Merrill Lynch Economists Prognosticate the Direction of S&P/TSX Financials Index

Reuters, Lynne Olver, 18 July 2008

The huge recovery posted by Canadian financial stocks this week is actually a bad sign for the sector, as bear markets bring big bounces, Merrill Lynch economists said on Friday.

The S&P/TSX Financials index, composed of 28 bank, insurance company and asset management stocks, fell sharply on Monday and again Tuesday, with the country's largest banks hitting 52-week lows on Tuesday.

But on Wednesday, the financials index bounced up a "shocking" 5.5 percent, followed by a 3.2 percent climb on Thursday, Merrill economists David Wolf and Carolyn Kwan said in a weekly research note.

On Friday, the index gained an additional 1 percent.

Before this week, there had been only five days since 1988 when the S&P/TSX financials index was up more than 5 percent -- and four of them came during the financial crisis of 1998, Wolf and Kwan noted. The other was during the "Enron-inspired credit swoon late in 2002."

"Overall, we remain of the view that there are further declines in store for the Canadian financials," the economists stated.

As for daily bounces of just 3 percent in the financials index, none came between 2003 and 2006, a period in which the index more than doubled.

"We've already had seven such 3 percent up days in 2008, on track to break the previous record high of 10 in 1998," the Merrill note said.

While the problems facing Canadian financial stocks have not been as grave as those pressuring U.S. banks, "the market action of recent weeks has reminded us of how interlinked the sector is globally, and the domestic banks have their own challenges on the way, in the form of a slowing Canadian consumer and a weaker Canadian housing market."

Illustrating the volatility this week, investors who managed to buy Canadian bank stocks right at their 52-week lows would have reaped substantial gains in just a few sessions.

For example, Canadian Imperial Bank of Commerce hit a low of C$48.70 a share on Tuesday, and closed on Friday at C$57.76, for a gain of nearly 19 percent.

Bank of Montreal rallied 22 percent from its Tuesday low of C$37.60 to its close this week at C$45.96.

Royal Bank of Canada bounced 13 percent from its Tuesday low to Friday's close of C$44.70.

Bank of Nova Scotia rallied 14 percent from its Tuesday low, while Toronto-Dominion Bank climbed 10 percent.

Despite the recent swings, the Big Five bank stocks remain down from 2007 year-end levels, with year-to-date losses ranging from nearly 5 percent to more than 18 percent.

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Reuters, Lynne Olver, 15 July 2008

Fears about the state of the U.S. financial system and the outlook for the U.S. economy battered Canadian bank stocks for a second day on Tuesday, with most share prices at or near 52-week lows.

In the case of Canadian Imperial Bank of Commerce, its stock plumbed five-year lows.

One analyst said CIBC, Canada's fifth-largest bank, could take as much as $1.9 billion in additional credit market-related writedowns in the current quarter.

The broad themes dragging down the Canadian sector were worries about the U.S. financial system and the broader U.S. economy, tumbling U.S. bank stocks, and signs of deteriorating loans at some U.S. regional banks.

"The situation in the U.S. is at the heart of what's happening now, first because of the credit crunch but secondly the increasing concern that this is going to translate into a U.S. recession, with Canadian banks and Canada not being immune," said Michael Goldberg, an analyst at Desjardins Securities in Toronto.

"I've been saying that (Canadian bank stocks are) all undervalued, but they could get more undervalued before the situation improves."

Federal Reserve Chairman Ben Bernanke warned on Tuesday that a weakening housing market, tighter credit and rising oil prices threaten U.S. economic growth, while inflation risks have become more intense.

Many financial markets and institutions remain under "considerable stress," Bernanke told the Senate Banking Committee.

His comments seemed to ruffle investors already anxious about the U.S. financial sector after Friday's seizure by regulators of IndyMac Bancorp Inc, the weekend pledge of U.S. government support for mortgage finance companies Fannie Mae and Freddie Mac, and this week's plunge in U.S. bank shares.

On the Toronto Stock Exchange on Tuesday afternoon, Toronto-Dominion Bank was off 4.1% at $53.45, after falling as low as $53.05; Bank of Montreal was down 1.1% at $39.65 a share, after trading as low as $37.60; while Canadian Imperial Bank of Commerce was down 3.0% at $49.62, after touching $48.70 in morning trade -- a level last seen in May 2003.

