book.

Maintain Overweight Recommendation on Banks

• We maintain an overweight recommendation in the bank group based on attractive valuations and strong fundamentals. Banks are trading at low a P/E multiple of 12.0x on our slightly revised 2008 earnings estimate. The market in our view is heavily discounting bank earnings levels and the multiple does not reflect the level of profitability, earnings resilience or growth.

• Maintain 1-Sector Outperforms on TD and RY with 2-Sector Performs on BNS and CM and 3-Sector Underperforms on BMO and NA. CWB and LB remain both 2-Sector Performs with CWB representing growth and LB representing value.
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Financial Post, Duncan Mavin, 5 June 2007

These must be tough times to be a bailiff if the strength of banking loan books is anything to go by.

Despite a 35% year over year increase in provision for loan losses at the big banks in the second quarter of 2007, loan defaults remain at historically low levels.

“It’s still tame,” said UBS Investment Research analyst Jason Bilodeau. “It’s still fair to say the credit environment remains benign and conditions are pretty favourable.”

Across the big banks, the total provision for bad debts has been between $600-million and $700-million for the past three quarters — as recently as 2003, the banks were recording provisions almost twice as large.

In fact, the rise in loan loss provisions in the most recent quarter has less to do with new loans going bad than it is caused by the drying up of recoveries of loans written off by the banks in prior periods, he said. “It’s really that benefit that is going away that is starting to show up,” Mr. Bilodeau explained.

Most analysts still expect a gradual increase in loan losses. “You’re coming from such an incredibly benign credit environment, you’ve almost got nowhere to go but to get worse,” Mr. Bilodeau said.

Continued growth in loan portfolios and an increase in impaired loans should result in the absolute level of provisions rising in 2008, said Dundee Securities analyst John Aiken.

The forecast change in provision levels will have the least impact on Royal Bank of Canada and Toronto-Dominion Bank, which both benefit from having a broad range of earnings sources, Mr. Aiken said.

“TD’s ownership of TD Waterhouse and interest in TD Ameritrade provide significant diversification away from its lending operations, while Royal has one of the lowest reliance on net interest income sourced earnings of the group,” he said.
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RBC Capital Markets, 4 June 2007

All banks reported Q2/07 EPS that were higher than our expectations (and consensus), with the exception of Royal Bank. TD was most ahead of expectations, and it and BNS posted the highest quality earnings against our expectations.

The industry continued to benefit from solid growth in retail revenues and net income, as well as active capital markets and low loan losses. We believe that retail banking divisions will continue to grow rapidly, but are concerned that the current strength in capital markets revenues may not be sustainable and credit quality is showing signs of having peaked.

We continue to believe that there is limited upside to current valuation multiples. We expect profitability to remain high by long-term standards but earnings growth is likely to slow compared to recent years. Credit losses are likely to come off their lows, equity markets are unlikely to maintain their torrid pace of the last four years and capital markets activity is benefiting from high levels of liquidity. Also, interest rates are likely to increase, which presents a risk to bank valuations.

We are increasing our investment rating on Royal Bank from Sector Perform to Outperform. The bank's shares have underperformed its peers since May 1, 2007, partly because it was the only bank not to surpass Q2/07 EPS expectations. However, some of the items that caused the miss were one-timish in nature, particularly disability claims in the insurance businesses, trading revenues related to U.S. sub-prime securities and integration costs in U.S. retail banking. These businesses are also "lower multiple businesses" in our view. Wealth management and retail banking continued to perform well.

We are lowering our investment rating on CIBC from Top Pick to Outperform. We now forecast similar total returns (appreciation in stock prices plus dividends) of 13-14% in the next 12 months for CIBC, TD and Royal Bank following the appreciation in CIBC's stock since May 1, 2007 and our recent increase in our 12-month target price for TD Bank. We believe that CIBC's slight P/E discount makes the stock attractive, in spite of a lower revenue growth profile, given improving retail revenue growth (and tight expense controls), the prospects for a 17% increase in the dividend in Q3/07, and less exposure to wholesale income and potentially rising business loan losses.

Royal Bank - Upgrading to Outperform from Sector Perform

We are increasing our investment rating on Royal Bank from Sector Perform to Outperform.

• Attractive Relative Value - RBC shares have underperformed the financials group since May 1 2007, most notably against CIBC, TD Bank, National Bank, Industrial Alliance and Northbridge. The bank’s shares have even underperformed those of Bank of Montreal, which has had well-publicized issues related to its commodity trading businesses.

• Strength in the highest multiple businesses – Q2/07 earnings highlighted strength in wealth management and retail banking. Wealth management income was up 22% against Q2/06 on revenue growth of 13%. The domestic retail bank (ex insurance) had a very impressive quarter in our view, with revenues rising 11%, market share increases in lending products, and a 23% increase in income.

• Q2/07 earnings were below the high expectations we and the street had for the bank. However, some of the items that caused the miss were one-timish in nature, particularly disability claims in the insurance businesses, trading revenues related to U.S. subprime securities and integration costs in U.S. retail banking. These businesses are also “lower multiple businesses” in our view.

• We believe that the bank’s premium valuation is sustainable (0.6x on 2007E P/E and 0.3x on 2008E) on the basis that the bank will grow earnings at a more rapid rate than its peers in 2007 and 2008 (19% and 11% versus an industry median of 17% and 7%), driven by:

o Dominant, and rapidly growing retail banking and wealth management franchises, the two highest multiple businesses Canadian banks participate in.

o A more diversified capital markets business, which should lead to lower volatility in revenue and earnings than other Canadian banks’ investment dealers.

o A superior outlook for near-term revenue growth, driven by a 16% increase in risk weighted assets in the last 12 months, a result of organic growth and acquisitions.

• The two biggest risks to our Outperform recommendation relate to credit quality and capital markets.

o A very rapid deterioration in credit quality would hurt Royal Bank more than TD Bank and CIBC, as well as the insurers, in our view. Although we are expecting credit losses to rise, we are not calling for significant deterioration in credit quality in the near term and believe that the bank can maintain above-average bottom line growth if credit losses rise gradually, as we predict.

o A worldwide decline in equity markets and capital markets activity would likely hurt the bank more than most of its peers given the size of its wealth management and capital markets businesses. A mild decline would be offset by increased investments in those businesses, in our view, while isolated declines would be mitigated by greater geographic diversification than other Canadian peers.

CIBC - Downgrading to Outperform from Top Pick

We are lowering our investment rating on CIBC from Top Pick to Outperform.

We now forecast similar total returns (appreciation in stock price plus dividends) of 13-14% in the next 12 months for CIBC, TD and Royal Bank following the appreciation in CIBC’s stock since May 1, 2007 and our recent increase in our 12-month target price for TD Bank.

