TD Bank Funds $3.8 Billion in BCE Takeover

Bloomberg, Sean B. Pasternak & Frederic Tomesco, 17 July 2007

Toronto-Dominion Bank said it agreed to provide C$3.8 billion ($3.64 billion) in financing for the proposed takeover of BCE Inc. by investors that include the Ontario Teachers' Pension Plan.

Canada's third-biggest bank will lend C$3.3 billion and buy C$500 million in BCE stock, in the largest private-equity financing ever for the Toronto-based company.

Toronto-Dominion joins other lenders including Citigroup Inc. that will provide C$34.3 billion in credit for the world's biggest leveraged buyout. BCE, based in Montreal, is Canada's largest phone company.

``While these commitments are large, they were entered into following the bank's normal processes and are within the risk tolerances provided for in the bank's risk management framework,'' Toronto-Dominion said in a statement today.

The investment group will put up about C$8 billion and borrow the rest for the buyout, Teachers' Senior Vice President Jim Leech said. He declined be more specific or say when regulatory documents would be filed.

``We are still tweaking and fine tuning,'' Leech said in a telephone interview from Toronto today. ``We'll have the final numbers when we file our regulatory documents.''

Under the C$51.7 billion takeover, which includes debt, Teachers' will own 52 percent of BCE, while Providence Equity Partners Inc. will own 32 percent and Madison Dearborn Partners LLC will have 9 percent. The proposed takeover, announced June 30, is expected to close next year.

Toronto-Dominion, which helped advise the Ontario Teachers' plan on the purchase, plans to ``syndicate,'' or distribute the debt and equity to other banks and investors. BCE's financial advisers also included Citigroup, Royal Bank of Scotland Group Plc and Deutsche Bank AG.

__________________________________________________________

Dow Jones Newswires, 17 July 2007

Toronto Dominion Bank said it has underwritten C$3.3 billion of a C$34.3 billion (US$32.9 billion) credit facility and provided a C$500 million equity bridge facility to a group of institutional investors led by Ontario Teachers' Pension Plan Board in support of their bid to acquire BCE Inc.

The Toronto-based Canadian chartered bank said the commitments "were entered into following the bank's normal credit processes and are within the risk tolerances provided for in the bank's risk management framework."

In the ordinary course, the bank would expect to syndicate these commitments among other financial institutions and investors, it noted.

__________________________________________________________

The Globe and Mail, Sinclair Stewart & Boyd Erman, 17 July 2007

Toronto-Dominion Bank has agreed to commit about $4-billion in capital to help finance the record takeover of BCE Inc., including purchasing a half-billion dollars worth of equity that will give the bank a 7-per-cent ownership stake in the telecommunications company, according to people familiar with the matter.

These sources said TD offered to put up $500-million for a minority stake in Montreal-based BCE to help Ontario Teachers' Pension Plan and two U.S.-based private equity suitors raise sufficient Canadian equity for their $35-billion takeover bid, which was endorsed by BCE's board late last month.

Teachers, which will own 52 per cent of the equity, has disclosed that U.S.-based Providence Equity Partners and Madison Dearborn Partners will together hold 41 per cent, but it has declined to identify the owner of the remaining 7 per cent.

The plan is for TD, which has $400-billion of assets, to unload its equity stake to other large Canadian investors once the deal is approved.

The bank will likely start feeling out prospective buyers in coming weeks, the sources said.

“It's a very gutsy call,” one person close to the process said of taking on the equity portion.

“Many banks are trying to squash this.”

The arrangement, known as a bridge equity loan, has become an increasingly controversial one in banking circles, with some major firms, like JPMorgan Chase & Co., saying they want to end the practice because the returns rarely justify the amount of risk to which they may be exposed.

The fear is that banks will not be able to sell the equity they purchase to other investors if the market drops, leaving them to keep the investment on their books and face a possible writedown on its value if markets soften.

TD's equity bridge in the BCE deal appears to be the largest yet by a Canadian bank, and sources close to the Teachers consortium said the arrangement was a “critical” component in finalizing the deal, on which TD stands to earn big fees for advisory work and lending. In addition to the equity loan, the bank has $3.5-billion worth of capital commitments, which include long-term debt and credit facilities.

Finding enough Canadian equity was a stumbling block during the BCE auction, given federal rules that cap foreign ownership in telecom companies at 46.7 per cent. TD agreed to step in with an equity commitment for Teachers at a time when rival bidders, including a group led by the Canada Pension Plan Investment Board, appeared to have locked up investment dollars from many of the country's leading pension funds.

The investment by TD comes at a time when the business of doing leveraged buyouts, which has boomed for years, faces headwinds amid reticence on the part of debt investors to buy the bonds needed to finance the debt-heavy purchases.

And while TD has specialized in the telecom business over the years, the results haven't always been pretty: The bank set aside $2.9-billion in 2002 to cover bad loans, many to telecom companies.

After that, the bank shifted its emphasis to retail banking, but in recent years chief executive officer Ed Clark has returned to a greater focus on TD's investment bank.

“Taking down equity of that size when you are a bank focused on retail, that's pretty ballsy,” said a rival Canadian investment banker. “They were saying a few years ago their focus was retail. Now we're seeing them use their capital much more aggressively to support their wholesale side.”

“It will be a giant revenue stream for them if it's all successful,” the banker added.

Still, many firms are leery of equity bridges because, while regular debt bridges are at least secured by assets, equity stakes have last claim on assets.

“Bridge equity is not liquid and there's no clear market in which to price it, so if there are storm clouds brewing you can't blow it out,” said a senior deal maker at a U.S.-based investment bank. “The problem you have with capital markets is the risks increase every day, every hour you hold something.”

Because of that, “there's almost not enough money to pay you for the risk,” the banker said.

The total amount of the equity component in the BCE offer is $7.5-billion, a figure that includes the $2-billion worth of BCE shares that Teachers already owns.

In addition to TD, the lenders providing the $34.35-billion of debt financing are Citigroup Inc., Royal Bank of Scotland and Deutsche Bank, according to documents filed with Canadian regulators.

The figures were blacked out in the documents, but by cutting-and-pasting the redacted section into a fresh word-processing document, it is possible to view the numbers.

__________________________________________________________

Bloomberg, Caroline Salas and Miles Weiss, 17 July 2007

Goldman Sachs Group Inc., JPMorgan Chase & Co. and the rest of Wall Street are stuck with at least $11 billion of loans and bonds they can't readily sell.

The banks have had to dig into their own pockets to finance parts of at least five leveraged buyouts over the past month because of the worst bear market in high-yield debt in more than two years, data compiled by Bloomberg show.

Bankers, who just a few months ago boasted that demand for high-yield assets was so great that they would have no problem raising debt for a $100 billion LBO, are now paying for their overconfidence. The cost of tying up their own capital may curb earnings and stem the flood of LBOs, which generated a record $8.4 billion in fees during the first half of 2007, according to Brad Hintz, the former chief financial officer at New York-based Lehman Brothers Holdings Inc.

``The private equity firms, being very tough negotiators, are unlikely to let the banks off the hook,'' said Martin Fridson, chief executive officer of high-yield research firm FridsonVision LLC in New York. ``They'll say that's your problem and that's why we're paying you: To take risk.''

As the market began to turn sour last month, Goldman Sachs, Citigroup Inc., Lehman and Wachovia Corp. had to buy $725 million of bonds that Goodlettsville, Tennessee-based Dollar General Corp. was selling to finance Kohlberg Kravis Roberts & Co. purchase of the company for $6.9 billion. All of the securities firms are based in New York, except Wachovia, which is located in Charlotte, North Carolina.

Those bonds are probably worth 94 cents on the dollar, or $43.5 million less than when they were sold on June 28, according to Justin Monteith, an analyst at high-yield research firm KDP Investment Advisors in Montpelier, Vermont. KKR completed the acquisition of Dollar General on July 9.

Bear Stearns Cos. strategists estimate that about $290 billion of deals still need to get funded, including those of Greenwood Village, Colorado-based credit-card processor First Data Corp. and energy company TXU Corp. of Dallas.

The question is ``how much yield are the brokerage firms going to have to eat,'' said Hintz, who is now an analyst at Sanford C. Bernstein & Co. in New York. ``What they've committed to is not current trading rates in the market. If I have a problem it doesn't mean I can't place the problem, but it's going to cause a mark-to-market loss.''

Acquisitions by private equity firms such as New York's KKR and Blackstone Group LP helped push sales of high-yield bonds and loans worldwide up more than 70 percent during the first half of the year to a record $708 billion, according to data compiled by Bloomberg. High-yield, or junk, bonds are those rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's.

The investment banking fees generated by LBOs in the first half amounted to almost two-thirds of the $12.8 billion paid by LBO firms to Wall Street in 2006, data compiled by Freeman & Co. and Thomson Financial show. In the race to win deals, the five largest U.S. investment banks more than tripled their lending commitments to non-investment grade borrowers during the past year to $174 billion, according to their regulatory filings.

KKR co-founder Henry Kravis in May called it the ``golden era'' of buyouts at a conference in Halifax, Nova Scotia. The extra yield investors demanded to own junk bonds rather than Treasuries shrank to a record low of 2.41 percentage points in June from the peak of more than 10 percentage points in 2002, according to index data from New York-based Merrill Lynch & Co. The spread has since widened to 3.07 percentage points.

For loans rated four or five levels below investment grade, the spread over the London interbank offered rate shrank to 2.12 percentage points in February from more than 4 percentage points in 2003. It has since widened to 2.72 percentage points.

Some bankers even speculated that $100 billion LBO was possible, a scenario that is now ``definitely'' off the table, said Stephen Antczak, high-yield strategist at UBS AG in Stamford, Connecticut. Wall Street's confidence in its ability to finance just about any deal led buyout firms to remove clauses in their purchase agreements that would allow them to back out if their banks couldn't come up with the financing.

Just three of the 40 biggest pending LBOs have an escape clause that lets the buyer back out if funding can't be arranged, said Mike Belin, U.S. head of equity derivatives strategy at Deutsche Bank AG in New York. A couple of years ago, a majority of deals included a financing contingency, Belin said, based on his research.

``If you were a credit officer or a risk manager who said `No' to virtually anything over the last few years you were wrong,'' Hintz said. ``So did they take it too far? Well, yeah. But that's part of any cycle. The issue is did they take it too far and is it going to hurt their earnings.''

Tribune Co.'s agreement to be bought by billionaire Sam Zell is one of the three acquisitions with an escape clause. Zell or Tribune can back out of the purchase if funding can't be obtained ``on the terms set forth in the financing commitments'' or on similar terms, according to regulatory filings.

Zell agreed to pay $25 million to Tribune, owner of the Los Angeles Times and Chicago Tribune, should the financing fall through. Tribune spokesman Gary Weitman said banks have ``fully committed'' to the deal.

The market for high-yield bonds and junk-rated, or leveraged loans began to crack in June as concerns that LBOs were becoming too risky coincided with a slump in the market for subprime mortgages that caused the near-collapse of two Bear Stearns hedge funds.

Junk bonds lost 1.61 percent last month, the most since March 2005 when General Motors Corp. forecast its biggest quarterly loss since 1992 and the debt lost 2.73 percent, according to Merrill Lynch.

Investors refused to buy bonds to finance purchases of companies including Dollar General and ServiceMaster Co., forcing bankers to either buy the bonds themselves or extend a loan to make up for the securities that weren't sold.