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The Globe and Mail, Tara Perkins, 15 July 2008

Jittery investors dragged Canadian bank stocks down yesterday, dealing the biggest punishment to those with the greatest exposure to the United States, where continued mortgage woes are raising fears about the health of regional banks.

The market is on the edge of its seat after IndyMac Bancorp Inc. collapsed last week in the second-largest bank failure in U.S. history.

"I think the market is really recognizing the deterioration that's happening in the credit environment," said Edward Jones analyst Craig Fehr. "It's a classic case of what we've been seeing now for some time, indiscriminate selling. The market just doesn't want to own anything that's exposed to this credit risk."

National Bank Financial analyst Robert Sedran said it seems "the Canadians are taking direction from the U.S. banks right now, and that direction is not a good one. We believe the fundamentals behind the Canadian banks are better, but that matters little right now."

Among Canada's big banks, Bank of Montreal and Toronto-Dominion Bank have the highest gross loan exposure to U.S. borrowers, Blackmont Capital analyst Brad Smith said in a note to clients. BMO's exposure is $51-billion, or 25 per cent of its consolidated loans outstanding, while TD's is $46-billion, or 23 per cent, he said.

Investors appeared to be taking this U.S. vulnerability into account, with Toronto-Dominion the biggest loser of the Big Five yesterday, dropping by 5.1 per cent to $55.74. It was the stock's lowest close since November, 2005,with 6.87 million, or 2.3 times the average daily trading volume of shares, changing hands.

Bank of Montreal shares also lost a lot of ground yesterday, falling by 4.2 per cent to $40.09 on higher-than-average trading volume. This was the stock's lowest close since March 17.

The other banks, however, held up just slightly better, and all had heavier-than-normal trading activity.

Bank of Nova Scotia sank by 3.6 per cent to $43.82, its lowest point since March 19. Royal Bank of Canada shed 3.4 per cent to $41.03, touching its lowest close since October, 2005. Canadian Imperial Bank of Commerce lost the least amount of ground on a percentage basis, down just over 2 per cent. However, it's end-of-session price of $51.15 was the stock's lowest close since June, 2003.

"Despite its well-established U.S. retail banking and wealth operations, Royal Bank of Canada has only modest loan exposure at $25-billion, or 10 per cent of consolidated loans outstanding," Mr. Smith wrote. Scotiabank and CIBC have the lowest exposures, at 6 per cent and 3 per cent, although CIBC actually has the highest relative exposure to U.S. credit if its large credit derivative portfolio is included.

Mr. Smith believes that both BMO and TD could see their 2009 earnings chopped by roughly 7 per cent as a result of U.S. personal and commercial banking loan exposures. However, he noted that "estimating the potential impact on earnings from identified credit exposures is fraught with hazard as ultimate losses reflect a combination of factors, including macroeconomic conditions and company-specific credit underwriting processes."

Genuity Capital Markets analyst Mario Mendonca said the issue with TD's shares appears to be weakness in the loan books of two northeastern U.S. regional banks. M&T Bank saw credit losses spike, while Webster warned of higher credit losses, Mr. Mendonca said. (TD Banknorth Inc. is based in Portland, Me.) "This has the market wondering if in fact TD's Northeast exposure is really that much better than other parts of the U.S.," he said.

Shane Jones, managing director of Canadian Equities at Scotia Cassels Investment Counsel Ltd., said some of the bank weakness might stem from hedge funds that are selling.

Yesterday's share price declines were a continuation of weakness that has plagued the sector recently, with Canadian banks stocks having fallen about 5 per cent last week, Mr. Smith said in his note.

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Analyst Speculates on CIBC Takeover

Financal Post, David Pett, 15 July 2008

The possibility of more writedowns at CIBC could force the bank into another's hands, says John Aiken, analyst at Dundee Securities.

Following on the heels of the U.S. Federal Reserve's Fannie Mae and Freddie Mac intervention and the U.S. bank failure of IndyMac, Mr. Aiken said CIBC may be forced to raise common equity once again as a result of continued write-downs on its credit and liquidity exposure.

Mr. Aiken said CIBC is safe for now from needing to raise additional capital, noting it can withstand pre-tax charges of up to $2.5-billion. But with potential charges of roughly $4-billion to come, he believes CIBC would need more capital before all is said and done.