CIBC trades at 12.5x our estimated 2007E earnings versus a peer average of 13.0 times. We believe that the relative multiple makes CIBC’s stock attractive, in spite of a lower revenue growth profile, hence our Outperform rating. The following points summarize our investment thesis on CIBC shares.

• Potential for Upward Earnings Revisions - We expect the consolidation of FirstCaribbean’s results and improving retail revenue growth, combined with flat expenses in Canada, will drive earnings growth that exceeds expectations in H2/07. We also believe that Q2/07 retail loan losses could prove to have been abnormally high in the near term.

• 17% increase in the dividend expected in Q3/07 - The current dividend rate of $3.08 implies a payout ratio of 38% based on our 2007E EPS, well below the bank's official target range of 40%-50%.

• The bank’s multiple should benefit from having the second-lowest exposure to wholesale income. The retail mix should also increase given the acquisition of FirstCaribbean, improving revenue growth in retail businesses and a likely reduction in merchant banking gains.

• Less exposed to potentially rising business loan losses, the area that most concerns us from a credit quality standpoint. Business loan losses for the Canadian banks are currently non-existent, compared to a 17-year average of 80 basis points. CIBC's loan book has the least exposure to business and government loans and the bank holds $10.4 billion in credit default swaps – a large amount relative to its $34.0 billion business and government loan book.

Valuation - Thesis Unchanged Post Q2/07 Results
Valuation Multiples Do Not Have Much Upside

Canadian bank valuations are justifiably well above very long term averages, although it is difficult to argue for more upside at this stage in the credit and capital markets cycles.

In the near term, valuations should benefit from very active capital markets, low credit losses, strong growth in retail lending and the rash of takeout activity of Canadian companies, which is likely to lead to reinvestment in Canadian financial services stocks.

Furthermore, over the last 15 years banks have improved their ROEs and capitalization ratios, lowered their exposure to credit risk and grown higher-multiple businesses such as wealth management and retail banking, while risk-free rates have declined.

We believe that further multiple expansion is unlikely, however, as ROE cyclicality has been lowered, not eliminated, and it is hard to picture a better environment for banks.

• Volatility will still arise in poor credit and capital markets environments. Repeating the strong earnings growth of recent years is likely to be difficult, given the phenomenal credit performance of the last 5 years, strong equity market appreciation, and very active debt and M&A markets.

• A rise in Canadian bond yields would likely negatively impact bank valuations, particularly if the 10-year yield were to extend above 5%. Bank valuations have historically been highly negatively correlated with long-term interest rates.

• The bank sector’s relative forward P/E is at 80% of the market multiple, well above the 64% long-term average, limiting potential upside. We are not alarmed by potential downside either, though. Part of this increased relative valuation is driven by cyclically high profitability of the key basic materials and energy sectors (which as usual is accompanied by lower than average P/Es) and part would be driven by justified increases in bank valuations. Basic materials and energy make up 44% of the S&P/TSX Composite Index, versus 17% for banks.

• Retail and institutional appetite for foreign securities has risen following changes to pension regulation and years of outperformance by Canadian equity markets and the Canadian dollar. Increased interest in foreign securities is a negative, in our view, as bank stocks have always been popular with both Canadian institutional and retail investors, given their earnings and dividend growth track records.

Prefer Lifecos Over Banks

We continue to believe that there are fewer risks to owning the shares of life insurance companies at current valuations, although two key macro indicators are currently more favourable to the banks’ shares in our view, while the other two are only beginning to show signs of trending in a direction that would favour life insurers versus banks.

• Capital markets activity remains high, fueled by high liquidity, low risk premiums and the increasingly easier access to bank lending. Mergers and acquisitions, debt and equity underwriting, trading businesses and proprietary investing have all benefited. While this level of activity appears unsustainable, the longer it lasts, the better off banks are versus life insurers.

• The rapid increase in the Canadian dollar, up 11% since February 7, 2007, is more negative for the life insurers, who generate more earnings from outside of Canada than the banks (Industrial Alliance excepted) and do not have trading operations that benefit from the rapidly rising dollar.

• Long-term interest rates remain low by long-term standards but 10-year Government bond yields have risen by 53 basis points in Canada and 39 basis points in the U.S. since March 7, 2007. Rising long-term rates are positive for the life insurers, which have liabilities that are of longer duration than assets. Conversely, rising rates are negative for bank’s P/E ratios given their high dividend yields and the potential impact on their earnings because of the negative impact on loan growth and credit quality. RBC Economics expects 10-year Government of Canada bond yields to continue rising with a target of 5.4% by the end of 2008.

o The outlook for short-term rates in Canada has also changed, with the Bank of Canada now expected to raise rates earlier than had previously been the case. Rising Bank of Canada rates have historically been negative for bank stocks more often than not.

• Exposure to deteriorating credit quality is higher at the banks than the life insurers. Credit losses remain low by long-term standards but signs of deterioration in the near term are appearing. Net impaired loan losses are higher, provisions for credit losses have risen, as have formations, and coverage ratios have weakened since the H2/06 peak. Reduced recoveries in business loan portfolios and growth in credit card lending are the main drivers of the increased losses.

Bank Q2/07 Results Ahead of Expectations

All banks reported Q2/07 EPS that were higher than our expectations (and consensus), with the exception of Royal Bank. TD was most ahead of expectations. The sources of the variance varied by bank.

• TD exceeded our expectations in the highest quality businesses (retail banking and wealth management) while Scotiabank also delivered better-than expected results in its retail division. TD’s results were by far the least dependant on wholesale income, in spite of that division’s net income coming in well ahead of our estimate.

• Bank of Montreal, CIBC and National Bank beat estimates on the bottom line, but the main drivers were wholesale businesses (and a low tax rate in the retail division at CIBC) and as such their stocks did not react as well following the release of their results. National Bank and Bank of Montreal generated the highest proportion of core earnings from wholesale businesses.

• Royal Bank’s earnings were below the high expectations we and the street had for the bank. However, some of the items that caused the miss were one-timish in nature, particularly disability claims in the insurance businesses, trading revenues related to U.S. sub-prime securities and integration costs in US retail banking. These businesses are also “lower multiple businesses” in our view.