In most deals, investment banks promise to provide loans to the buyer. They then seek other lenders to take pieces of the loans and find buyers for bonds. When buyers vanish, the banks must either buy the bonds themselves or provide a bridge loan to the borrower, tying up capital that would otherwise be used to finance more deals. The banks typically parcel out portions of bridge loans to reduce their risk.

Citigroup, the biggest U.S. bank, reported that its securities and banking division recorded an expense of $286 million in the first quarter to increase loan-loss reserves to account for higher commitments to leveraged transactions and an increase in the average length of loans.

Lehman reported on July 10 that its commitments for ``contingent acquisition facilities'' more than doubled in the quarter ended May 31 to $43.9 billion, exceeding its stock market capitalization of $39.1 billion. Lehman said its commitments contain ``flexible pricing features'' that allow it to charge more if market conditions deteriorate.

Goldman Sachs more than doubled its lending commitments to non-investment grade borrowers to $71.5 billion in the year ended May 31.

Citigroup spokeswoman Danielle Romero-Apsilos, Lehman spokeswoman Tasha Pelio and Goldman Sachs spokesman Michael Duvally, either declined to comment or didn't return phone calls.

JPMorgan failed to sell $1.15 billion of bonds for Memphis, Tennessee-based ServiceMaster on July 3. The banks provided ServiceMaster, the maker of TruGreen and Terminix lawn-care products, with a bridge loan to make up for the failed bond sale. ServiceMaster is being bought by private equity firm Clayton Dubilier & Rice Inc. for $4.7 billion.

KKR and New York-based Clayton Dubilier this month completed their $7.1 billion purchase of Columbia, Maryland-based US Foodservice, a unit of Dutch supermarket company Royal Ahold NV, even though junk bond investors refused to buy $1.55 billion of bonds and $3.37 billion of loans to finance the deal, according to estimates from New York-based Bear Stearns.

Deutsche Bank led the bond offering, which included $1 billion of ``toggle'' bonds that would have allowed US Foodservice to pay interest in either cash or additional debt. KKR and Clayton Dubilier relied on loans to complete the deal, according to S&P's Leveraged Commentary and Data unit.

``Many of these things are beyond our risk desires,'' said Bruce Monrad, who manages $1.5 billion of high-yield bonds at Northeast Investment Management Inc. in Boston.

JPMorgan spokesman Adam Castellani, Deutsche bank spokesman Scott Helfman and Morgan Stanley spokeswoman Jennifer Sala either declined to comment or didn't return calls. All the banks are based in New York, except Deutsche Bank, which is in Frankfurt.

Banks can always sell the debt if demand increases. Meanwhile, they may have to report a loss from the decline in value of their holdings, a process known as marking to market.

Banks could also lose money should they have to offer discounts on loans in order to syndicate the deals, said Tanya Azarchs, a banking industry analyst at New York-based S&P.

``I don't think it's going to cause banks to fail or even lead to downgrades,'' Azarchs said. ``But I do think there will be a little indigestion and lower earnings.''

The biggest concern is ``hung deals,'' where a lender is left holding a large loan to a single borrower, said Azarchs. ``Those traditionally in all the prior credit cycles have caused the greatest amount of grief for the large syndicating banks,'' Azarchs said.

In 1989, First Boston Corp., now part of Credit Suisse, made a bridge loan for a buyout of Ohio Mattress Co., the predecessor to Sealy Corp. The junk bond market collapsed before First Boston could refinance the loan, and the securities firm ended up owning a big stake in the bedding manufacturer.

The deal became known as ``Burning Bed.''

``The thing about this business is memories are two seconds long,'' said James Schell, a private equity attorney in the New York office of Skadden, Arps, Slate, Meagher & Flom LLP.

Banks led by Citigroup committed to extend $37.2 billion in credit to fund the purchase of TXU by a group that included KKR, Fort Worth, Texas-based TPG Inc. and Goldman Sachs's private equity group. The financing will comprise $25.9 billion of term loans and $11.3 billion in an unsecured bridge loan.

Credit Suisse, based in Zurich, is leading banks in the U.S. that have agreed to provide KKR with $16 billion of loans for its $26.1 billion takeover of First Data. The plans include an $8 billion bond sale, which is scheduled for August or September, according to a Banc of America Securities LLC research report.

For firms such as KKR or Blackstone, both based in New York, the tighter credit environment may make their acquisitions less profitable and even change the way they go after future targets. Mark Semer, a spokesman for KKR, declined to comment.

``The underwriters are going to be forced to provide bridge loans and it's getting pretty ugly, but Wall Street deserves to get smacked around a little,'' said William Featherston, managing director in high-yield at J. Giordano Securities LLC in Stamford, Connecticut. ``It's been easy for so long.''

;

Preview of Life Insurance Cos Q2 2007 Earnings

Scotia Capital, 16 July 2007

Event

• Canadian insurers start reporting Q2/F07 results on July 31. We've released our detailed Insurance Q2/F07 Earnings Preview on July 16.

What It Means

• We believe the Canadian lifecos could beat our EPS estimates this quarter (which are $0.01 below consensus for each lifeco) despite the currency headwind, largely due to very buoyant equity markets (up 17% YOY).

• Going forward we see little likelihood of EPS increases, in fact there could be decreases, as currency continues to be a headwind and equity markets are expected to appreciate only in the mid-single digit range. Exceptions include SLF, where the recently announced funding arrangement and stronger US VA sales levels could add $0.05-$0.07 to 2H/07 EPS and $0.03 in 2008, and GWO, where Putnam financing without common equity issuance could add $0.05-$0.06 to our 2008 estimate (we currently account for 1/2 of this).

The following is an excerpt and a summary from our Insurance Q2/F07 Earnings Preview report released July 16.

• There is a possibility, due to the buoyant equity markets in Q2/F07, that the companies could beat our estimates and consensus despite the currency headwinds. Certainly, currency has been a headwind. The average CAD continues to be particularly strong. In Q2/F07 it is up 3% year-over-year (YOY) and 7% quarter-over-quarter (QOQ) versus the USD, it is up 9% YOY and QOQ versus the ¥, and it is up 5% QOQ but down 6% YOY versus the £. Manulife in particular suffers, and, with 65% of its earnings exposed to the USD and 10% exposed to the ¥, we estimate that YOY foreign exchange changes could take $0.02 to possibly $0.03 out of Q2/07E EPS (the impact is effectively already in our estimates). For Great-West Lifeco and Sun Life the impact is closer to $0.01 (again, the impact is already in our estimates), as both these companies have less exposure to the USD and more exposure to the £, which in fact outpaced the average Q2/F07 CAD on a YOY basis. But we believe the currency headwind could be more than offset by several positives on a YOY basis, namely favourable equity markets, a continued favourable credit environment, and the positive impact of rising long-term interest rates. U.S. and Canadian equity markets are each up 17% YOY (on average) and 5% and 7% QOQ (on average), respectively, well in excess of the 7% annualized rate we assume. This could translate into better-than-expected fee income from wealth management business, better-than-expected net realized gains on assets supporting surplus, and possibly some favourable movement in reserves associated with guarantees on segregated fund/variable annuity business. We estimate the average EPS impact of these stronger-than-expected markets YOY to be $0.02-$0.03 in Q2/F07 for the lifecos (currently not in our estimates), with Sun Life and Industrial-Alliance, each by a small margin, benefiting the most. This benefit more than offsets the negative headwind due to currency.

• But we see little likelihood of any significant increases in EPS estimates going forward. Unless we see something higher than a 7% return on the equity markets going forward (our portfolio strategist suggests just 2%-3% for the S&P/TSX and 6%-7% for the S&P 500), the 3% expected appreciation in the average CAD versus the USD in 2008 over average Q2/F07 levels (as per the most recent Scotia Economics forecast) will continue to put pressure on EPS estimates, especially for Manulife. The pressure is a little less for Great-West Lifeco and Sun Life due to more exposure to the £ (which, as per the most recent Scotia Economics forecast, is expected to be flat versus the CAD through the end of 2008), and less exposure to the USD. That said, the credit environment remains favourable and rising long-term interest rates certainly help more than hurt.

• However, for SLF and GWO we could see increases in EPS estimates. Sun Life, however, is one company for which we expect there is a chance it will come out of the quarter with a lift in EPS estimates, largely due to the recently announced funding arrangement for its U.S. insurance business, and mostly impacting the second half of 2007. Great-West Lifeco is another, where we believe the strong likelihood of funding the Putnam acquisition without issuing common equity could add another $0.02 to 2008E EPS (in addition to $0.03 we have already incorporated).

Great-West Lifeco Inc.

1-Sector Outperform : $40 target, based on 3.0x 6/30/08E BV & 14.1x 2008E EPS

• We are looking for $0.58 per share for Q2/F07, $0.01 per share below consensus. Our 2007 EPS estimate is $2.41, $0.01 ahead of consensus, and our 2008 EPS estimate is $2.75, $0.04 ahead of consensus.

• We look for the Putnam acquisition to close imminently, and financing to be finalized, with no common equity issuance. We believe that financing without common equity will add another $0.02 to 2008E EPS (in addition to $0.03 we have already incorporated).

• Europe should continue to drive growth, helped in part by $10.9 billion brought in-house in February, 2007, from the Equitable Life payout annuity block acquisition.

• Recently completed tuck-in acquisitions in the United States (two 401(k) blocks and managed care blocks, all closed in the last nine months) should start to bear fruit.

• We look for a 6% increase in the dividend.

Industrial-Alliance Insurance and Financial Services Inc.

3-Sector Underperform : $38 target, based on 1.7x 6/30/08E BV & 12.5x '08E EPS

• We are looking for $0.73 per share in Q2/F07, $0.01 below consensus. Our 2007 EPS estimate of $2.96 is $0.01 below consensus, and our 2008 EPS estimate of $3.19 is $0.09 below consensus.

• A significant reduction in new business strain is likely to drive results in Q2/07 (helped in part by a decline in YOY sales), but strain reduction will unlikely be a growth driver in 2008.

• Unless another acquisition is made, we see 2008 EPS growth returning to the 8%-9% range, consistent with the 8% organic growth in 2006 (ex the tax gains) and the expected 10% organic growth in 2007 (ex the tax gains).

• Good chance of a 7%-11% dividend increase.

Manulife Financial Corporation

2-Sector Perform : $43 target, based on 2.5x 6/30/08E BV and 13.9x 2008E EPS

• We are looking for $0.68 per share for Q2/F07, $0.01 per share below consensus. Our 2007 EPS estimate of $2.75 is in line with consensus and our 2008 EPS estimate of $3.06 is $0.05 below consensus.

• We look for 5% earnings growth in the U.S. division (ex foreign exchange) as the U.S. Fixed Products segment finally starts to return to 'guided to' earnings levels.

• New U.S. variable annuity product launch is expected continue to gain traction, but we expect an update on new product launches slated for Q3/F07 in Japan, as well as measures to address the continued slide in U.S. individual insurance sales.

• Share buyback activity appears to have picked up again. Q2/F07 activity was a twice the run rate of prior three quarters. If current pace continues we could $0.02-$0.03 to 2008E EPS.

• We assume the CAD will average US$0.93 in 2008; if it's US$0.95 we will decrease our EPS estimate by $0.05 per share, and if it's US$0.99 we will decrease our estimate by $0.12.

Sun Life Financial Inc.

1-Sector Outperform : $58 target, based on 1.9x 6/30/08E BV & 13.0x 2008E EPS

• We are looking for $0.95 per share for Q2/F07, $0.01 below consensus. Our 2007 EPS estimate of $3.92 is $0.04 below consensus and our 2008 EPS estimate of $4.41 is line with consensus.