That won't be an easy task, he added, and could leave CIBC with possibly no other option than to be taken over by another bank.

"Should CIBC need to raise common equity, we believe it would be very difficult for the bank to gather additional public funding, given that it is currently trading well below the offer price of the previous offering and the fact that there is no guarantee that the write-downs have come to an end," he wrote.

"Should the regulator become concerned with its capital position and the bank is unwilling or unable to tap the market for incremental equity, CIBC could be forced into the hands of another financial institution as the best solvency alternative."

Mr. Aiken admitted that the process would require significant changes to the Bank Act and a considerable amount of political will, but told clients the benefit of allowing bank mergers in Canada would far outweigh the cost of losing one of the country's "Big 6" banks. .

The analyst said the most "politically-expedient method of salvaging CIBC", in the case that a common equity infusion was denied by the public market, would be a cross-pillar acquisition, most likely by Manulife Financial Corp.

"However, should CIBC fall into the hands of another suitor, it would be next to impossible for the government to stop the consolidation at that step, given the outsized assets and market capitalization that the new entity would have. Further, it would have a very significant advantage should insurance be allowed to be sold through the branches (which would be a likely concession that Manulife would demand for 'saving' CIBC)."

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The Globe and Mail, John Partridge, 15 July 2008 10:56 AM

Continuing woes at Canadian Imperial Bank of Commerce could trigger a new round of consolidation in Canadian financial services, a Bay Street analyst contends.

John Aiken at Dundee Securities Inc. said Tuesday that additional charges CIBC is facing as a result of its exposure to U.S. bond insurers and subprime mortgages could force the bank to try to raise additional common equity from an unwilling market.

“Should the regulator become concerned with [CIBC's] capital position, and the bank is unwilling or unable to tap the market for incremental equity, CIBC could be forced into the hands of another financial institution as the best solvency alternative,” Mr. Aiken said in a note to clients.

The most “politically expedient” solution would be for Ottawa to allow a so-called “cross-pillar” acquisition, with Manulife Financial Corp. as the most likely buyer, he said.

Manulife made an unsuccessful run at CIBC in 2002, when the bank's U.S. operations were in crisis, but was blocked by the federal government.

However, if CIBC was taken over by another rival, Mr. Aiken said, this would likely create such a large financial institution in terms of assets and market capitalization that it would be “next to impossible” for Ottawa.

“We freely admit that this is not as simple a process as we make it sound, requiring extensive changes to the Bank Act and a multitude of politically charged approvals, including the Minister of Finance, among many other hurdles,” he said. “However, we believe that allowing financial services consolidation would be much more beneficial to the Canadian financial services sector and economy as a whole than a losing one of the country's Schedule I banks outright.”

“Therefore, while not a probable event at present, we believe that the possibility of financial services consolidation is closer than most investors would allow and significantly closer than it was even three months ago.”

A CIBC spokesman declined to comment on Mr. Aiken's report.

CIBC has been hit much harder than other Canadian banks in the current credit crunch because of its exposure to the U.S. bond insurer and sub-prime mortgage crisis.

Mr. Aiken estimates CIBC will likely take $1.5-billion to $1.9-billion in additional charges related to the problems when it reports third-quarter results next month, on top of the $3.8-billion in after-tax hits it has taken in the past two quarters.

And there is no guarantee that the third-quarter hits will be the last of the charges, he added.

The charges over the past two quarters have “completely swamped” the $2.9-billion in common equity that CIBC raised in January in both a public stock offering at $67.05 a share and a private placement at $65.26, Mr. Aiken said.

Like other financial services stocks, CIBC has been hit hard over the past few months and was trading at $49.20 on the Toronto Stock Exchange Tuesday morning, down $1.95 from Monday's finish.

This would probably make it “very difficult for the bank to gather additional public funding,” Mr. Aiken said.

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Scotiabank Buys E*Trade Canada

TD Securities, 15 July 2008

Event

Yesterday after market close, Scotiabank announced the purchase of 100% of E*Trade Canada.

Impact

Not our first choice, but deal adds clients and makes financial sense. We have made no changes to our estimates, and continue to view Scotia as one of the best operating outlooks in the group, although we note that the stock has now moved to trade at a healthy premium. Reiterate 'Buy.'