Retail Banking Shows Few Signs of Slowing Down

Q2/07 results highlighted well-established positive retail trends, which show no signs of abating:

o Loan growth remained strong in the quarter. Residential mortgages rose 9.1% and other consumer loans were up 8.7% in the 12 months ending April 30/07. The conditions that have driven the rapid loan growth remain in place – employment growth, rising incomes, low interest rates and a solid housing market. There is likely to be deterioration in some of those factors but the environment for retail loan growth remains very good, both in absolute terms and relative to the U.S. TD Bank, Royal Bank and Scotiabank have increased their market share in the last year, while CIBC and Bank of Montreal have lost some.

o Revenue growth did not necessarily follow market share trends, which is best exemplified by looking at Bank of Montreal and Scotiabank’s results. Domestic market share grew 18 basis points in the last year at Scotiabank and dropped 101 basis points at Bank of Montreal, partly driven by the bank’s withdrawal from third party mortgage channels. Revenue growth at the two banks was similar, however, which is indicative of the spread erosion that has occurred in the mortgage space in our view.

o Canada’s two largest retail banks, Royal Bank and TD Canada Trust, would have continued to grow core revenue and earnings more rapidly than the other Big 5 banks if it were not for the higher than usual disability claims at Royal Bank. These two banks benefit from heftier physical presences, larger sales forces and larger customer bases to which they sell additional products and services, as well as greater exposure to insurance. The others continue to be challenged to profitably grow their market share.

o Revenue growth of 11-13% at those two banks was higher than the group average.

o Net interest income margins improved versus Q2/06, compared to declines at 3 of the 4 other banks.

o Net income growth was at the high end of the group despite the disability insurance claims at Royal Bank. Both banks increased their market share of lending products, indicating that they are not sacrificing profitability for share - something the smaller players have struggled to accomplish.

o Retail net interest income margins were down 5 basis points in the last 12 months, in line with the year-over-year decline in
Q1/07. We expect continued pressure on retail margins based on (1) continued increases in money market funds and high-yield transaction accounts at the expense of checking accounts; (2) loan portfolios are increasingly secured; (3) in a rising rate environment, consumers may decide to lock in their mortgages at five-year rates, which would negatively impact most banks' margins, and they may be more incentivized to move savings from transaction accounts into term deposits; and (4) increased demand for mutual funds or other types of equity market-driven savings is a negative for deposit growth.

Capital Market Environment Remains Active

Capital markets businesses again delivered strong revenue growth, maintaining a trend that we believe is at risk of eventually turning.

o Revenue growth in wholesale businesses for the industry was 12% versus Q2/06, driven by mergers and acquisitions, debt and equity underwriting activity and trading revenues that remained high. National Bank led the group with 31% revenue growth while Royal Bank trailed with flat revenues on tough fixed income trading comparisons (and brought down the group by virtue of being the biggest in this area). Worldwide M&A, equity markets and credit markets are all very active, driven by massive liquidity, with no obvious near-term catalysts for change. Unexpected increases in interest rates by central banks or increases in long bond yields (which would impact borrowing rates for private equity buyers) are risks to the current environment in our view.

o Wealth management businesses continued to benefit from the upward path the S&P/TSX Composite Index has been for almost five years. The index is up 9.4% so far this year, following four years of excellent returns (24.3% in 2003, 12.5% in 2004, 21.9% in 2005 and 14.5% in 2006). A return to more normal appreciation in equity markets would negatively impact the revenue growth of the Canadian banks’ wealth management operations, which was 10% in the last quarter (Royal Bank and TD Bank led the way with 13-14% revenue growth while CIBC, Bank of Montreal and National Bank had growth rates in the 4-6% range).

Canadian Dollar Has Resumed Its Rising Path

The Canadian dollar has resumed its upward trajectory against the US dollar, rising 11% since February 7, 2007. Canadian banks’ trading businesses should benefit from more active currency trading, driven by both hedgers and speculators but the net impact to net income is likely to be negative given the scale of their operations outside of Canada. Scotiabank is clearly more impacted by a rising Canadian dollar, with about 45% of its net income coming from outside of Canada, while the impact on National Bank would be marginal. The Big 3 Canadian lifecos would all be more impacted than the banks by a rising Canadian dollar as they all generate more than 50% of their earnings from outside of Canada, with Manulife highest at 75%. (Exhibit 15)

Increase in Risk Weighted Assets Driving Revenue Growth and Higher Risk

The increase in Canadian banks’ risk weighted assets has recently been very rapid (12% in the last 12 months), driven by acquisitions, strong corporate loan growth (business and government loans on the banks’ balance sheets are up 18% in the last 12 months) and rising market risk. Disaggregating where the increase in risk is coming from and looking at return on risk weighted assets helps understand the reward aspect of the equation:

o Increases in risk weighted assets driven by acquisitions normally come with a net income base, and do not necessarily suggest that banks are taking on incremental risk without being rewarded for that added risk.

o Increases in market risk weighted assets tend to lead to rapid revenue realization as they often relate to trading businesses. Trading businesses are high ROE businesses but the market does not reward investment banks with high valuation multiples given the volatility and unpredictability of revenues.

o Increases coming from rapidly growing corporate loan books are fueling revenue growth but are also leading to an implied increase in credit risk, which is not currently reflected in income statements given (1) a very benign credit environment; (2) recoveries of loans previously classified as impaired; and (3) normal seasoning.

Core returns on risk weighted assets have not been negatively impacted by the rapid rise in risk weighted assets, suggesting that the banks are getting rewarded (so far) for the risks they are taking. However, the nature of certain activities (business loans in particular) would lead to revenues today with 'costs' coming later (in the form of loan losses).

Credit No Longer Improving (But Losses Are Still Low)

Credit losses remain low by long-term standards but signs of deterioration in the near term are appearing.

o Industry specific provisions for credit losses were up 34% versus Q2/06, with larger increases at TD Bank and Royal Bank. Scotiabank was at the other end with a 43% decline in specific provisions.

o Rising provisions related to growth in credit card portfolios were a common theme as growth in those portfolios has been strong. Lower recoveries in business loans were also cited as a cause of rising provisions.

o Specific and total coverage ratios, as well as impaired loans to equity continued to show early signs of deterioration, a trend that started in Q3/06.

o Impaired loan formations, although lower than in the last two quarters, remained higher than the experience of most of 2005 and 2006.

Business loans are witnessing loan losses most below long-term averages and are most at risk of normalizing. Canadian corporate profit growth is slowing, debt has grown rapidly (and underwriting standards have loosened, particularly in the U.S.) and interest rates have risen (albeit modestly) – we expect credit quality to deteriorate as a result. However, a strong case can be made that deterioration should be modest by long-term standards given low leverage ratios and interest rates. While the biggest potential swing in loss rates resides in the corporate portfolio, in our view, increases in loan losses are likely to initially arise in commercial lending, as the increasing Canadian dollar is likely to negatively impact central Canada’s manufacturers and credit card losses are likely to rise on fairly rapid portfolio growth and the knock-on impact of manufacturing job losses, if they occur.