• Good likelihood of raising 2007 EPS estimates by $0.05-$0.07 coming out of this quarter due to recently announced funding arrangement, and $0.03 in 2008 due to strength in U.S VA sales.

• We look for a 5%-8% dividend increase, consistent with the company’s practice of increasing the dividend 5%-9% each six months over the last several years.

;

BofA Profit Trails as Citigroup, JPMorgan Go Abroad

Bloomberg, Bradley Keoun and Will Edwards, 16 July 2007

Bank of America Corp. does more business in the U.S. than any of its competitors, and that's eroding returns for shareholders of the Charlotte, North Carolina-based company.

Demand for financial services is increasing three times as fast outside the U.S., fueled by companies and investors in Brazil, China, India and Russia. While Bank of America operates in 45 countries, they produce only 13 percent of its revenue. That's puny compared with Citigroup Inc., which derives almost half its sales from abroad and ranks among the biggest banks in Mexico, Poland and South Korea.

The same domestic focus that made Bank of America, Wachovia Corp. and Wells Fargo & Co. the best performing of the biggest U.S. bank stocks during the first half of the decade is working against them now. With Europe and Asia accounting for more than half of the world's economic output and home to six of every 10 millionaires, the banks and securities firms that expanded internationally stand to benefit most.

``Bank of America is largely a play on the U.S. and it's suffering more because the domestic economy has been growing at sub-3 percent,'' said Chris Hagedorn, who helps oversee about $22 billion at Cincinnati-based Fifth Third Asset Management, which owns shares of Citigroup, Bank of America and Wachovia. ``The growth right now is coming internationally.''

Kenneth Lewis, Bank of America's 60-year-old chief executive officer, is unswayed. He says the U.S. represents the best opportunity because it's still the world's single biggest source of banking, brokerage and money-management fees.

``We do better when we play to our strengths, and our strengths are in the U.S.,'' Lewis said in a June 19 interview in New York.

For now, the geographic divide between U.S. banks is growing, and it may widen even further this week when the five largest, Citigroup, Bank of America, JPMorgan Chase & Co., Wachovia and Wells Fargo, report second-quarter results.

Analysts surveyed by Bloomberg estimate that New York-based Citigroup, led by CEO Charles Prince, increased earnings by 7.7 percent, and JPMorgan, which gets a quarter of revenue from outside the U.S., had a 6.4 percent gain. Bank of America may post a 2 percent profit drop, its first decline since 2005, the survey shows.

The situation is already playing out on Wall Street, with Lehman Brothers Holdings Inc. generating almost all of its $1.1 billion increase in second-quarter revenue from international markets. Lehman, the fourth-largest securities firm, said profit increased 27 percent in the three months ended in May.

It was a different story for Bear Stearns Cos., which relied on the U.S. for 87 percent of last year's business. Chief Executive Officer James E. ``Jimmy'' Cayne, who resisted the pressure to expand in investment banking and trading overseas, reported a 10 percent drop in profit as mounting home-loan defaults in the U.S. hurt trading.

Merrill Lynch & Co. shareholders will find out tomorrow how much the world's No. 3 securities firm benefited from its overseas operations, which typically provide 35 percent or more of revenue. The New York-based firm probably will report an 18 percent increase in earnings, the Bloomberg survey shows.

The Boston Consulting Group's ``heat map,'' a color-coded chart showing where financial-services demand is expanding fastest, makes the point graphically. Over on the far right of the page, China's 8.5 percent growth stands out in fiery red. The U.S., where such revenue is rising 2.8 percent a year, sits on the left in an icy blue.

Overall, the pool of fees for everything from investment banking to retail-brokerage services and basic savings accounts will swell by 896 billion euros ($1.2 trillion), or 43 percent, from 2005 to 2015, according to Boston Consulting. About 671 billion euros of the growth will come from abroad.

``Other markets are going to grow faster than the U.S. for the foreseeable future,'' said Michael McKeon, managing partner in the financial services practice of consulting firm Booz Allen Hamilton in New York.

If anything, Bank of America's Lewis is doubling down on the U.S. His agreement to buy ABN Amro Holding NV's Chicago-based LaSalle Bank unit for $21 billion won the backing of the Dutch Supreme Court on July 13. The purchase would bring the bank right up against the federally enforced 10 percent market-share cap on U.S. deposits. The bank currently has almost 6,000 branches in 31 states.

Lewis points to research by McKinsey & Co. and studies by Bank of America that show the U.S. will generate the largest pool of banking fees over the next decade. He predicts that Bank of America can boost earnings per share by 10 percent a year just by gaining a greater share of the U.S. market and making selective investments overseas.

Bank of America became the nation's largest private bank earlier this month with the $3.3 billion acquisition of U.S. Trust Corp. In addition to holding the most U.S. deposits, Bank of America also is the nation's biggest credit-card issuer.

While Bank of America has plans to expand in some developing markets, such as China, it's scaling back operations in others. Last year, the bank swapped its Brazilian unit for a stake in Banco Itau Holding Financiero SA, completing a two-year effort to dispose of assets acquired in the 2004 purchase of FleetBoston Financial Corp.

Lewis says he doesn't like doing business directly anywhere in the world ``where we're 13th.''

Investors have second-guessed Lewis before and lost. When Bank of America agreed to buy FleetBoston in October 2003, its shares tumbled 10 percent. Shareholders rebelled similarly after Lewis proposed buying credit-card issuer MBNA Corp. in June 2005 for 30 percent more than market value. In both cases, Bank of America met or exceeded the cost savings Lewis promised.

In Lewis's first five years as CEO following his promotion in April 2001, Bank of America's stock gained 72 percent. Citigroup's rose 4 percent and JPMorgan's fell 11 percent.

``Up to now you have to give Ken Lewis a lot of credit,'' said Marshall Front, who helps manage about 500,000 Citigroup shares and 300,000 Bank of America shares at Front Barnett Associates in Chicago. ``Our largest holding has been Citigroup, and it hasn't particularly been a good investment.''

The tables have turned during the past year. Bank of America shares advanced 2.5 percent, while Citigroup gained 10 percent and shares of New York-based JPMorgan jumped 22 percent.

Citigroup does business in more than 100 countries, and the $9.2 billion it earned overseas last year exceeded net income at Charlotte-based Wachovia, the fourth-largest U.S. bank.

``When I think about our competition trying to go international, one country at a time, it's not always going to take forever, but it's a very risky strategy because you could happen to be to be in the wrong country at the wrong time,'' CEO Prince said at an investor conference in May.

Prince, 57, spent at least $10 billion in the past eight months on foreign acquisitions. Citigroup bought control of Nikko Cordial Corp., Japan's No. 3 brokerage, and acquired London-based Egg Banking Plc, the world's largest independent online bank. It invested in banks in El Salvador, India and Turkey and agreed to buy another in Taiwan. Citigroup's current expansion plans include doubling branches in Japan to 50, signing up 20,000 customers a month in Russia and building a securities business in China. The company also may purchase 50 percent of Chile's second-biggest bank.

Citigroup is an ``underappreciated global franchise, with first-mover advantage in a lot of developing countries,'' said Hagedorn of Fifth Third. In the U.S., ``banks are looking at 2 percent earnings growth, and that's not terribly exciting.''

Bank of America's overseas strategy has centered on partnerships. Under Lewis, the company has spent almost $5 billion since 2002 taking stakes in China Construction Bank Corp., China's third-biggest bank, and Grupo Financiero Santander Serfin, Mexico's No. 3 bank.

For now, Bank of America is limiting its international expansion mainly to capital markets and credit cards. The company will invest $300 million to $400 million over the next several years to gain a greater share of securities sales and trading in Europe and Asia.

Lewis also wants to sell banking products to credit-card customers in Europe by direct mail. Bank of America's $35 billion purchase of Wilmington, Delaware-based MBNA last year made it a leading credit-card issuer in the U.K., Ireland and Spain.

In the U.S., banks have been squeezed by the so-called flattening yield curve. That's when long-term rates decline and short-term rates increase, narrowing the spread banks earn on the difference between rates on deposits and loans.

Now, with the collapse of the U.S. subprime-mortgage market and the decline in house prices, banks also face bigger losses on home-equity debt and loans to homebuilders, Citigroup analyst Keith Horowitz wrote in a July 10 research note.

Wachovia and San Francisco-based Wells Fargo, the fifth- biggest U.S. bank, both generate less than 5 percent of their revenue from abroad. Wells Fargo Chairman Richard Kovacevich has referred to U.S. states east of the Mississippi River as ``overseas markets.''

Expanding into Europe was easier for Citigroup and JPMorgan in past decades because state-owned banks such as France's Credit Lyonnais SA and Banque Nationale de Paris couldn't keep up with the more nimble Americans, said Giorgio Questa, a finance professor at Cass Business School in London who used to oversee international investment banking at Italy's IMI SpA.

In the securities industry, U.K. brokers were snapped up by U.S. giants such as Merrill, which bought the biggest, Smith New Court, in 1995. Now, ``banks like Bear Stearns, Wachovia and Bank of America are finding entrenched and stiff competition from U.S. banks that were there before,'' Questa said. ``Largely, they have missed the boat.''

That's costing them opportunities to tap into the surge in international demand for financial services. European and Asian companies have accounted for 61 percent of equity-underwriting fees paid to investment banks this year, data compiled by Bloomberg show. In 2000, U.S. companies paid 57 percent.

``You clearly have a much higher growth rate in Asia and in Eastern Europe, compared with the U.S.,'' David Sidwell, chief financial officer at Morgan Stanley, said in a July 12 interview. ``Can you just shift resources out of the U.S. to Asia? The simple answer is no. You need to make sure you're investing in both.''

Bear Stearns, the fifth-biggest Wall Street firm, wants to forge more international partnerships to invest in companies that operate in faster-growing economies, Co-President Alan Schwartz said in March. In March, the company formed a $500 million fund with Huang Guangyu, the richest man in China, to invest in the country's retail industry.

International markets don't come without the kinds of risks Bank of America's Lewis prefers to avoid. Citigroup said it would shut about 80 percent of its consumer-finance branches in Japan earlier this year after the government passed legislation capping interest rates. The company raised its loan-loss reserves in Japan by $375 million and had closure costs of $40 million.

Morgan Stanley, Citigroup and Bank of America all are scheduled to stand trial in coming months for their financing of Parmalat Finanziaria Spa, the Italian dairy company that went bankrupt in 2003 after revealing a 3.95 billion-euro bank account didn't exist. The banks face allegations that they didn't have sufficient internal controls to prevent Parmalat employees from committing fraud.

Goldman CEO Lloyd Blankfein says the cost of staying too close to home may be greater. Developing markets such as Brazil, Russia and China have reached a ``tipping point'' that makes them harder than ever for investment banks to ignore, he said at a conference last month.

``If you forgo the opportunities in emerging markets, you're putting your global franchise at risk,'' Blankfein said. ``Isn't it better to invest in a place where everything is growing at 11 percent than where everything is growing at 2 percent?''

;

Blackmont Capital Comments on Banks' Subprime Exposure

Financial Post, Duncan Mavin, 12 July 2007

It can be difficult to discern exactly how Canada’s banks are exposed to the turbulent U.S. sub-prime mortgage market as Blackmont Capital analyst Brad Smith can likely testify after spending the last couple of weeks “Staring into the Structured Finance Labyrinth” to prepare his report of the same title.