Details

Wouldn't have been our first pick, but hard to argue with. Discount brokerage wouldn't have been our first priority for Scotia's expanding domestic wealth business as the industry continues to bear the pressure of ongoing price erosion and remains subject to volatile trading activity. That said, we find it hard to argue with the logic of acquiring one of the few remaining wealth management assets in the country, in a deal that adds a high margin business at a price that is accretive out of the gate and which contributes to Scotia's over-riding domestic objective; adding customers.

No change in our estimates. The acquisition is set to close in the fall of 2008 and is expected to be accretive in year one and add two cents in year three based on what the bank views as conservative assumptions that reflect the current challenging environment for trading activity and take into account the impact of E*TRADE Canada’s lower pricing alternatives. Also, the outlook has not factored in any potential revenue synergies.

The impact on capital is relatively modest (20bp) for a well capitalized bank; Scotia had a Tier 1 of 9.6% as of the end of Q2/08 (Basel II). We don't expect material integration challenges as Scotia has proven to be a capable buyer over the years and appears intent on moving judiciously. Ultimately, the key upside to the deal is likely to come from leveraging the potential cross-sell opportunities to the expanded client base, but that will likely only happen gradually.

What can we infer of ETFC's intentions? Beyond Scotia, the question remains; what will ultimately become of ETFC and a potential transaction with AMTD? To us this move, along with ETFC’s 2008 Turnaround Plan and other efforts to recapitalize, suggest a strong desire to remain independent. Quality story, premium valuation. Scotia remains one of the best operating outlooks in the group in our view underpinned by the strong medium-term outlook of the international business and increasingly supported by an improving domestic profile. However, on the back of strong relative performance amid a very weak tape for financial services, the stock has now moved to trade at a wide relative valuation premium. We still see attractive upside in the name on a 12-month view, although relative out performance may be constrained.

Conference Call Highlights

Transaction details. The purchase price of approximately US$442 million (or approximately C$444 million) will be made with 100% cash and is expected to close by the end of September/October 2008.

Market share. Scotia expects the addition of E*TRADE Canada to increase the banks market share from 6% to 10% (based on # of accounts), ranking Scotia #2 relative to the industry. The deal is expected to bring in over C$5B in Assets Under Administration and Scotia expects AUA to double by 2016.

Future cross sell opportunities. The bank expects opportunities to cross sell Scotia products to E*TRADE Canada customers and providing them the ability to transfer funds between their trading account and a Scotiabank retail account along with the full suite of Scotia banking products. Through this online channel, Scotia anticipates being able to offer their products on a lower cost basis.

Business mix. Scotia indicated that approximately 80% of E*TRADE Canada sales are retail focused and 20% are institutional. During year end December 31, 2007, E*TRADE Canada contributed nearly U$93M to ETFC’s net revenues. Also, the addition of E*TRADE Canada should complement the active trader focus with Scotia’s previous acquisition of Trade Freedom.

Margins. Margins from E*TRADE Canada are similar to ScotiaMcLeod Direct, which the bank views as a high/attractive margin business.

Outlook

We have made no material changes to our outlook and our estimates remain unchanged at C$4.10 for 2008 and C$4.50 for 2009.

Justification of Target Price

We expect Scotiabank to hold its premium valuation relative to the Big-Five Canadian banks, reflecting superior growth prospects, strong return on equity and healthy excess capital. We base our target price on 12.50x forward earnings, a premium to our outlook for the group.

Key Risks to Target Price

The following are key risks that we have identified for Scotiabank and could prevent the stock from attaining our target price. These include: 1) the continued weakening of the U.S. dollar, 2) country and political risk in its international markets such as Mexico, 3) integration challenges associated with its recent and future acquisitions and 4) adverse changes in the credit markets, interest rates, economic growth or the competitive landscape.

Investment Conclusion

Bottom-line, this deal should help Scotia drive their ‘client acquisition’ strategy and adds to what we view as an improving domestic story. We view Scotia as one of the best operating outlooks in the group, but the stock’s premium valuation tempers our enthusiasm. Reiterate 'Buy.'

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Financial Post, David Pett, 15 July 2008

The Bank of Nova Scotia's acquisition of E*Trade Canada could be followed by more acquisitions, says National Bank Financial analyst Robert Sedran.