Relative to long-term average loss rates, Q2/07 specific provisions for credit losses were lowest at Scotiabank (18%) and National Bank (27%), largely reflective of greater exposure to business loans. We therefore believe that those two banks are more exposed to deteriorating credit quality.

Risk From Current Tax Proposals Manageable; But Risk Remains

Banks’ tax rates have generally been in line with guidance so far in 2007. We expect tax rates to remain within banks’ targeted ranges in 2008, which would imply flat to slightly higher tax rates, in contrast with the declines experienced from 2004 to 2006.

The proposed elimination of double-dipping structures1 is negative for banks, but is likely to ultimately cause more headaches than have a material impact on tax rates.

o The five-year grace period on both existing and new double-dipping structures gives financial services companies time to examine other alternatives to reduce their tax rates.

o The exemption of withholding taxes on interest between Canada and the US will make tax structures that were previously unappealing more attractive.

o The implementation of the Government’s proposal may not come through as it does not seem to generate any revenue to Canadian tax authorities – it would more likely lead to lower deductions outside of Canada. The establishment of a panel to review Canada’s system of international taxation may or may not lead to changes in the proposal.

It is important to understand that double-dipping structures are an important source of tax management, but far from being the only one. We believe that tax strategies around insurance and trading revenues are two key contributors to the lower tax rates, as well as established presences in the Caribbean and Asia.

Banks’ tax rates could still be at risk of increasing. We believe that the federal Government’s comments at the time it released its budget in March 2007 indicate a desire to make it harder for corporations to lower their tax rates by taking advantage of lower tax jurisdictions. We believe that the use of (legal) tax structures to book income outside of Canada when most of the physical and intellectual infrastructures as well as clients are in North America are most at risk of being targeted by the Government. We do not believe that financial services companies with large operations and client bases in lower tax jurisdictions are at risk.

Banks’ tax rates fell by an average of 6 percentage points to 21% from 2004 to 2006, which has led to a cumulative earnings lift of 8%. We believe that the decline in tax rates of the last few years may end as banks are likely to become more cautious in using tax structures to lower their tax rates, in order to avoid drawing attention to themselves. The tax line that is at risk is “income from foreign operations subject to different tax rates.” To blindly say, however, that that entire line would disappear would be misguided, as part of that deduction comes from operations in foreign jurisdictions – not just the use of foreign tax structures. For sensitivity purposes, if half that deduction were lost, bank earnings would drop by an average of 5%.

Investment Thesis

BMO: We maintain our Underperform rating. BMO trades at 12.8x 2007E EPS, compared to an industry median of 13.0x. We feel that a discount is justified given retail banking challenges in both Canada and the U.S., less room for dividend increases and less earnings coming from retail businesses.

BNS: We maintain our Sector Perform rating. Scotiabank's stock trades at 13.3x 2007E earnings, slightly above the Canadian peer average of 12.9x. Scotiabank holds the most excess capital of the Canadian group and has, in our mind, above-average medium-and long-term growth prospects compared to its peers due to its presence in Latin America and the Caribbean. However, domestic retail revenue and net income growth lags the leading banks', the bank is more exposed to normalizing business loan losses and Mexican operations are likely to be taxed at a higher rate and see higher loan losses in 2007 than in 2006. Our 12-month price target of $57 implies a forward P/E multiple of 13.1x, compared to the current multiple of 13.3x.

CM: We rate CIBC’s shares Outperform. CIBC trades at 12.5x our estimated 2007 earnings versus a peer average of 12.9x. We believe that the relative multiple makes CIBC’s stock attractive, in spite of a lower revenue growth profile, hence our Outperform rating. We believe that revenue growth will continue to lag the industry in the near term but that earnings could still come in ahead of consensus estimates in H2/07. We expect the consolidation of FirstCaribbean’s results and improving retail revenue growth, combined with flat expenses in Canada, will drive earnings growth that exceeds expectations. We also believe that Q2/07 retail loan losses could prove to have been abnormally high in the near term. We are looking for a 17% increase in the dividend in Q3/07 as the current dividend rate of $3.08 implies a payout ratio of 38% based on our 2007E EPS, well below the bank's official target range of 40%-50%. The bank’s multiple should benefit from having the second-lowest exposure to lower-multiple wholesale income. The retail mix should also improve given the acquisition of FirstCaribbean, improving revenue growth in retail businesses and a likely reduction in merchant banking gains. The bank is less exposed to potentially rising business loan losses, the area that most concerns us from a credit quality standpoint.

NA: We maintain our Underperform rating. National Bank trades at a 0.9x 2008E P/E discount to the group, in line with its average of the last five years, and we do not believe the discount will narrow in the coming year as EPS growth should lag the group. National Bank's current provisioning rate is more at risk of rising than other banks' in our view, retail loan growth has slowed in Quebec due to increased competition, and the company's successful partnership programs with wealth management firms are not yet large enough to offset slower growth in the bank's base market. Securities gains were also abnormally high in 2006. The proportion of earnings coming from wholesale businesses is also higher than for peers, supporting a lower multiple. Our 12-month price target of $65 implies a forward P/E multiple of 11.2x, compared to the current multiple of 11.5x.

RY: We are upgrading our rating from Sector Perform to Outperform. We believe that the bank’s premium valuation is sustainable (0.6x on 2007E P/E and 0.3x on 2008E) and that the bank will grow earnings at a more rapid rate than its peers in 2007 and 2008 (19% and 11% versus an industry median of 17% and 7%), based on: 1) Dominant, and rapidly growing retail banking and wealth management franchises, the two highest multiple businesses Canadian banks participate in; 2) A more diversified capital markets business, which should lead to lower volatility in revenue and earnings than other Canadian banks’ investment dealers; 3) A superior outlook for near-term revenue growth, driven by a 16% increase in risk weighted assets in the last 12 months, a result of organic growth and acquisitions.

TD: We rate TD Bank shares Outperform. TD Bank’s shares currently trade at 13.5x 2007E earnings compared to the Canadian peer average of 12.9x. Domestic retail growth and higher earnings from the U.S. (driven by cost synergies at TD Ameritrade, and by higher ownership of TD Banknorth) should buoy earnings growth for TD. We believe that TD can grow 2007 and 2008 earnings per share by 19% and 11%, respectively, ahead of median expected growth of 16% in 2007 and 8% in 2008 for the bank's five Canadian peers. We also believe that there is less downside risk to our forecast for TD than for the industry.