Some of the banks may have got involved through the booming global trade in complex credit derivatives called collateralized debt obligations, or CDOs — the market has grown at a compound annual rate of 99% since 2002 and stood at more than US$34-trillion in 2006, says Mr. Smith. CDOs are ultimately tied to mortgage-backed securities, which are securities backed by pools of often sub-prime mortgages.

But finding out who holds these CDOs and how much they hold is not an easy task.

“Disclosure of derivative trading activity has improved greatly in recent years, but remains inadequate for drawing definitive conclusions regarding any given bank’s ultimate exposure to credit derivative trading,” says Mr. Smith.

Fortunately, the Blackmont analyst has done some of the hard work, compiling figures for the Canadian banks where information is available.

Among the conclusions he has been able to draw is that Bank of Nova Scotia has the smallest exposure to credit derivatives, weighted for risk, compared to market capitalization.

Canadian Imperial Bank of Commerce has the highest exposure, almost 6 times the size of Scotiabank’s when compared to market capitalization, according to Mr. Smith’s calculations. “CIBC’s involvement in credit derivative swap trading has ballooned since 2005,” he notes.

It is also worth noting that CIBC issued a press release on Tuesday that played down its exposure to the U.S. sub-prime real estate mortgage market. The bank said its “unhedged” exposure is “well below” a rumoured amount of US$2.6-billion.

CIBC has not confirmed what its actual exposure is.

;

BMO Agrees to Buy Two Wisconsin Banks

Scotia Capital, 11 July 2007

Event

• Bank of Montreal announced July 10 two small acquisitions in Wisconsin for US$327.2 million representing 25.4x LTM earnings.

What It Means

• BMO continues to expand the Harris footprint with small high priced acquisitions with operating challenges. We view these acquisitions as mildly negative given price, low market share, difficult operating environment, execution risk and low expected shareholder return. These acquisitions also reaffirm BMO's statement that Harris is the key growth platform for the bank and it does not intend to sell its U.S. operations.

• In terms of deposit market share, BMO will have the number 9 position in Wisconsin and the number 6 position in Milwaukee, however, combined market share would be a modest 1.5% in Wisconsin and 3% in Milwaukee (as of June 2006).

• BMO is trading at a 5% P/E premium to the bank group on our 2008 earnings estimates with lower than industry average ROE and return on risk-weighted assets.

• Maintain 3-Sector Underperform.

BMO Announces Two Small Acquisitions in Wisconsin - Mildly Negative

• Bank of Montreal (BMO) announced july 10 two small acquisitions in Wisconsin for a combined US$327.2 million of which US$137.2 million will be paid in cash and US$190 million will be paid in stock. The purchase price represents 25.4x LTM earnings, 2.2x combined book value and a combined deposit premium of 19% (26% excluding US$0.5 billion in time deposits at MMBI).

• The bank expects that the acquisitions will exceed the 10% cost of capital. Excluding one-time costs, the transactions are expected to be mildly dilutive in 2007 and mildly accretive in 2008.

• BMO continues to expand the Harris footprint with small high priced acquisitions with operating challenges. We view these acquisitions as mildly negative given price, low market share, difficult operating environment, execution risk and low expected shareholder return. These acquisitions also reaffirm BMO's statement that Harris is the key growth platform for the bank and it does not intend to sell its U.S. operations.

Ozaukee Bank - Strong Brand, Affluent Market

• Ozaukee Bank is primarily a retail bank with 6 full-service and two limited-service locations with a strong brand in the high end area of Ozaukee. The bank has US$694 million in assets and US$561 million in deposits. Ozaukee Bank has 1.42% deposit market share in Milwaukee and 0.54% deposit market share in Wisconsin (as of June 2006).

MMBI - Weak Financial Performance = Potential Opportunity

• Merchants and Manufacturers Bancorporation (MMBI) is a bank holding company dealing primarily in commercial banking with 34 full-service locations and 11 limited-service locations. The bank's earnings have been weak in the past. Currently, MMBI has $1.5 billion in assets and $1.2 billion in deposits. MMBI has deposit market share of 1.58% in Milwaukee and 1.02% in Wisconsin (as of June 2006).

Combined Market Share Modest at 1.5% - 3%

• These acquisitions are BMO's first foray into the state of Wisconsin. The two acquisitions give the bank 40 full-service branches with 33 concentrated in the Milwaukee area. In terms of deposit market share, BMO will have the number 9 position in Wisconsin and the number 6 position in Milwaukee, however, combined market share would be a modest 1.5% in Wisconsin and 3% in Milwaukee (as of June 2006). The transactions are expected to close in late 2007.

Recommendation

• In our comment "BAC Acquires LaSalle - Harris Strategic Options" dated April 24, 2007, we stated that if we were to apply a 30% range deposit premium for Harris the value would be $12 per BMO share, approximately $6 billion or 17% of market capitalization, significantly below earnings contribution of 5%.

• BMO is trading at a 5% P/E premium to the bank group on our 2008 earnings estimates with lower than industry average ROE and return on risk-weighted assets.

• Maintain 3-Sector Underperform.

__________________________________________________________

The Globe and Mail, Tara Perkins, 11 July 2007

Bank of Montreal has not ruled out making a blockbuster acquisition in the U.S., but none have come its way.

Yesterday, the bank gobbled up two small regional players for nearly $330-million (U.S.), pushing it into Wisconsin for the first time.

"We're always looking at acquisitions, whether they're smaller ones like this or larger ones," Ellen Costello, chief executive officer of BMO's U.S. subsidiary Harris Bankcorp Inc., said in an interview.

Any opportunity would have to meet all of the bank's criteria, including the right price and having a strong cultural fit, she said. No large bank seems to make the cut at the moment.

BMO did take a look at LaSalle Bank, one of its major Chicago-area rivals that is up for grabs. LaSalle, the U.S. bank owned by Dutch giant ABN Amro, is the No. 2 bank in the area, while Harris is No. 3, based on the amount of deposits. LaSalle is in the midst of a takeover battle that will likely see it acquired for more than $20-billion.

Ms. Costello said Harris looks at everything that's available in the market, and noted LaSalle is a well-regarded competitor.

BMO said yesterday it will pay $190-million in stock for Milwaukee-based Ozaukee Bank, which has six full-service branches and $694-million in assets.

It also announced a deal to buy Wisconsin-based Merchants and Manufacturers Bancorporation Inc. for $137.2-million in cash, or $37.30 per share. Merchants and Manufacturers is a holding company that has six bank subsidiaries which together operate 34 full-service locations. Combined, the six subsidiaries have $1.5-billion in assets.

"Merchants and Manufacturers' emphasis on serving small and mid-market commercial customers complements our recent addition of our business banking services in the greater Milwaukee area," Ms. Costello said.

About Ozaukee Bank, she said "when you consider that Ozaukee County has the second-highest median household income in the state, we believe the combined power of our two banks will deliver tremendous results for customers in this market. In particular, we see this as an attractive market for our wealth and business banking capabilities."

UBS analyst Jason Bilodeau said in a note the "synergies are likely to be limited and risks slightly higher for an out-of-market deal, but management suggests each bank is well-positioned in good markets with an attractive deposit base." He said the move suggests BMO is able to speed up its U.S. growth through acquisitions. "Most importantly, we believe this demonstrates that management remains firmly committed to its U.S. retail strategy and will continue growing the platform through organic growth, additional bolt-on acquisitions and, under the right circumstances, potentially larger transactions."

Both deals are expected to close later this year, and are subject to approvals from regulators in the U.S. and Canada as well as the shareholders of the target banks.

Ms. Costello said BMO is still looking for acquisitions. Indiana and Wisconsin are two areas where she sees opportunities. Harris has more than 230 locations in Illinois and Indiana, and aims to bulk up to between 350 and 400 locations across the U.S. Midwest. It has $42-billion (U.S.) in assets and $29-billion (U.S.) in deposits.

• BMO's U.S. presence

Illinois & Indiana

Through its American franchise, Harris Bank, BMO operates more than 230 locations in Illinois and Indiana, with a long-term target of 350 to 400 locations in the U.S. Midwest. Harris has annual revenue of $1.3-billion (U.S.) and is concentrated in the Chicago area, with 9.8 per cent of deposits in the city's banks. Total assets amount to $42-billion and total deposits are $29-billion.

Wisconsin

Ozaukee Bank has six full-service and two limited-service locations in northern Milwaukee. Ozaukee leads other banks in its county with $561-million in deposits and $694-million in assets. Merchants and Manufacturers Bank has 34 full-service and 11 limited-service locations through six subsidiaries in the Milwaukee area. Assets total $1.5-billion and the bank holds $1.2-billion in deposits.

__________________________________________________________

Financial Post, Duncan Mavin, 11 July 2007

Bank of Montreal has bought two banks in Wisconsin to add to its U.S. operations, showing its ambitions in the Midwest are not dented by the possible intrusion into the region of retail-banking giant Bank of America.

The two deals will cost BMO a combined $340-million in stock and cash and will boost the size of the branch network at BMO's Chicago-based Harris Bank by 16%, or 40 full-service branches and 13 other locations.

The deals announced yesterday for Merchants and Manufacturers Bancorporation Inc. and Ozaukee Bank, both located in the Milwaukee area, will add US$1.75-billion in deposits, bumping Harris's total deposits by 10%.

BMO's first forays into Wisconsin will position Harris as the ninth-largest institution by deposit market share in the state, and the sixth-largest bank by deposit market share in Milwaukee.

There has been some recent speculation the bank's ambitions would be stalled by Bank of America's proposed US$21-billion purchase of LaSalle Bank, which is a significant player in the same "Chicagoland" market as Harris.

LaSalle would add 151 branches to the 56 Bank of America owns in Chicago. A deal, if it goes through, is expected to intensify the already fierce competition in the Chicago banking sector, and some observers had suggested it would also stifle Harris' plans in the region because it could push up the price of smaller, target banks. But Harris's latest purchases appear to show the bank is sticking to its growth plan, said banking analysts.

"We believe [the deals] demonstrate that management remains firmly committed to its U.S. retail strategy and will continue growing the platform through organic growth, additional bolt-on acquisitions and, under the right circumstances, potentially larger transactions," said UBS Investment Research analyst Jason Bilodeau.

"We do not anticipate a material contribution to earnings but do believe that these announcements indicate BMO will continue to focus on growing its U.S. operations through additional acquisitions," said Dundee Securities analyst John Aiken.

Harris Bank chief executive Ellen Costello said competition throughout the mid-west is tough but management is not deterred from making further deals in the region.

Ms. Costello, a former investment banker with years of merger and acquisitions experience, was installed in the Harris hot seat last July.

One of her main tasks is to grow Harris to its stated goal of 350 to 400 locations across the Midwest.

Including yesterday's acquisitions, the Harris network has increased by more than 70 branches, or about a third, since Ms. Costello took over the reins.

UBS's Mr. Bilodeau said the Wisconsin purchases, along with the September 2006 acquisition of First National Bank & Trust for US$290-million, will "be a test of management's ability to accelerate the pace of acquisition growth and to deliver improved operating results."

"Synergies are likely to be limited and risks slightly higher for an out of market deal," he said.

__________________________________________________________

Financial Post, Duncan Mavin, 10 July 2007

BMO's acquisition of two Wisconsin-based banks to add to its Chicago-based retail banking franchise show that it “will continue to focus on growing its U.S operations through additional acquisitions,” says Dundee Securities analyst John Aiken.