On Monday, Scotia said it was purchasing E*Trade Canada from US-based parent E*Trade Financial Corp. for US$442-million in an all cash deal. In addition E*Trade Financial will withdraw US$69-million of capital from the Canadian division, bringing total proceeds to $511-million. The deal adds about $4.7-billion in assets under administration and 190 employees to Scotia's wealth management business.

"In our view, this transaction sharpens the focus on a key component of our investment thesis: those companies that do not have to concentrate on retrenchment and risk reduction are better positioned to grow - both organically and via acquisition," wrote Robert Sedran, analyst at National Bank in a research note.

"Given Scotiabank's well-earned reputation as a shrewd acquirer, we expect more transactions to be announced in coming quarters as this theme matures."

Mr. Sedran added that while the deal is not financially material, it does add to Scotia's wealth management earnings.

He maintained his "outperform" rating and left his $55 price target on the stock unchanged.

Desjardins analyst Michael Goldberg, meanwhile, reiterated his "top pick" rating and $57.50 price target for Scotia.

"Yesterday's announcement that Scotia will acquire E*Trade Canada is a tangible example of a Canadian bank benefiting from the US turmoil," he told clients in a note.

"While it is not an entré into the US for Scotia, it avoids the risk of doing so and instead furthers Scotia's goal of continuiing to strengthen its Canadian wealth management franchise."

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The Globe and Mail, Tara Perkins, 14 July 2008

July 14, 2008 at 9:34 PM EDT

Bank of Nova Scotia is cashing in on the deal-making opportunities arising from the U.S. mortgage turmoil, picking up online brokerage E*Trade Canada for $444-million.

The deal becomes the biggest part of the turnaround plan that New York-based E*Trade Financial Corp. announced in January, after it dangled dangerously close to bankruptcy over worries about mortgage loan losses.

With this deal, E*Trade, which originally aimed to raise $500-million (U.S.) by selling non-core assets, will have raised more than $700-million this year.

In return for the cash, Scotiabank's Canadian wealth management business, which has become a key priority for the bank, will receive a major boost. The transaction will double the size of Scotiabank's presence in the direct investing sector while adding 125,000 active accounts.

“This is truly a unique opportunity to acquire the last significant independent player in the direct investing market in Canada, and one with an exceptionally strong platform,” Scotiabank chief executive Rick Waugh said on a conference call Monday.

Seeking to expand its wealth management operations, Scotiabank bought TradeFreedom Securities Inc., a Canadian online brokerage boutique, last year, and more recently acquired Dundee Bank and a stake in DundeeWealth.

“Direct investing is an important and growing segment in Canada, even much more so in Canada than other markets,” Mr. Waugh said Monday. “We see this acquisition as a unique opportunity to immediately become a leader in this very attractive market.”

The deal is expected to make Scotiabank the second-largest brokerage in the industry based on number of accounts, and third largest in assets.

E*Trade Canada has roughly $4.7-billion (Canadian) in assets under administration and 190 employees. Scotiabank executives said they recognize that E*Trade's pricing strategy is key to its success.

“Online brokerage is playing an increasingly significant role in wealth management as more Canadians are using online investing solutions, and many are becoming more active traders,” said Chris Hodgson, head of domestic personal banking at Scotiabank. “This is a growing market,” he added, noting that it has a compound annual growth rate of 15 per cent over the past five years and assets under administration are expected to double over the next eight years.

Scotiabank also hopes this deal will prompt some E*Trade customers to open bank accounts so they can easily transfer money between accounts. The bank will also pitch products, like mortgages, to E*Trade customers online.

In an interview, E*Trade Canada president Duncan Hannay said the deal represents a great opportunity for E*Trade Financial to free up more than $500-million (U.S.) of capital to move forward.

The Canadian brokerage business has been shopped around for a number of months, and “I think it's fair to say that we had a very robust process, there was lots of interest in the business,” he said.

Like its competitors, revenue growth at E*Trade Canada's operations has been stung this year by the market environment.

One analyst called the deal reasonable but expensive, noting it's one of the last books of business left to buy. However, he added that it's safe to say Scotiabank is benefiting from having been more patient than some of its peers to take advantage of the troubles in the U.S. financial sector. For example, TD's $8.5-billion acquisition of New Jersey-based Commerce Bancorp in March would have been significantly cheaper had the bank waited.