Valuation

BMO: Our 12-month price target of $71 is a combination of our sum of the parts and price to book methodologies. It implies a multiple of 12.0x 2008E cash EPS, compared to the a 5-year average forward multiple of 12.5x.Our P/B target of 2.2x book value in 12 months is at the low end of the banking sector given a lower ROE. Our sum of the parts target of 11.3x 2008E earnings is below our target industry average for banks, reflecting higher exposure to low-multiple wholesale businesses and retail banking execution challenges.

BNS: Our 12-month price target of $57 is a combination of our sum of the parts and price to book methodologies. It implies a multiple of 13.1x 2008E cash EPS, compared to the current 13.3x multiple on 2007E earnings and a 5-year average forward multiple of 12.3x. Our P/B target of 2.6x in 12 months is slightly higher than our target average for the banks given a higher ROE and strong capitalization. Our sum of the parts target of 12.7x 2008E earnings is slightly higher than our target average for the banks, as strong performance in the rapidly growing international division is offset by slower growth in domestic retail banking relative to other banks in recent years and lower exposure to wealth management

CM: Our 12-month price target of $114 is a combination of our sum of the parts and price to book methodologies. It implies a multiple of 13.0x 2008E cash EPS, compared to the current 12.5x multiple on 2007E earnings and a 5-year average forward multiple of 11.9x. Our target multiple is high versus the historical multiple because we believe there is upside to earnings estimates. Our relatively high price to book target multiple of 3.0x reflects the bank's industry-leading ROE and low credit risk. Our sum of the parts target P/E of 12.3x is in line with our target average for the banks, as lower exposure to low-multiple wholesale businesses is offset by slower than average revenue growth.

NA: Our 12-month price target of $65 is a combination of our sum of the parts and price to book methodologies. It implies a multiple of 11.2x 2008E cash EPS, compared to the current 11.5x multiple on 2007E earnings and a 5-year average forward multiple of 11.3x. Our P/B target of 2.1x in 12 months is at the low end of our target for banks given a lower ROE and a higher risk premium, based on more exposure to deteriorating credit quality. Our sum of the parts target of 11.3x 2008E earnings is below our target industry average, reflecting higher exposure to low-multiple wholesale businesses and slow revenue growth in retail banking.

RY: Our 12-month price target of $64 is a combination of our sum of the parts and price to book methodologies. It implies a multiple of 13.6x 2008E cash EPS (highest of the six banks we cover), compared to the 5-year average forward multiple of 12.7x. Our relatively high price to book target multiple of 3.2x reflects the bank’s industry leading ROE and strong capitalization. Our sum of the parts target of 13.8x 2008E earnings is higher than our target industry average for the banks, reflecting a leading domestic retail franchise and more diversified wholesale banking revenues.

TD: Our 12-month price target of $82 is a combination of our sum of the parts and price to book methodologies. It implies a multiple of 13.4x 2008E cash EPS, compared to the current 13.5x multiple on 2007E earnings and a 5-year average forward multiple of 12.1x. Our P/B target of 2.4x in 12 months is at the low end of the bank sector given a lower ROE. Our sum of the parts target of 13.7x 2008E earnings is higher than our target industry average, reflecting a superior domestic retail franchise and lower exposure to low multiple wholesale businesses.

Price Impediments

BMO: Risks to our price target include the health of the overall economy, sustained deterioration in the capital markets environment, the potential for non-accretive acquisitions and/or related execution risk, declining domestic market share and a rising Canadian dollar. Risks to our cautious view relative to peers include better than expected operating leverage, a turnaround in retail earnings and changing sentiment toward bank mergers.

BNS: Risks to our price target include the health of the overall economy, sustained deterioration in the capital markets environment, the potential for non-accretive acquisitions and/or related execution risk, deterioration in the Latin American political and economic climate a rising Canadian dollar and rising business loan losses.

CM: Risks to our price target include the health of the overall economy, sustained deterioration in the capital markets environment, loss of domestic market share, a decline in underwriting activity (particularly income trusts) and weakening retail credit quality.

NA: Risks to our price target include the health of the overall economy, sustained deterioration in the capital markets environment, the health of the Quebec economy, an unexpected acquisition, rising business loan losses and a change in the competitive or political environment in Quebec.

RY: The biggest risks to our recommendation change and to our price target relate to credit quality and capital markets. Although we are expecting credit losses to rise, we are not calling for significant deterioration in credit quality in the near term and believe that the bank can maintain above-average bottom line growth if credit losses rise gradually. A worldwide decline in equity markets and capital markets activity would likely hurt the bank more than most peers given the size of its wealth management and capital markets businesses. Additional risks include the potential for non-accretive acquisitions and/or related execution risk and a worse than expected impact from Enron-related litigation (although it appears that risk has declined, given a court ruling in another Enron trial).

TD: Risks to our price target include the health of the overall economy, sustained deterioration in the capital markets environment, an unexpected acquisition, pricing pressure in the discount brokerage industry, integration risk with both TD Ameritrade and TD Banknorth, a rising Canadian dollar and a worse than expected impact from Enron-related litigation (although it appears that risk has declined, given a court ruling in another Enron trial).
;

01 June 2007

CIBC Q2 2007 Earnings

  
Analysts' ratings and target prices for CIBC:

• BMO Capital Markets maintains "outperform," 12 month target price is $110

• Blackmont Capital maintains "hold," 12 month target price is $103

• Credit Suisse downgrades from "outperform" to "neutral," 12 month target price is $112.

Credit Suisse notes that CIBC has reported its Q2 2007 operating EPS above consensus, with retail bank earnings rising 25% YOY due to a lower than expected tax rate and an increase in the contribution from FirstCaribbean. The probability of CIBC hiking its dividend or initiating a share buyback program in the near term is high, Credit Suisse adds. The downgrade to "neutral" reflects the elimination of the historical valuation discount, issues at the retail banking unit, and limited upside to earnings expectations.

• Desjardins Securities maintains "buy," 12 month target price is $110

• Dundee Securities downgrades from "market outperform" to "market neutral," 12 month target price has been reduced from $119 to $111.

According to Dundee's research note, the core EPS of $1.95, while above consensus, cannot be claimed to be of the highest quality. CIBC's loan loss provisions of $190 million was higher than Dundee's estimate of $150 million; capital market revenues declined by 12%. As for the bank's $33-million increase in expenses, it's due mostly to the inclusion of FirstCaribbean for a full three months; Dundee is optimistic that CIBC's earnings would receive a positive boost, if it could achieve its target of eliminating expense growth.