The two banks, Ozaukee Bank and Merchants and Manufacturers Bancorp, will cost BMO a combined $340-million in cash and stock, and add more than US$2-billion in assets, or 10%, to the U.S. growth platform.

BMO’s Harris bank franchise will gain a further 40 full-service branches and 13 other locations and marks the banks entry into Wisconsin. The acquisition grows the total number of Harris Bank branches by 16%.

“It’s a relatively low amount of capital expended to gain access to a third contiguous state for Harris,” says Mr. Aiken. “Each platform allows for additional cross-selling potential,” he adds.

The Dundee analyst says the the outlook on the deals is modestly positive. His 12-month target price for BMO is unchanged at $75.

__________________________________________________________

Bloomberg, Doug Alexander and Sean B. Pasternak, 10 July 2007

Bank of Montreal, Canada's fourth-largest lender, agreed to buy two Wisconsin banks for $327.2 million, its biggest consumer-banking investment in more than a decade.

Bank of Montreal offered $190 million in stock for Ozaukee Bank, and $137.2 million in cash for Merchants and Manufacturers Bancorporation Inc., the Toronto-based bank said today in statements. The purchases are the first in Wisconsin for Harris Bank, and will increase its U.S. branches by more than a fifth.

``It's demonstrating that they're committed to their U.S. retail strategy,'' said UBS Canada analyst Jason Bilodeau, who rates Bank of Montreal a ``neutral 2'' and doesn't own the stock. ``They've indicated that they want to accelerate the pace of bolt-ons and this may be the first indication of that.''

Bank of Montreal is trying to reverse a slump in U.S. consumer banking, where profit has declined since fiscal 2005. The bank has spent about C$1.5 billion ($1.4 billion) on U.S. banks since 2000 to expand Chicago-based Harris. Ozaukee has eight offices and Merchants has 45, boosting Harris Bank's network to 285 branches in the U.S. Midwest.

Bank of Montreal offered $37.30 a share for Merchants, or 33 percent more than yesterday's closing share price of $28. Stock of the New Berlin, Wisconsin-based bank rose $8.05, or 29 percent, to $36.05 at 3:38 p.m. in over-the-counter trading. Bank of Montreal fell 27 cents to C$69.10 at 4:10 p.m. on the Toronto Stock Exchange.

``What this does for us is add another diversifying element to our footprint in another attractive market,'' Harris Bank Chief Executive Officer Ellen Costello said in an interview. ``This should be evidence that we're serious about growing.''

Merchants has $1.5 billion in assets and $1.2 billion in deposits, with half near Milwaukee. The company had net income of $4 million in 2006, 22 percent less than in 2005.

Ozaukee investors will get about 3 million Bank of Montreal shares as part of the transaction, the bank said. Ozaukee Bank, based in the Milwaukee area, has $694 million in assets and $561 million in deposits.

Chief Executive Officer William Downe, who took over the top job in March, has said that he wants Bank of Montreal to have between 350 and 400 U.S. branches within four years. Last August, the bank promoted Costello to head the U.S. consumer bank to help make acquisitions.

``When Bill Downe was appointed, the U.S. was going to become more important,'' said John Aiken, an analyst at Dundee Securities in Toronto. ``He is an American, and he spent a lot of time down in Chicago, so it stands to reason that this is probably in his comfort zone.''

The takeovers may increase U.S. assets and deposits by about 10 percent, Aiken said today in a note to clients. The acquisitions make Harris the sixth-largest bank for deposits in Milwaukee and ninth in the state, Costello said.

The two acquisitions are the largest consumer-banking investment for Bank of Montreal since its C$378 million purchase of Household Bank in 1996, according to the bank's Web site. In January, Bank of Montreal acquired Indiana's First National Bank & Trust for about C$342 million.

Harris Bank has been ``actively talking'' with other U.S. Midwest banks about takeovers and would consider something larger, Costello said. Harris would consider more takeovers in Illinois and plans to buy more banks or open new branches in Indiana and Wisconsin, she said. Bank of Montreal has ``C$2 billion plus'' in excess cash that could be tapped for acquisitions, she said.

Earnings from U.S. consumer banking, where Bank of Montreal receives less than 5 percent of its annual profit, fell 3.6 percent to C$27 million in the fiscal second quarter, as the Canadian currency surged 6.2 percent relative to the U.S. dollar.

``We've been suffering in the last 18 to 24 months from a slowing real estate market, which has affected us on both the consumer and commercial side,'' Costello said. ``The tactic we've taken is to be really aggressive on managing our costs.''

;

CIBC Subprime Investments `Well Below' U$2.6 Billion

Bloomberg, Doug Alexander, 10 July 2007

Canadian Imperial Bank of Commerce, Canada's fifth-largest lender, said its investments in the U.S. subprime mortgage market are ``well below'' the $2.6 billion cited in some news reports.

``CIBC does not disclose individual securities positions but confirms its previous statement to the media that its unhedged exposure to this sector is well below $2.6 billion,'' the Toronto-based bank said today in a statement.

New York-based newsletter Grant's Interest Rate Observer reported on June 15 that CIBC may have as much as $2.6 billion in investments linked to subprime mortgage-backed securities. Barron's also cited CIBC in an article yesterday about mortgage- backed securities such as collateralized debt obligations.

Most of the securities held are rated AAA, and the lender has insurance to cover some of the investments, the bank said. Bank spokesman Rob McLeod declined to say how much CIBC has in these type of securities.

CIBC holds investments in mortgage-backed securities including a CDO called Tricadia, CIBC World Markets Chief Executive Officer Brian Shaw said on a May 31 earnings conference call. So-called CDOs package mortgage bonds into new securities. The Tricadia 2006-7A has a face value of $328.5 million, according to Bloomberg data.

``Our risk in this space is not at all major,'' Shaw said during the call. ``We don't view this as a major credit item at all for us.''

Banks, hedge funds and other investors may face losses of $52 billion from investments in bonds backed by U.S. subprime mortgages amid the fallout from rising mortgage delinquency rates, according to a Credit Suisse report. Bear Stearns Cos. in New York, the world's fifth-biggest securities firm, is providing $1.6 billion to rescue one of its hedge funds that invested in subprime debt.

Banks will probably lose between $5 billion and $15 billion from their investments in CDOs, said Credit Suisse analysts led by Ivan Vatchkov in London.

``It is scarcely surprising that a large fixed-income trading operation, as with all Canadian banks, has some exposure to subprime residential mortgage-backed securities in the U.S.,'' BMO Capital Markets analyst Ian de Verteuil said yesterday in a research note. ``While losses can and do occur in any trading operation, we believe the impact of the meltdown in the U.S. is limited for CIBC.''

__________________________________________________________

The Globe and Mail, Tavia Grant, 10 July 2007

Canadian Imperial Bank of Commerce's exposure to the U.S. subprime mortgage market continues to attract more attention, though the bank has not changed its position that the risk is much lower than the market speculates.

The latest attention came from a Barron's article this week, which noted that some observers are saying CIBC's exposure could be more than $2-billion (U.S.). Business Week and other financial publications have recently carried similar speculation.

The bank has acknowledged exposure of about $330-million, but told The Globe and Mail last month that its "direct exposure" is well below a figure of $2.6-billion that had been surmised by one industry newsletter. The bank has declined to quantify its exposure and declined to comment yesterday.

In a note to clients, Genuity Capital Markets analyst Mario Mendonca - who previously worked for CIBC World Markets - said he discussed the speculation with CIBC's senior management and "while management was not dismissive, we came away with the impression that the hypothesized potential loss of $2.6-billion is a gross overestimate of the bank's actual exposure.

"Management explained that absent a further, more significant, downturn in the value of subprime mortgages in the U.S., the bank does not anticipate reporting material losses on its U.S. [collateralized debt obligations]," he wrote.

Mr. Mendonca said he does expect marked-to-market losses to be reported in CIBC's fiscal third quarter, which ends this month. (Mark to market is a financial term for estimating a value for a derivative based on the current market price.) The analyst also noted that CIBC has bought back shares recently, "suggesting that management's perception of potential loss is well below the amounts recently hypothesized."

Bank of Montreal banking analyst Ian de Verteuil wrote yesterday that "management has been limited in its comments except to reiterate its previous media statements that exposure is 'well below' the $2.6-billion (U.S.) level mentioned."

He added that "it appears as if [CIBC] already took some charges in its second quarter for the deterioration in the subprime sector," but he believes that "CIBC has good processes to ensure that unhedged trading exposures are prudent and limited. While losses can and do occur in any trading operation, we believe the impact of the meltdown in subprime in the U.S. is limited for CIBC."

Barron's article, published over the weekend, said that banks, brokerages and other financial firms could be facing "financial Armageddon" because of subprime mortgages.

Wall Street has rolled out about a trillion dollars of securities in the past two years to fund the mortgages of borrowers who don't have good credit, and the article estimated that the losses on these securities could eventually exceed $100-billion.

Low interest rates and lending standards allowed many Americans to buy homes in the past few years despite not having the money to pay their debts. Mortgage rates are now rising, and the well-known troubles in U.S. subprime mortgages are beginning to spread.

To raise the trillion dollars needed to buy subprime mortgages from banks and other mortgage lenders, brokerage firms invented residential mortgage-backed securities, which they sold to institutional investors.

The securities are made up of different slices of bonds, with different levels of risk. To make it easier to sell the riskier slices - those rated triple-B - Wall Street repackaged many of them into new securities called mezzanine collateralized debt obligations, or CDOs. Debt rating agencies rated about 80 per cent of the principal amount of the triple-B slices, or tranches, as triple-A."Mezzanine subprime exposure is showing up in all sorts of surprising places," the article says. "The Canadian bank CIBC has acknowledged ownership of around $330-million, though some observers say the figure could be more than $2-billion. That estimate would constitute a substantial chunk of the bank's approximately $13-billion in shareholder equity."

The article makes an educated guess - based on conversations with brokerage firms, hedge funds, dealers and traders - that the total pool of mezzanine CDOs out there is somewhere between $150-billion and $200-billion. Last month, CIBC spokesperson Stephen Forbes told The Globe and Mail that an article in Grant's Interest Rate Observer, a New York-based financial newsletter, speculating that CIBC could have exposure of up to $2.6-billion (U.S.) was "simply not true."

"As we have commented previously, our exposure to the subprime market is indirect through our participation in structured credit transactions," he said. "The majority of this exposure is rated Triple-A. Our direct exposure is well below what the report suggests."

Bank of Nova Scotia spokesman Frank Switzer said yesterday that his bank does not have any exposure to similar investments. The other major banks would not immediately comment.

Toronto-Dominion Bank spokesman Nicholas Petter also said yesterday it "does not have any exposure to subprime mortgages via investments in CDOs."

__________________________________________________________

Reuters, 9 July 2007

Speculation about the size of Canadian Imperial Bank of Commerce's exposure to the troubled U.S. subprime mortgage market swirled once again on Monday as the bank's name was mentioned in another report in a U.S. publication.

"The Canadian bank CIBC has acknowledged ownership of around US$330-million, though some observers say the figure could be more than US$2-billion," Barron's newspaper said without identifying the "observers."

"That estimate would constitute a substantial chunk of the bank's approximately US$13-billion in shareholder equity."

Rob McLeod, a spokesman for CIBC, Canada's fifth biggest bank, said that a statement the bank made last month and published in the Globe and Mail newspaper still "reflects the situation."

Bank spokesman Stephen Forbes told the newspaper in June that an article in Grant's Interest Rate Observer, a New York-based financial newsletter, speculating that CIBC could have exposure to the subprime market of up to US$2.6-billion was "simply not true."