Analysts said the $444-million (Canadian) E*Trade purchase would not prevent Scotiabank from making another acquisition, such as a U.S. regional bank. This spring, the bank took a look at National City Corp., a troubled Cleveland-based bank that would have cost billions. However, executives at the bank have recently downplayed the idea of any imminent foray into U.S. retail banking.

The acquisition of E*Trade is expected to close in September or October, following regulatory approvals.

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Duncan Mavin, Financial Post, 14 July 2008

Bank of Nova Scotia has boosted its online wealth-management business by picking up the Canadian unit of struggling U.S. broker E*Trade Financial Corp. which is in the midst of a turnaround plan.

The Canadian bank has made no secret of its aim to build a bigger presence in the lucrative wealth-management space and said Monday the $444-million acquisition of E*Trade Canada will double its online investing business, adding about $4.7-billion in assets under administration and 190 employees.

The all-cash deal "demonstrates our commitment to pursuing opportunities to grow our wealth-management business," said Scotiabank chief executive Rick Waugh.

Scotiabank pounced after E*Trade reported a record loss last year that led to several senior executives leaving the company. The U.S. discount brokerage was rocked by rising losses on home loans, and a new executive team committed to selling off parts of the business in an effort to steady the balance sheet.

After the deal with Scotiabank, E*Trade chief executive Donald Layton said, "We continue to make solid progress against our 2008 turnaround plan by monetizing non-core assets to generate capital."

Combined with the other planned non-core asset sales announced this year, E*Trade has generated more than $700-million in proceeds, Mr. Layton said.

E*Trade Canada was launched in 1994 as Versus Technologies Inc. and Versus Brokerage Services Inc. The retail business was launched in 1997 through a perpetual licence agreement with E*Trade. In 2000, E*Trade acquired Versus for US$174-million in stock. At the time, Versus had 37,000 retail clients and handled about 13% of all trading volume on the Toronto Stock Exchange.

The addition of the E*Trade Canada is the latest in a series of moves by Scotiabank to bulk up its presence in wealth management, where it has lagged its domestic rivals.

"This announcement is consistent with our overall strategic focus on growing our wealth management business in Canada and around the world," Mr. Waugh said.

After the deal, Scotiabank will become the second-largest online broker in Canada by number of accounts, with a 21% share of the trading volumes in the market, it said.

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League Tables • H1 / Q2 2008

The Globe and Mail, Boyd Erman, 14 July 2008

Royal Bank of Canada's securities division raised the most money of any firm selling Canadian stocks and bonds in the second quarter, dominating a sleepy three months as roller-coaster markets kept investors and issuers largely on the sidelines.

The bank's RBC Dominion Securities Inc. division topped market share rankings for stock sales in the quarter, helping to lead about a fifth of all sales by value, thanks to a run of relatively small deals, according to rankings prepared by information services firm Thomson Reuters. RBC also led in bond sales.

The slow times in April, May and June came on the heels of a quiet first quarter. So far this year, the overall amount of new stock sold in Canada has slumped by about 38 per cent, to $17-billion, compared with the same period last year. Companies are nervous about selling stock into such tumultuous markets, as banks and other financial companies continue to struggle, bankers said, and without some stability in global share prices it's hard to forecast when the doldrums will end.

"There's a number of issuers we're in discussions with and we know are likely to want to come to market; it's just they would prefer to do it when there's a bit better tone," said Doug McGregor, co-president of RBC Dominion.

"If you can get the financials back on their feet, that would be, I think, a step in the right direction."

RBC's winning quarter in the equity rankings helped it narrow the gap with Canadian Imperial Bank of Commerce's CIBC World Markets Inc., which leads the year-to-date Thomson Reuters rankings.

CIBC's position at the top of the stock sales table for the first half is controversial in the securities industry because the firm's biggest deal was a $3-billion equity offering for its parent bank.

While such "self-led" deals count in Thomson rankings, critics say self-led deals don't generate any real profit for an investment bank or demonstrate an ability to win business. However, self-led deals have been common around the globe as banks have been busy recapitalizing by raising money in markets.

In Canada, other than the big CIBC stock sale, most of bank fundraising has taken place in the debt and preferred-share markets, giving them a boost.

If markets don't get back on their feet soon, look for more investment banks to trim staff in Canada to compensate for slumping revenue, as CIBC World Markets and Bank of Montreal's BMO Nesbitt Burns Inc. have already done.