• National Bank Financial downgrades from from "outperform" to "sector perform," 12 month target price is $107

• RBC Capital Markets maintains "top pick," 12 month target price is $114

• Scotia Capital maintains "sector perform," 12 month target price is $115

• TD Securities maintains "hold," 12 month target price is $106.00

• UBS mainatains "neutral," the target price has been raised from $113 to $114.

UBS notes that CIBC’s share price has appreciated significantly by 30% over the last year, reflecting improved earnings mix, risk management, and cost structure. CIBC has resumed its share buybacks, which is expected to bolster the bank’s bottom-line going forward. CIBC's dividend growth is likely to be fairly aggressive going forward, as the bank is aiming to increase its payout ratio, UBS adds. The EPS estimate for 2007 has been raised from $8.13 to $8.17.
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Scotia Capital, 1 June 2007

Q2/F07 Earnings Increase 26%

• Canadian Imperial Bank of Commerce (CM) reported cash operating earnings of $1.95 per share relatively inline with our estimate of $1.96 per share but above the street estimate of $1.91 per share. Earnings growth was strong year over year at 26% but earnings declined 11% sequentially reflecting slowing earnings momentum. The bulk of the bank's cost saves have been realized and revenue growth is not fully compensating.

• Cash ROE was 24.9% versus 28.1% in the previous quarter and 24.3% a year earlier. Return on RWA assets was 2.17% versus 1.87% a year earlier.

• Reported earnings were $2.29 per share which included the following special items, an $80 million or $0.24 per share tax recovery related to CIBC Retail Markets, a $24 million ($17 million after-tax or $0.05 per share) general reversal, an $11 million or $0.03 per share reversal of a future tax asset and a $10 million ($7 million after-tax or $0.02 per share) mark-to-market impact of corporate loan credit derivatives.

• CIBC World Markets led earnings growth at 48% with CIBC Retail Markets increasing 14% (excluding $80 million tax recovery and the impact of the FirstCaribbean acquisition).

Retail Markets Cash Earnings Increase 14%

• Retail Markets Q2 cash earnings increased 14% (excluding $80 million or $0.24 per share tax recovery and the impact of the FirstCaribbean acquisition) driven by volume growth in cards, deposits and mortgages partially offset by spread compression in lending products.

• Revenue growth excluding the impact of the FirstCaribbean acquisition was modest at 3.2%. Management indicated that growing revenue is a major focus for the bank and that retail revenue growth rates are expected to converge with industry retail revenue growth rates in the upcoming quarters.

• Retail loan losses remained relatively unchanged at $182 million from $180 million a year earlier.

• Deposit and payment fees remained flat at $193 million unchanged from the previous quarter versus $187 million a year earlier. Securitization revenue was $136 million versus $129 million in the previous quarter and a year earlier. Card fees were $60 million compared with $70 million in the previous quarter and $52 million a year earlier.

• Mutual fund revenue increased 7% YOY to $216 million from $201 million a year earlier. Mutual fund assets (IFIC) increased 9% to $50.8 billion. Investment management and custodian fees increased 10% to $130 million.

Canadian Retail NIM

• Canadian retail NIM improved 8 bp sequentially but declined 11 bp from a year earlier to 3.39%.

Retail Market Share Losses Primarily in Credit Cards

• CM continued to lose market share in credit cards this quarter. Credit cards outstanding market share declined 40 bp sequentially and 50 bp year over year to 17.6% while credit card purchase volumes market share declined 20 bp sequentially and 190 bp year over year to 24.1%. Consumer loans (excluding credit cards) market share declined 20 bp sequentially and 80 bp year over year to 9.4%.

• CM experienced small gains in residential mortgages and consumer deposits market share. Residential mortgage market share increased 10 bp sequentially and 20 bp year over year and consumer deposits market share increased 10 bp sequentially and 30 bp year over year.

CIBC World Markets Earnings Strong : Earnings Up 48%

• CIBC World Markets cash earnings increased 48% to $179 million driven by strong investment banking activity, loan growth and market at risk asset growth.

• Investment banking and credit product revenue increased 108% year over year to $247 million. Loans increased 19% with market at risk assets increasing 33%.

• Loan loss provisions were $4 million this quarter versus recoveries of $16 million a year earlier.

• Revenue increased an impressive 20% with non-interest expenses increasing 4% for high operating leverage of 16%. Revenue growth was driven by strong capital markets revenue and slightly higher merchant banking revenue.

Trading Revenue Relatively Weak

• Trading revenue (excluding the impact of VIEs) was relatively weak at $176 million compared with $245 million in the previous quarter and $186 million a year earlier.

• Equities trading revenue was weak in the quarter at $75 million versus $104 million in the previous quarter and $86 million a year earlier.

Capital Markets Revenue Solid

• Capital markets revenue was solid at $404 million versus $414 million in the previous quarter and $367 million a year earlier.

• Underwriting and advisory fees increased 30% to $178 million while commissions on securities transactions declined 2% to $226 million.

High Security Gains

• Security gains were $119 million or $0.23 per share in the quarter versus $0.09 per share a year earlier and $0.27 per share in the previous quarter.

• In addition to security gains, CM recorded a loss on equity-accounted investments and limited partnerships of $16 million versus a gain of $48 million a year earlier.

Unrealized Surplus

• Unrealized security surplus increased to $474 million (including limited partnerships) versus $351 million in the previous quarter and a deficit of $8 million a year earlier.

Operating Leverage 2%

• Revenue growth was 9% (4% excluding FirstCaribbean) driven by higher net security gains and net unrealized gains in the designation of certain fair value hedges. Non-interest expenses increased 7% to $1,967 million.

Productivity Ratio

• The productivity ratio in the quarter was 63.2% versus 61.4% in the previous quarter and 64.4% a year earlier.

Loan Loss Provisions Increase 17%

• Specific LLPs increased 17% to $190 million or 0.47% of loans (excluding a $24 million general reversal) from $163 million or 0.46% of loans a year earlier.

• Credit card losses have increased over 60 bp in the past 6 months to over 400 bp from approximately 340 bp in Q4/06.

• We are increasing our 2007 LLP estimate to $650 million or 0.39% of loans from $600 million or 0.36% of loans due to higher credit card losses. Our 2008 LLP estimate is unchanged at $700 million or 0.41% of loans.

Impaired Loans

• Gross impaired loans (GILs) were $981 million in the quarter versus $991 million in the previous quarter and $817 million a year earlier.

• Net impaired loans were negative $535 million versus negative $565 million in the previous quarter and negative $787 million a year earlier.

Loan Formations - Modest and Stable

• Gross loan formations were $370 million this quarter versus $360 million in the previous quarter and $385 million a year earlier. Net loan formations were $210 million versus $253 million in the previous quarter and $146 million a year earlier.