"As we have commented previously, our exposure to the subprime market is indirect through our participation in structured credit transactions," Forbes said at the time.

"The majority of this exposure is rated triple-A. Our direct exposure is well below what the report suggests."

Fueled by rising interest rates, defaults by less credit-worthy U.S. homebuyers on higher-risk, subprime mortgages have been rising in recent months, raising concerns about banks' and hedge funds' exposure to potential losses of billions of dollars.

BMO Capital Markets analyst Ian de Verteuil said he believed CIBC's "most material" exposure was to a US$330-million senior secured tranche of an underwriting that ran into problems in April with the decline in fixed income markets.

"It appears as if the bank already took some charges in its second quarter for the deterioration in the subprime sector," de Verteuil said in a note to clients.

He added that it was "scarcely surprising" that a large fixed-income trading operation has some exposure to the U.S. residential subprime market.

"We believe that CIBC has good processes to ensure that unhedged trading exposures are prudent and limited. While losses can and do occur in any trading operation, we believe the impact of the meltdown in subprime in the U.S. is limited for CIBC," he said.

__________________________________________________________

The Globe and Mail, Tara Perkins. 9 July 2007

The Canadian Imperial Bank of Commerce's exposure to the U.S. subprime mortgage market has attracted more attention, with a Barron's article noting that some observers say it could be more than $2-billion (U.S.).

It comes on the heels of a report in the Globe and Mail and a recent report in BusinessWeek, each of which cited observers who speculate that the Canadian bank might have significant exposure. The bank has acknowledged exposure of about $330-million (U.S.) and told the Globe and Mail last month that its “direct exposure” is well below a figure of $2.6-billion that had been surmised by one industry newsletter.

The bank has declined to quantify its exposure.

The Barron's article, published over the weekend, said that banks, brokerages and other financial firms could be facing “financial Armageddon” because of subprime mortgages.

Wall Street has rolled out a trillion dollars or so of securities in the past two years to fund the mortgages of borrowers who don't have good credit, the article said, and it estimated that the losses on these securities could eventually exceed $100-billion.

Low interest rates and lending standards allowed many Americans to buy homes in the past few years despite not having the money to pay their debts. Mortgage rates are now rising, and the well-known troubles in U.S. subprime mortgages are beginning to spread, the article suggested.

To raise the trillion dollars to buy subprime mortgages from banks and other mortgage lenders, brokerage firms invented residential-mortgage-backed securities, which they sold to institutional investors. The securities are made up of different slices of bonds, with different levels of risk. To make it easier to sell the riskier slices – those rated triple-B – Wall Street repackaged many of them into new securities called mezzanine collateralized debt obligations, or CDOs. Debt rating agencies rated about 80 per cent of the principal amount of the triple-B slices, or tranches, as triple-A, in a piece of Wall Street ingenuity that resembles alchemy, the Barron's article says.

“Mezzanine subprime CDOs are all the same junk,” the article quotes one dealer of mortgage backed securities. But the rating agencies allowed most of these highly speculative securities to be turned into gold, Barron's quotes the dealer as saying.

“Mezzanine subprime exposure is showing up in all sorts of surprising places,” the article says. “The Canadian bank CIBC has acknowledged ownership of around $330-million, though some observers say the figure could be more than $2-billion. That estimate would constitute a substantial chunk of the bank's approximately $13-billion in shareholder equity.”

The article makes an educated guess — based on conversations with brokerage firms, hedge funds, dealers and traders — that the total pool of mezzanine-CDOs out there is somewhere between $150-billion and $200-billion. “A goodly portion of these debt securities could lose all their value if current market projects turn out to be accurate,” it said.

Last month, CIBC spokesperson Stephen Forbes told the Globe and Mail that an article in Grant's Interest Rate Observer, a New York-based financial newsletter, speculating that CIBC could have exposure of up to $2.6-billion (U.S.) was “simply not true.”

“As we have commented previously, our exposure to the subprime market is indirect through our participation in structured credit transactions,” he said. “The majority of this exposure is rated Triple-A. Our direct exposure is well below what the report suggests."

;

CIBC Increases Credit-Swap Trading, Veritas Says

The GLobe and Mail, Tara Perkins, 10 July 2007

Canadian Imperial Bank of Commerce's trading operations quietly made a dramatic push into credit derivatives last year, exposing the bank and its investors to greater potential risk, a Veritas Investment Research report says.

The report from the independent research firm sheds light on the difficulty that analysts and investors are having when it comes to understanding the complex trading operations of Canada's big banks and the lack of disclosure surrounding them.

Concern about trading operations at the banks was heightened after Bank of Montreal revealed in May that its commodity trading desk unexpectedly lost $680-million this year. The bank says it is still investigating the circumstances surrounding its trading losses to determine whether any potential irregularities in trading and valuation took place.

"The reality is that the trading operations of each of the big banks are so complex that investors must trust that the bank's risk-management function is designed effectively and operating as designed," Veritas analyst Ohad Lederer wrote in the recent report to clients, about CIBC.

Mr. Lederer pored over the notes to CIBC's financial statements and found indications that the bank's exposure to credit derivatives is on the rise, pointing to increased risk.

Last year, "CIBC rushed into trading long-dated credit default swaps (CDS) whereas, in prior years, it took only very small positions" in swaps with a greater than five-year residual term to maturity, Mr. Lederer said in his note. In general, long-dated options are harder to price than short-term options.

The notional value of CIBC's credit derivative book increased by 95 per cent in 2006, while its credit derivatives with a term to maturity of over five years increased a whopping 739 per cent, he said.

Despite having the smallest market value and least Tier 1 capital of the Big Five banks, CIBC has the second-largest portfolio of credit derivatives with a term greater than five years, Mr. Lederer said.

Royal Bank of Canada and Toronto-Dominion Bank have also been active in this area. Last year, RBC had $91-billion of notional credit default swaps outstanding compared with CIBC's $79.9-billion. But RBC has significantly more Tier 1 capital to cushion itself, Mr. Lederer pointed out.

He added that CIBC appears to be dealing with a lower average quality of counterparty - the people on the other side of the transactions - than the other banks, and "the average counterparty quality is trending worse rather than staying level or improving, as it is at the other large banks, which leads us to believe that a much greater proportion of [CIBC's] CDS trading is with hedge funds rather than with regulated financial institutions.

Mr. Lederer said he is not accusing CIBC's risk management department of not delivering on either design or execution. "We don't know that any problems are going to arise from CIBC's credit-derivative trading operations," he concluded.

However, he noted, the regulatory capital framework of the Office of the Superintendent of Financial Institutions, which regulates Canadian banks, requires CIBC to put aside more capital for each dollar of "in-the-money [long-dated] CDS than its peers, strongly implying higher counterparty risk. Further, the bank's activities in longer-duration, harder-to-price options have drastically increased. Caveat emptor."

CIBC declined to comment.

__________________________________________________________

Bloomberg, Doug Alexander, 29 June 2007

Canadian Imperial Bank of Commerce has expanded trading of credit derivatives more rapidly than any other Canadian lender, exposing the country's fifth-biggest bank to more risk, said Veritas Investment Research analyst Ohad Lederer.

The size of CIBC's credit derivatives portfolio almost doubled in 2006, as the Toronto-based lender followed rivals Royal Bank of Canada and Toronto-Dominion Bank in trading long- term credit-default swaps, the analyst said.

"It appears that CIBC is rushing in to this area of trading,'' Lederer said in an interview yesterday. "They've seen Royal Bank and Toronto-Dominion make headway into this area and they've tried to catch up."

CIBC, which has the smallest market value and the least amount of Tier 1 capital of Canada's biggest banks, has the second-largest portfolio of long-term credit derivatives, Lederer said in his note. A greater proportion of CIBC's trading of credit-default swaps may be with hedge funds rather than financial institutions, he said.

CIBC's actions may be putting it at a level of risk that's both higher than its competitors and increasing over time, Lederer said in his note. CIBC's portfolio of long-term credit derivatives rose to almost C$119 billion ($112 billion) the end of the fiscal second quarter.

"Investors must have faith that as trading ramps up in such a dramatic fashion, the bank has the risk management skills to price the risk and the instruments accurately," Lederer wrote.

Investors must also rely on adequate oversight of the trading to prevent what happened with Bank of Montreal, he said. Bank of Montreal reported losses of C$680 million in May from trading natural-gas contracts.

"We don't know that any problems are going to arise from CIBC's credit derivative trading operations,'' Lederer said. "It is possible the bank has in place effective risk controls."

CIBC spokesman Rob McLeod declined to comment.

Credit-default swaps are financial instruments based on bonds or loans that are used to speculate on a company's ability to repay debt. They're traded in the privately negotiated over-the-counter market by banks and securities firms.

;

Anti-money Laundering Costs Balloon

The Globe and Mail, Tavia Grant, 9 July 2007

The cost of fighting money laundering and terrorism financing has mushroomed around the world, including Canada.

In North America, banks' spending on anti-money laundering systems jumped 70 per cent over the past three years, according to a global study by KPMG Monday – far more than the 43-per-cent increase banks had anticipated back in 2004.

Now, as governments ramp up measures against criminal activity and financial markets become more complex, compliance costs are set to spiral further, KPMG said.

“The need for more stringent anti-money laundering processes will only continue to grow for Canadian banks consistent with global expectations of the banking sector,” said James Hunter, head of the firm's forensic practice in Canada, in the report.

Tracking illicit money flows is increasingly difficult because financial markets are increasingly global, with more exposure to unfamiliar emerging markets, and as the popularity of alternative assets explodes.

Globally, spending to combat money laundering jumped 58 per cent, on average, over the past three years, KPMG said, based on its survey of 224 banks from 55 countries. Most of that spending is on transaction monitoring and staff training costs.

Banks continue to lowball cost estimates of compliance. “Just as three years ago banks under-estimated their level of spending in the future, so now they still seem in danger of being overly optimistic,” the study said. “On average, they are predicting an increase of only 34 per cent in their spending over the next three years.”

Canada is no different. Rules, such as the proceeds of crime and terrorist financing act, have been tightened recently, requiring Canadian banks to increase their scrutiny of banking relationships and politically exposed people.

“All of this costs money, so we can expect rising costs of compliance globally to be matched by the banking sector in Canada as well,” Mr. Hunter said.

He stressed that methods of money launderers tend to be different from those who are financing terrorism.

“While money launderers try to integrate the proceeds of crime into the legitimate economy, terrorist financiers may often take funds raised legitimately, perhaps by a community group who believe they are funding a charitable cause back home, which in turn are then funnelled back into the underground economy to fund terrorist activities.”

The number of suspicious activity reports has also increased at over 70 per cent of global banks. Almost half said those reports have increased “substantially.”

Following the money across borders is a challenge for many banks. Globally, 41 per cent said they weren't capable of tracking across countries, and 26 per cent were only partially capable.

In all, “the opportunities for money launderers are multiplied by changing investment patterns such as the shift from transparent public markets to private and opaque structures.

“One thing is certain: governments and regulators are only going to increase the pressure on banks and other financial intermediaries in Canada and elsewhere to devote resources, technology and people in the fight against the money launderers and those who would use the global financial system to finance terrorism,” Mr. Hunter said.

KPMG, which makes money by helping companies meet government standards, releases its money laundering study every three years.

;

Financial Services Industry Needs to Go Global: Study

The Globe and Mail, Tara Perkins, 9 July 2007

Easy profits at home have prevented financial markets firms from becoming global players, and that could soon haunt them as domestic opportunities fizzle, a new study suggests.