"I don't think the cuts will be really dramatic," Mr. McGregor said. "There will be some attrition; there will be some cuts - but I don't think it's going to match what's going to happen in New York."

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Genuity: RBC's Writedowns Could Double to > $3 Billion

Financial Post, Duncan Mavin, 10 July 2008

Royal Bank of Canada's writedowns could double to more than $3-billion as ongoing deterioration in U. S. credit markets takes its toll on Canada's largest bank, a report warned yesterday.

Worsening conditions in the United States may force RBC to take another $1.5-billion hit to add to the $1.6-billion in credit-crunch losses it has disclosed, said the report from Genuity Capital Markets analyst Mario Mendonca.

The potential losses would likely wipe out the entire quarterly profits at RBC, and would put a big dent in any hopes the worst of the credit crunch is behind Canada's banks.

Mr. Mendonca's warning comes a day after Mark Carney, the Bank of Canada governor, signalled a better outlook for credit markets here by saying he is closing an emergency fund set up to help the banking sector. But most of the recent trouble for the Canadian banks has come from their involvement in U. S. markets, where Ben Bernanke, chairman of the Federal Reserve, said this week he will keep the door open for emergency Fed funding into next year if market turmoil persists.

The announcement soothed the nerves of cash-strapped Wall Street banks but fuelled fears that the credit crunch is far from over.

Mr. Mendonca said his forecast of more writedowns at RBC is based on a further slide in the U. S. subprime mortgage market, plus weakening of mortgage-backed securities values and worsening conditions on a variety of structured products since late June. Another key driver is a recent fall in the credit rating of monoline insurer MBIA Inc., a counterparty to some of RBC's U. S. investments. "We re-examined RBC's exposures in this light and we estimate that [the bank] will take a third-quarter pre tax charge ranging from $900-million to $1.5-billion," Mr. Mendonca said.

The bank's stock fell almost 4% on the Toronto Stock Exchange yesterday, down $1.84 to close at $44.16. RBC's share price has fallen 28% in the past year, and is down 14% since the start of June.

Mr. Mendonca noted that the potential writedowns would not undermine RBC's strong capital position. But he also said the bank, which reports its third-quarter results on Aug. 28, is facing a variety of additional issues, including exposure to U. S. builder finance and tough conditions for generating profits from its significant capital-markets group.

A spokesman for RBC declined to comment on the analyst's report. However, Gord Nixon, chief executive of RBC, said in May that "a significant portion" of the $854-million writedown the bank took in the second quarter of 2008 "reflects liquidity pressures on assets that we continue to hold, rather than underlying credit quality."

Mr. Nixon has partly blamed the writedowns on new accounting rules that require banks to account for the investments based on their value in the market, which can result in fluctuating valuations.

RBC's total credit-crunch losses are the second-largest of any bank in Canada.

Canadian Imperial Bank of Commerce has recorded $6.7-billion in credit-crunch charges since last summer, and a number of bank-industry analysts say the bank could take another $1-billion to $1.5-billion in charges when it reports third-quarter results on Aug. 27. Bank of Montreal and Bank of Nova Scotia have recorded about $1.2-billion in writedowns between them, while Toronto-Dominion Bank has avoided similar writedowns.

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RBC Plans to Enter Islamic Finance Market

The Globe and Mail, Sonia Verma, 7 July 2008

When Ford Motor Co. sold the iconic British Aston Martin luxury car maker to a consortium led by British racing entrepreneur David Richards last year, the deal hinged on some unusual conditions.

Mr. Richards' Kuwaiti partners, Investment Dar and Adeem Investment, would only back the $848-million (U.S.) deal if it were done according to Islamic principals. So, in accordance with the Koran, 40 per cent of the deal was structured to avoid directly paying interest on a loan.

But to do their deal, Mr. Richards and his partners didn't turn to a Middle Eastern bank with an extensive background in Islamic, or sharia, finance. Instead, the buyers of Aston Martin – most famous as James Bond's car – went to a German bank, WestLB AG, for $450-million in sharia financing, through a structure known as murabaha.

The Aston Martin deal, as the first sharia leveraged buyout in Britain, was a watershed for Islamic finance and highlighted the growing influence of sharia banking in Western finance.

After a few years of strong growth focused largely in the Middle East, a new generation of Islamic bank startups is setting its sights on the West.