Tier 1 Ratio

• Tier 1 ratio declined to 9.5% this quarter versus 9.6% in the previous quarter and but increased from 9.2% a year earlier.

• The common equity to risk-weighted assets (CE/RWA) ratio was 8.7% compared with 8.6% in the previous quarter and 7.8% a year earlier. Total risk-weighted assets increased 10.5% to $127.2 billion versus $115.1 billion a year earlier. Market at risk assets increased 33% to $5.2 billion from $3.9 billion a year earlier.

CIBC Announces Normal Course Issuer Bid

• On April 27, 2007 CM announced a normal course issuer bid to commence on or about May 2, 2007. CM intends to repurchase up to 10 million shares or approximately 3% of its total float for cancellation.

Recommendation

• Our 2007 and 2008 earnings estimates remain unchanged at $8.20 per share and $8.80 per share. Our 12-month share price target is unchanged at $115. Our share price target represents 14.0x our 2007 earnings estimate and 13.1x our 2008 earnings estimate.

• We maintain a 2-Sector Perform rating.
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Financial Post, Duncan Mavin, 1 June 2007

After focusing on slashing costs for the past 18 months, Canadian Imperial Bank of Commerce may be ready to start spending more cash on acquisitions to expand revenue.

Gerry McCaughey, CIBC's chief executive, was charged with steadying the ship when he took over the bank in 2005.

But with the recent acquisition of a bigger stake in First- Caribbean International Bank under his belt, Mr. McCaughey has signalled the bank is ready to change course and look to acquisitions to expand overseas.

"With the FirstCaribbean acquisition now complete, CIBC will consider further opportunities for international growth, both through organic expansion at FirstCaribbean and additional strategic acquisitions," he said.

Since December, CIBC has raised its stake in FirstCaribbean to 91.5% from 49.5% for a total cost of $1.1-billion.

The Caribbean bank contributed about $38-million to CIBC's second-quarter results announced yesterday.

The bank offered scant details about likely acquisitions.

But Mr. McCaughey is particularly careful when it comes to the wording of his public statements and his comments yesterday will likely be seen as an indication of his intentions to step up the bank's hunt for revenue growth.

Indeed, revenue-generating acquisitions would go some way to waylaying fears among analysts that the bank's cost-cutting focus has stymied growth.

The bank reported a 38% increase in second-quarter profits to $807-million from $585-million in 2006, but some analysts were unimpressed.

UBS Investment Research analyst Jason Bilodeau said "the platform has risen to a higher level of earnings generation, but excluding acquisitions, the core pace of growth in retail is unclear at this point."

Blackmont Capital analyst Brad Smith said earnings per share of $1.95 fell short of his forecast of $1.98 because of "weaker-than-expected revenues in both the retail and wholesale operating segments.

Total revenue increased 10% in the second quarter to $3.1-billion from $2.8-billion in the year ago period.

The bank's retail banking group reported revenue of $2.12-billion up from $1.97-billion last year.

The 10% increase was due to volume growth, lower taxes and the acquisition of a controlling interest in FirstCaribbean, the bank said.

CIBC World Markets' revenue increased to $726-million from $607-million in the same quarter of 2006. Net income for the group was up 76% to $194-million.

Mr. McCaughey was praised for reducing costs at CIBC which became a necessity after the bank took a hit of US$2.4-billion related to its involvement with Enron.

Last year the bank exceeded targeted cost savings of $250- million. Mr. McCaughey has said it is aiming to hold expenses flat to 2006 levels.

Expenses were $2-billion in the second quarter of 2007, up from $1.9-billion in the previous quarter primarily due to the inclusion of $99-million related to FirstCaribbean.
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Bloomberg, Sean B Pasternak & Doug Alexander, 31 May 2007

Canadian Imperial Bank of Commerce and National Bank of Canada, two of the country's six largest lenders, reported record second-quarter earnings as stock sales and mergers fueled investment-banking revenue.

Net income at CIBC climbed 38 percent in the period ended April 30 to C$807 million ($755.8 million), or C$2.27 a share, beating the average estimate of analysts in a Bloomberg survey. National Bank, ending its last quarter under Chief Executive Officer Real Raymond, said profit rose a better-than-expected 8.9 percent to C$233 million, or C$1.40 a share.

Canada's banks are benefiting from the worldwide surge in takeovers and booming demand for stocks and bonds. National Bank said equity-trading revenue rose 72 percent while CIBC earned twice as much in underwriting and merger-advisory fees. The gains contrast with Royal Bank of Canada, whose profit missed analysts' estimates after trading revenue fell.

``It's going to be another good year for the banks,'' said John Kinsey, who helps manage $900 million, including CIBC shares, at Caldwell Securities Ltd. in Toronto. ``Earnings are coming through nicely, and I think the dividends will all be increased again.''

Shares of Toronto-based CIBC dropped the most since August 2005 after some analysts said revenue was weak and the company met estimates only because of a lower tax rate and gains on the sale of securities. Profit was C$1.95 a share excluding one-time gains such as tax recoveries and reversals of loan losses. That compared with the C$1.91 average in the Bloomberg survey.

CIBC fell $3.47, or 3.27 percent, in trading on the Toronto Stock Exchange. National Bank shares dropped 97 cents to C$65.05.

Earnings at CIBC World Markets, Canadian Imperial's securities unit, jumped 76 percent to C$194 million. The bank ranked second in Canada for both stock offerings and mergers completed during the fiscal second quarter, according to data compiled by Bloomberg.

CIBC, which underwrote stock sales for companies including Fortis Inc. and Enbridge Inc., said revenue also was bolstered by fees from a $3.9 billion sale of commercial mortgage-backed securities.

Profit from consumer banking rose 35 percent to C$583 million. That includes C$38 million from the acquisition of FirstCaribbean, Chief Financial Officer Tom Woods said on a conference call with analysts today.

An increase in provisions for credit losses to C$166 million from C$138 million a year ago hurt net income.

Still, CIBC's was the biggest profit increase among Canadian banks this past quarter. Royal Bank, the country's No. 1 lender by assets, reported a 14 percent gain.

CIBC also said Chief Risk Officer Steven McGirr will leave the bank by July 1. Ken Kilgour, who is the executive vice president of treasury and risk management, will succeed him.

At National Bank, the largest lender based in Quebec, new CEO Louis Vachon promoted Senior Vice President Michel Tremblay to chief operating officer of consumer banking and wealth management and Vice President Jean Dagenais to chief financial officer. Pierre Fitzgibbon, the current CFO, is leaving the bank.

National Bank hired John Cieslak, formerly of with stock- exchange operator TSX Group Inc., as senior vice president of technology.