Financial markets firms - such as banks, brokers and mutual fund companies - come in near the bottom of a ranking of sectors when it comes to tapping international markets, says a study to be released today by IBM Corp. and the Economist Intelligence Unit.

The study stacked up sectors based on the proportion of their sales, assets and shareholders that are foreign. It found that the financial industry is easily beat by sectors such as food and beverages, mining, consumer goods, motor vehicles, pharmaceuticals and telecommunications.

"Aspirations aside, financial markets firms are not yet very global," said the study, called Get global, get specialized or get out: Unexpected lessons in global financial markets.

The biggest reason financial firms haven't conquered foreign markets is likely that they had plenty of profitable opportunities at home, it said. "But those easy days are gone. Innovation, if confined to veteran markets, is not going to be enough to maintain the margins that many financial markets firms have come to expect."

Worldwide, investable assets are expected to double by 2015 to almost $300-trillion (U.S.), and soar further to $700-trillion by 2025. But 60 per cent of that future growth is going to come from developing or "prospect" markets. That's more than twice the contribution that "veteran" markets - such as the United States, Britain, Japan and Canada - will make, the study said.

"In addition to the well-known BRIC [Brazil, Russia, India, China] markets, the next frontier is likely to include countries such as South Korea, Indonesia, Turkey and Mexico, where lower anticipated country risk is complemented by accelerated growth in GDP per capita and heightened sophistication of the financial sector," the study said.

Currently, deposits dominate the investment profile in many prospective parts of the world. But the report says that the securities-to-deposits ratio in prospect markets will be much closer to the typical veteran profile by 2025. "By 2020, the worldwide wealth tied to securities will likely surpass currency and deposits," it said.

That marks a massive shift in financial product consumption.

The study also ranked countries by the sophistication of their financial sectors, with Canada coming in fifth. "Despite having a relatively low stock market capitalization, Canada scores highly in most other criteria and very highly overall," it said.

But markets like Canada will represent an increasingly smaller portion of the available opportunities.

Between 1950 and 2007, the developed nations' share of the world's population shrank from 33 per cent to 20 per cent. Last year, China surpassed London and New York in initial public offering listings for the first time. The 2006 deal value of China's three largest exchanges - Shenzhen, Shanghai and Hong Kong - totalled $53-billion, surpassing London ($48-billion), and the New York Stock Exchange and Nasdaq combined ($46-billion).

And in the past five years, the number of IPOs in the United States has fallen by one-third. "Clients have been test-driving other markets, and the switching costs that historically kept them close to home have largely been overcome," the study said. There has been a flight of capital as taxation, litigiousness and regulation become increasingly onerous in veteran markets, the study said.

Moreover, much of the talent is increasingly coming from abroad. By 2017, it expects that prospect markets will be providing more than half of the financial industry's talent.

Of all their assets, financial markets firms' human employees present the biggest challenge to manage, the report said. It singled out HSBC Holdings PLC - which hunts down candidates from around the world and usually has them trained outside of their home region - as an example of what more firms should do.

"It might sound heretical - given the high salaries and enviable perks they offer - but many financial markets firms may be neglecting the people-related implications of running a global business," the study said.

;

Takeovers Set BMO's US Bank Into Play

The Globe and Mail, tara Perkins, 8 July 2007

As investors and analysts debate the fate of Bank of Montreal's U.S. bank, Harris Bankcorp Inc., its executives have been working on plans to take advantage of the uncertainty at a major competitor.

On the week of July 4, the financial districts of most U.S. cities look like ghost towns. But Harris's head office is a hive of activity. BMO CEO Bill Downe is making his weekly visit. A Milwaukee newspaper has reported that Harris has its sights on Ozaukee Bank's six branches. And everyone is eagerly awaiting a ruling from the Dutch Supreme Court this week that could determine the fate of Harris's major competitor, LaSalle Bank.

A series of takeovers is changing Chicago's banking scene, which could be dramatically transformed by a $20-billion (U.S.) takeover of LaSalle.

While banks gobble one another up, observers aren't quite sure whether Harris is going to eat or be eaten.

Around the corner and a few hundred feet away from Harris's head office sits the headquarters of LaSalle Bank, the Chicago-based U.S. operations of Dutch banking giant ABN Amro.

LaSalle's headquarters are aptly perched on LaSalle Street – Chicago's equivalent of Bay Street or Wall Street. Towards the end of this week, a Dutch court is expected to decide whether ABN Amro can sell LaSalle to Bank of America, which wants a Chicago presence to fill in one of its last remaining gaps in the United States.

The planned sale of LaSalle has been a sideshow to what looks set to become the biggest banking takeover ever, the sale of ABN Amro, which is in the midst of a tug-of-war between Barclays PLC and a consortium led by the Royal Bank of Scotland Group PLC.

RBS tossed a wrench in Bank of America's bid for LaSalle by shoving the deal into the Dutch court's hands in an attempt to win LaSalle for itself.

Although it's a sideshow, the battle for LaSalle has shoved banks in the greater Chicago area – known as Chicagoland – into the spotlight. And some observers think Harris risks being relegated to a supporting role.

“Harris Bank's retail and mid-market operations [have] faced difficult market conditions in Chicagoland during the past 24 months and delivered soft financial results,” Credit Suisse analyst James Bantis wrote in a note to clients after the battle erupted. “The operating environment continues to be challenging,” with compressed margins and intense competition in a slowing lending and deposit market, he wrote. A new owner would reinvigorate LaSalle, and “an improved LaSalle franchise only worsens an already difficult operating environment” for Harris.

With more than 400 branches around Chicago and Michigan, LaSalle – the area's No. 2 bank - held 14.2 per cent of the total $261-billion of deposits in Chicago banks last year, according to Oppenheimer research. Harris Bank trailed next in line with 9.8 per cent. JPMorgan Chase is the top bank in the region.

If executives opted to put the firm up for sale, Mr. Bantis estimated a takeover could garner about $4.5-billion for BMO.

More recently, CIBC World Markets analyst Darko Mihelic estimated a deal could fetch at least $6-billion. “As the trials and tribulations surrounding LaSalle's sale continue, we believe BMO has an opportunity to step up, invite a consortium of large U.S. banks into a data room and set off an auction process for Harris Bank,” he wrote.

“The result could be a very high premium for an asset that is dragging down BMO's overall results.”

Not to be outdone, Citigroup analyst Shannon Cowherd pegged the value of a Harris sale at more than $9-billion. “The recent spate of M&A bank deals in the Midwest, specifically Chicago's metropolitan statistical area, lead us to believe BMO will succumb to pressure to either take out a local competitor or divest Harris,” she wrote.

Peter McNitt, vice-chair and head of business banking at Harris, summarized his response in two sentences: “We are a consolidator,” he said, stressing the last syllable. “Our focus is on what we're doing to get bigger.”

Mr. McNitt thinks Harris has done a fine job of setting itself up in Chicagoland, where more than 300 banks compete.

Now it's setting its sights on expanding in places such as Indianapolis, Milwaukee, and Phoenix. “You take a look at something like Indianapolis and it's the second-fastest growing city in the Midwest,” he said, adding there are close to 55,000 business client in the city.

Harris is also doing all it can to take advantage of the window of uncertainty at LaSalle.

“It's not as if we haven't been competing anyway, this just adds another dimension that that institution has to deal with that we don't have to deal with, and that kind of uncertainty and that kind of lack of consistency is not a good thing when you're dealing with commercial clients.”

;

Ex-TD Bank Executive Now CEO of BoNY Mellon

The Globe and Mail, Sinclair Stewart, 6 July 2007

Bob Kelly, amateur archer, strolls over to a sideboard in his sprawling Manhattan office to provide a lesson in improbability. He picks up a slender, glass-topped display case, inside of which are two arrows, the point of one lodged squarely in the green-fletched nock of another. This feat is known among practitioners as a "Robin Hood," and the odds of pulling it off are about the same as a golfer making consecutive holes-in-one. Or a Nova Scotian kid of average means one day taking the reins of America's oldest bank.

Mr. Kelly, 53, officially stepped into the chief executive officer's chair at Bank of New York Mellon Corp. on Monday, capping an unlikely career trajectory that took him from a consultant's job in his native Halifax, to Toronto-Dominion Bank, and then across the border, where he had increasingly senior stints with First Union Corp., Wachovia Corp., and most recently, Mellon Financial Corp. of Pittsburgh.

In the process, Mr. Kelly has quietly become one of the most influential Canadians in the U.S. financial services industry.

While most of his compatriots were toasting Canada Day on the weekend, Mr. Kelly was hoisting a glass of champagne to celebrate the completion of Mellon's merger with Bank of New York, a deal that creates a $50-billion (U.S.) goliath in the murky world of asset management and custody services.

Custody firms help process and settle trades, acting as the intermediary between buyers and sellers of securities - not the most glamorous part of the financial industry, but the unseen backbone upon which most routine stock transactions rest.

Mr. Kelly, who inherited a photographic memory from his father, a former tax partner with KPMG, ticks off a rapid-fire sketch of the new company: 40,000 employees, 37 countries, $13-billion in annual revenue, $160-billion in balance sheet assets, a mind-bending $18-trillion in assets and custody under administration, and more than $8-trillion in assets under trusteeship.

Impressive as this seems, it's hard to tell whether Mr. Kelly is more excited by the combined clout of Bank of New York Mellon, or the museum-like environs he will now occupy on the corner of Wall Street and Broadway.

In addition to an interest in archery and cycling, Mr. Kelly is an avid history buff, and he's already begun to decorate his corner office with historical bric-a-brac, from a Winston Churchill photograph taken in 1914 to a signed photograph of Orville Wright. Beside the arrow display are several other time-worn trophies, including a seventh edition of Adam Smith's The Wealth of Nations, dating from the 18th century, that he purchased on eBay ("I couldn't afford a first edition").

"It comes back to the basic premise that if you don't understand history, and appreciate it, you'll make the same mistake over again," he said, in between breakfast swigs of a Diet Coke. "I love looking at the roots of issues. And cultural roots are an important part of understanding places you live and people you deal with."

Mr. Kelly may have been here barely a week, but he has already become fast acquainted with the roots of Bank of New York - the first stock traded on the New York Stock Exchange - and relishes his role as part-time tour guide.

A massive oil painting of Alexander Hamilton, the bank's founder and the first Secretary of the Treasury under George Washington, surveys the reception area (Andrew Mellon, the wealthy founder of Mellon Financial, was the 49th Treasury Secretary, Mr. Kelly explains, delighting in the coincidence).

The foyer also boasts Mr. Hamilton's original fold-top desk, his clock, and a miniature model neighbourhood showing his first home, not far from the bank's original site.

In one corner, behind an unassuming little cupboard, is the first loan ever extended to the fledgling U.S. government: a $200,000 note signed by Mr. Hamilton, whose final resting place, under a white-topped mausoleum, is a stone's throw from the bank.

It's hard to imagine a better fit for Mr. Kelly, a consultant who parlayed his computer skills into a job with TD in the early 1980s. He was soon dispatched to London, working on an escalating series of trading floor jobs, before being thrust into the chief financial officer's role and helping to oversee the bank's purchase of U.S. discount brokerage Waterhouse.

But when it became clear that Ed Clark, and not he, had a lock on succeeding Charles Baillie atop the bank, Mr. Kelly resigned, heading to First Union as chief financial officer and helping to orchestrate a takeover of Wachovia.

He spent a few years at the North Carolina company, and pocketed a handful of CFO of The Year awards, before accepting the top job at Mellon early last year - another firm steeped in tradition, but one that had fallen on some difficult times. Investors were agitating amid a slumping stock, and the company had run into regulatory problems. In the span of less than 12 months, he managed to quell shareholder dissent, invigorate the stock price and, oh yeah, announce a transformative merger with Bank of New York.

"I'm a change agent," he shrugs. "I love growth, and I love change. But change is more complicated the higher you get."

The two companies are seen as a complementary fit in a large, but relatively behind-the-scenes facet of the securities industry: custody, servicing and asset management.

The combined firm will also be a dominant player in corporate trust, which is like wealth management, and provide technology support and back office functions for pension funds, banks and a host of other financial companies.

Right now, about 25 per cent of the combined company's revenue comes from outside the United States, but Mr. Kelly foresees a time when this will swell to over half. One of the big growth areas is Europe, where banks have been slower than their North American rivals to outsource their back office functions. That move is afoot now, and the cumbersomely named Bank of New York Mellon is hoping to cash in, perhaps through acquisitions.

So will Mr. Kelly ever return to Canada? That appears unlikely, now that he's in command of a bank that is larger than most of its Canadian peers (including TD). But that doesn't mean he doesn't keep careful tabs on what's going on at home.

As an expat, he said he is "consistently astonished" at the similarities between the business environment in Canada and the United States. He does have a few small words of advice, though.

"Canada really should have one stock exchange, by the way," he said. "And it's too small a country in a rapidly globalizing world to have multiple securities regulators."

;

Banks Want No Part of Political Loans

The Globe and Mail, Steven Chase, 5 July 2007

Canadian banks are growing increasingly uneasy about a recent Harper government bill that would force financial institutions to become the sole source of big loans to federal political candidates.

Senior officials at two major chartered banks say the financial sector was caught off guard by Bill C-54, which was tabled eight weeks ago.

They warn it may thrust them into an uncomfortable position of altering political careers with lending decisions and open them up to unfair criticism.

“What do [banks] do . . . with an application from a candidate with a spotty financial record?” said a senior bank official speaking on condition of anonymity.

“If they turn the candidate down, they may be influencing the democratic process,” he added.

The bill would outlaw a practice of turning to family, friends and wealthy business people to underwrite political campaigns. Union and corporate loans would be banned.

Only banks, credit unions and similarly accredited financial institutions will be able to lend more than $1,100 to candidates, political parties or riding associations – at commercial rates of interest.

Party leadership contenders will be especially hard hit because the bill places stringent limits on providing guarantees or collateral for politicians and they typically need big dollars.

Bankers – citing concern in at least three big banks – say it puts them in an awkward position of being a gatekeeper for candidates, and leadership hopefuls in particular.

“Imagine the negative publicity if a [rejected]… applicant for a loan just happened to be running on a platform that included an excess profit tax on banks,” one banker said.

The bill, which the NDP supports, has been interpreted as a Conservative-led shot at the Liberals.

Candidates in last year's Liberal leadership race turned heavily to loans, borrowing from relatives and wealthy businessmen in the first major party campaign conducted since political fundraising laws were tightened in 2004.

Banks fear they could also find themselves in a politically hazardous situation where they are criticized for favouring one candidate over another under the new system, which would also requires disclosure of lending terms.

“If one is a bit of a deadbeat, and one is not, they're going to get a different rate,” a second banker said.

“If one candidate gets a loan at prime – 6 per cent now – and another gets it at prime plus two, or 8 per cent, there might be an allegation you are trying to shut someone out or favour someone.”

Conservative House leader Peter Van Loan said he thinks banks will be able to navigate the new federal rules — as they already have elsewhere.

“The banks, credit unions and trust companies have proven themselves capable of handling this responsibility in provinces where they are already the exclusive legal source of major political loans such as Ontario,” he said in a statement yesterday.

“It would be surprising to find they feel they cannot manage the same responsibility with federal political loans.”

NDP MP Pat Martin, a member of a parliamentary committee that studied the bill, said the banks are late to the table with criticism of a measure that already underwent legislative scrutiny in June.

It sits at report stage in the Commons now.

“They missed the boat and now they are throwing a spanner in the works . . . with all the money they spend on government lobbying, you would have thought they would have been better prepared for this,” Mr. Martin said of the banks.

The best hope for the banks is that the Tories prorogue Parliament in the fall, which essentially wipes the legislative slate clean, including Bill C-54.

The Canadian Bankers Association declined to comment.

Gerard Kennedy, a contender in the last Liberal leadership race, said the bill could put banks in the position of choosing who can participate in a leadership campaign.

;

Hollinger Sues CIBC, Scotiabank, TD Bank

Bloomberg, Joe Schneider and Doug Alexander, 5 July 2007

Hollinger Inc. sued three Canadian banks, accusing them of securing loan repayments while aware its former Chairman Conrad Black was improperly siphoning money to companies he controlled.

Hollinger sued the Canadian Imperial Bank of Commerce, Toronto-Dominion Bank and the Bank of Nova Scotia to recover C$65.2 million ($61.7 million) that the company said the banks received from an improper repayment of debt. The money came from a C$180 million Hollinger financing, part of which was diverted to Ravelston Corp., a company controlled by Black, Toronto-based Hollinger said in the complaint.

The banks received the debt repayment ``as a direct result of the breaches by Black associates,'' according to the June 29 complaint in Toronto. The banks ``had actual or constructive knowledge of these breaches,'' Hollinger said.

Black, 62, also the former chairman of newspaper publisher Hollinger International Inc., is awaiting a jury verdict with three former executives of that company in federal court in Chicago. The four are accused of diverting $60 million through illegal noncompete payments as Hollinger International sold more than $3 billion in newspaper assets.

The Chicago jury finished its sixth day of deliberations today without reaching a verdict. Jurors said in a note to the judge they plan to work tomorrow from 9 a.m. to 2 p.m.

Black controlled Hollinger International, now Sun-Times Media Group Inc., through a complex set of holding companies in Canada, including Hollinger Inc., Ravelston, Ravelston Management Inc. and Argus Corp.

Ravelston Corp. and Ravelston Management are in court- ordered receivership.

Beginning in 1998, Black and his associates improperly diverted to Ravelston most of the management fees that Hollinger International paid Hollinger Inc., according to the complaint. Ravelston let Hollinger Inc. keep C$10.7 million a year from management fees until 2001, when it stopped those payments and began providing loans to keep the company running, Hollinger said in the complaint.

John Boultbee wrote a letter from himself as chief financial officer at Ravelston to himself as chief financial officer of Hollinger Inc. ending the payments in 2001 ``in an attempt to evidence this termination,'' Hollinger said in the complaint. ``Boultbee signed this letter on behalf of Hollinger to indicate its agreement to the termination.''

The banks ``became aware of problems'' within Hollinger and Ravelston in 2002 and decided to end their lending relationship with the companies, Hollinger said in the complaint.

In March 2003, Hollinger raised C$180 million from the sale of notes and repaid the banks from the financing, according to the complaint. Hollinger used C$91 million of that to pay its debt to the banks. Ravelston got C$48.8 million for its advances to Hollinger and C$16.4 as a loan from Hollinger, and it then used those funds to pay its debt to the bank, according to the complaint.

The repayments ``were the direct result of a series of actions which the Black associates caused Hollinger to take between 1998 and 2003 in breach of their fiduciary duties,'' Hollinger said in the complaint.

Donald Fullerton, a former Canadian Imperial Bank of Commerce chairman and chief executive who was a Hollinger Inc. board member from 1992 to 2003, breached his duty to Hollinger by failing to notify independent directors of the improper transfers, according to the complaint.

"As a director of both Hollinger and CIBC, Fullerton was in an irreconcilable conflict of interest,'' Hollinger said in the complaint. Fullerton isn't named as a defendant in the suit.

CIBC spokesman Rob McLeod and Bank of Nova Scotia spokeswoman Ann DeRabbie declined to comment on the complaint.

``We're not in a position to comment as we have not yet been served with any lawsuit,'' Toronto-Dominion Bank spokesman Nick Petter said.

Black stepped down as Hollinger International chief executive officer in November 2003. Two months later, the board fired him as chairman and sued him for $200 million.

He quit as chairman and CEO of Hollinger Inc. in November 2004 as an Ontario judge was about to consider a shareholder's request to remove him from the posts. Black resigned as chairman of Ravelston in April 2005.

Boultbee, 64, former Hollinger Vice President Peter Atkinson, 60, and former General Counsel Mark Kipnis, 59, are on trial with Black in Chicago. Each man faces more than 20 years in prison if convicted.

Black, Boultbee, Atkinson and Kipnis have denied wrongdoing. Former Hollinger International President F. David Radler pleaded guilty to fraud and testified against them.

Hollinger Inc. sued Black, Radler, Boultbee, Atkinson and Ravelston in March 2005 to recover C$636 million the company claims was improperly diverted.

The new case is Between Hollinger Inc. and Canadian Imperial Bank of Commerce, 07-cl-7043, Ontario Superior Court of Justice (Toronto).

;

Bear Down on Risk, OSFI Head Tells Banks

The Globe and Mail, Tara Perkins, 5 July 2007

Bank of Montreal's recent $680-million loss from commodity trading is an important reminder to continually put risk under the spotlight, says the incoming head of Canada's financial services regulator.

Julie Dickson, who was appointed to the Office of the Superintendent of Financial Institutions yesterday by Finance Minister Jim Flaherty, said in an interview that BMO's control functions did detect a problem, and the bank took steps to contain its risk.

But "it's an important reminder to be on top of risk at all times," she added.

As the head of the OSFI, Ms. Dickson will work toward ensuring that the banks and other institutions that house Canadians' savings remain sound. OSFI was created 20 years ago to regulate and supervise federally registered deposit-taking institutions and private pension plans as well as insurers.

In a recent document outlining its plans and priorities, OSFI noted that "increasingly complex financial products mean that more effort is required, on the part of institutions and OSFI, to assess risk."

Ms. Dickson said one current focus at OSFI is stress testing, or pushing institutions to look at various possibilities and worst-case scenarios to determine how they would affect their businesses.

The increased use of stress testing is one of the changes coming about as Canadian banks prepare to implement Basel II this November. The new international recommendations on banking regulations will change the way financial institutions run their businesses and the way OSFI supervises, the regulator said.

Another change will be the need for financial institutions to adopt international accounting standards in the near future, Ms. Dickson said. The standards may add to the volatility of earnings, OSFI said recently, and current risk management practices might not be adequate.

Updating the capital requirements for insurance companies is another priority, she added, and the regulator also plans to increase the relationships it has with foreign regulators.

Ms. Dickson has been working at OSFI since 1999, and stepped in as acting superintendent last October after former superintendent Nick Le Pan retired.

She had previously worked for 15 years at the Department of Finance, and spent three years at a consulting firm.

For her, the new role will really be "a continuation of business as usual," she said, adding that that means maintaining the high level of confidence that Canadians have in the safety of money they entrust to financial institutions.

Ms. Dickson also noted that the regulator has a fair number of applications for new financial institutions. "There is interest out there in the marketplace in setting up new banks."

Her appointment is for a seven-year term, and she declined to speculate on whether bank mergers might take place on her watch.

There has been a lot of consolidation in the sector in the past, she said, and OSFI's role in those instances includes determining whether the deals are affordable and whether the institutions have viable plans, as well as examining everything from who the CEO should be to internal controls, she said.

;