Profit at National Bank's financial markets unit, which includes trading and investment banking, climbed 32 percent to C$95 million. Earnings from consumer banking and asset management also rose, the Montreal-based bank said.

National Bank was expected to earn C$1.32 a share, according to the median estimate of 12 analysts surveyed by Bloomberg. The company, the largest publicly traded lender based in Quebec, raised its quarterly dividend for the fourth time in two year. National Bank now will pay 60 cents a share as of Aug. 1, up 11 percent from the previous dividend.

Vachon, who takes over for Raymond tomorrow, said on a conference call today that he plans to raise the dividend again in the fiscal third quarter.
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National Bank Q2 2007 Earnings

  
Analysts' ratings and target prices for National Bank of Canada:

• BMO Capital Markets maintains "market perform," 12month target price is cut to $70

• Blackmont Capital maintains "hold," 12 month target price is $67.50

• Credit Suisse maintains "outperform," the target price has been raised from $72 to $73.

Credit Suisse notes that National Bank has reported Q2 2007 EPS significantly ahead of consensus and ROE in-line with estimates. National Bank's revenues grew by 9.5% YOY due to the higher contribution from the Financial Markets unit. The bank hiked its dividend by 11% and bought back 2.2 million shares in the quarter.

• Desjardins Securities upgrades from "hold" to "buy," 12 month target price is $70.50

• RBC Capital Markets maintains "underperform," 12 month target price is $65

• Scotia Capital maintains "underperform," 12 month target price is $77

• TD Securities downgrades from "buy" to "hold," 12 month target price has been reduced from $73 to $71
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RBC Capital Markets, 1 June 2007

Core diluted cash EPS of $1.40 were ahead of our expectations of $1.32 and consensus estimates of $1.33 (up 14% YoY). The positive variance came from Financial Markets ($95 million of net income versus our $70 million estimate, driven by continued strong trading revenues, higher than expected capital market fees and "other"), offsetting a $7 million shortfall versus our estimate in Personal and Commercial banking on lower than expected net interest income margins and other income. The dividend was increased to $0.60 from $0.54 and management indicated that it may raise the dividend again next quarter. We have raised our 2007E EPS by $0.10 to $5.60 to reflect the positive earnings variance in Q2/07 but are leaving our 2008E EPS unchanged at this time. Our 12-month target is also unchanged.

We maintain our Underperform rating. National Bank trades at a 0.8x 2008E P/E discount to the group, in line with its average of the last five years, and we do not believe the discount will narrow in the coming year as EPS growth should lag the group. National Bank's current provisioning rate is more at risk of rising than other banks' in our view, retail loan growth has slowed in Quebec due to increased competition, and the company's successful partnership programs with wealth management firms are not yet large enough to offset slower growth in the bank's base market. Securities gains were also abnormally high in 2006. The proportion of earnings coming from wholesale businesses is also higher than for peers, supporting a lower multiple. Our 12-month price target of $65 implies a forward P/E multiple of 11.2x, compared to the current multiple of 11.6x.
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Reuters, Lynne Olver, 31 May 2007

National Bank of Canada reported a 9% increase in second quarter earnings yesterday on the back of higher profits in its financial markets and wealth management segments, and the bank also raised its dividend.

Another dividend hike may be just a few months away, as National Bank's dividend payout ratio of 38% is below its target range, incoming CEO Louis Vachon said on a conference call.

"We'll be reviewing our dividend again next quarter and if earnings allow, then we'll certainly increase our dividend again to bring it within the 40% to 50% [payout] target," said Mr. Vachon, who will take over the top job today from retiring CEO Real Raymond.

Canada's sixth-biggest bank reported earnings of $233-million, or $1.40 a share, in the three months ending April 30. That compared with earnings of $214-million ($1.26) in the same period a year ago. Analysts had expected National Bank to report earnings of $1.32 a share before items, according to a poll by Reuters Estimates.

As expected, the bank boosted its dividend to 60? a share, up 11%.

National Bank also announced management changes, including a new chief financial officer.

Jean Dagenais becomes senior vice-president and chief financial officer. He replaces Pierre Fitzgibbon, who is moving to become president and CEO of biotechnology company Atrium Innovations, based in Quebec City.

National Bank said personal and commercial banking income rose 6% in the second quarter to $110-million, due to "sustained growth in retail loan and deposit volumes."

Earnings in the financial markets unit jumped 32% to $95- million, thanks to "significantly higher" fees and trading revenues.

In its wealth-management segment, National Bank's profit climbed 10% to $43-million.
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Supreme Court Dismisses Banks' Insurance Appeal

  
The Globe and Mail, Tara Perkins, 1 June 2007

The Supreme Court of Canada's dismissal yesterday of an appeal launched by eight large Canadian banks means that insurance continues to fall in the purview of the provinces. The Supreme Court was looking at the extent to which banks must comply with provincial laws regulating the promotion and sale of insurance. Specifically, it was considering whether the consumer protection rules in Alberta's 2000 insurance laws governed the promotion of insurance products that the banks are now allowed to sell under the federal Bank Act. The Supreme Court upheld earlier decisions by Alberta courts.
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Financial Post, Duncan Mavin, 1 June 2007

A Supreme Court of Canada ruling has dealt another blow to the ambitions of Canada's banks to increase their earnings from insurance sales.

The ruling, in a case the banks had hoped would extend their existing rights to sell insurance products under the Bank Act, states that "the promotion of authorized insurance is not part of the core of banking because it is not essential to the function of banking."

Although the case has had little public exposure, one senior insurance company executive called yesterday's ruling a "momentous decision."

Under the federal Bank Act, banks are prohibited from selling insurance, except for creditors insurance. In 2000, Alberta introduced changes to its Insurance Act that would bring creditor insurance sold by the banks under provincial regulations.

"The banks claimed that they were engaged in the provision of ordinary banking services under the federal act, so that they were immune to provincial legislation in respect of the business of banking, and that provincial legislation could not supersede federal legislation," said Finn Poschmann, director of research at the C.D. Howe Institute

The Supreme Court's decision against the banks' position will make their creditor insurance less efficient, said Mr. Poschmann.

"Clearly the distribution of creditors insurance products will be less competitive than it was," he said.

However, the insurers and financial advisors disagreed with that view.

They applauded the Supreme Court's ruling and said a ruling in favour of the banks would have given them an unfair advantage.

"The Supreme Court of Canada's unanimous ruling preserves a level playing field for financial advisors and an environment that places consumers' interests first," said Steve Howard, president of advisor association Advocis.

"It's only fair that all who sell insurance products should abide by the same rules."
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