And as the wealth of Gulf countries swells with skyrocketing oil prices, more Western banks, including some Canadian banks, are looking to those pools of capital. Banks such as Citigroup Inc., Lloyds TSB Group PLC, Deutsche Bank AG and Barclays PLC are now offering services along Islamic finance lines. In the Muslim world, some have partnered with local sharia banks to form joint funds. In the West, London ranks as the leading Islamic banking centre, with conventional banks, such as HSBC Holdings PLC, opening Islamic banking units.

“Islamic banking is growing faster than any other sector of the banking industry and the West is just starting to wake up to its potential,” says Anouar Hassoune, a Paris-based senior analyst with Moody's Investors Service who specializes in sharia banking.

In February, Royal Bank of Canada hired Zaher Barakat, who teaches Islamic banking and finance at Cass Business School in London, as head of financial products for the Middle East.

RBC is targeting a variety of clients in the region, including sovereign wealth funds, private banking arms of local banks and government pension funds. While the priority is to market the bank's existing services and products into the Middle East, RBC is planning to enter the Islamic finance market, Mr. Barakat said. “We are working now on one fund to transform it to be sharia-compliant,” he said.

Bank of Montreal, through its London institutional management group Pyrford International, manages sharia-compliant products for Middle Eastern clients and is expanding the offering, said BMO spokesman Paul Gammal.

Islamic banking forbids interest and obliges deals to be based on physical assets, not on speculation. Sharia-compliant products seek to replicate the structure of interest through cost-plus transactions, leasing arrangements, or by linking payments to returns on assets.

Iran leads all countries with the highest level of sharia-compliant assets, surpassing $150-billion, the chief operating officer of HSBC, David Hodgkinson, told an Islamic finance forum last fall. But flush with petrodollars, the Gulf has become fertile ground for Islamic bank startups.

The launches of three new state-owned Islamic banks – Abu Dhabi's Al Hilal Bank, Saudi Arabia's Alinma Bank and Dubai's Noor Islamic Bank – highlight the sector's rapid growth, and also its ambitions to export Islamic banking around the world and reap the profits.

Soon after it was launched last year, the chief executive officer of Noor Islamic Bank said he intended to go on a shopping spree for financial institutions in the West in an effort to become the world's largest sharia lender within five years.

The bank aims to gain a foothold in Europe – where demand for sharia-compliant services is growing – by acquiring controlling stakes in British banks. “We would like to take the Noor brand outside the [United Arab Emirates] by acquiring other financial institutions,” CEO Hussain Al Qemzi said in an interview.

For Al Hilal Bank, which has more than $1-billion in capital, “any place that has a strong Muslim population and presents an opportunity is motivation for us,” said CEO Mohamed Jamil Berro.

Mr. Berro rejects the criticism that Islamic finance structures lack transparency, and argues that Islamic banking is inherently less risky than Western finance, which has been battered by the subprime mortgage crisis.

“One of the things we don't do is subprime … because it's prohibited for us,” he said, referring to the Islamic banking principal that deals be based on tangible assets. “These [plans for expansion] are not meant with any political agenda or anything. More or less, it's just investing and creating a return,” he said.

The banking community at large could learn from sharia-compliant products, HSBC's Mr. Hodgkinson said. The products provide stability because of Islamic finance's emphasis on ethics and self-regulation.

Mr. Hassoune, the Moody's analyst, says Islamic financing is using the credit crisis in the West to its advantage, offering liquidity and security where conventional banks are coming up short.

However, the market is not without its problems.

Islamic banks are typically ruled by a board of religious scholars who determine whether particular deals are compliant with Islamic law. There are growing indications that these religious scholars are challenging Islamic banks' unprecedented growth, questioning whether their products truly comply with Islamic law.

Sheik Muhammad Taqu Usmani, an influential sharia scholar from Bahrain, recently sent shock waves through Islamic finance circles by warning that 85 per cent of Islamic bonds, or sukuk, do not truly comply with Islamic law, undermining public confidence.

“People are getting worried. Islamic banking is not just a business. It's ethics-based, so the opinion of these scholars matters,” Mr. Hassoune said.

Experts say standardized practices and industry-wide regulations could address those concerns, but could also stymie growth, because Islamic finance has to evolve based on its clients of any country where it takes root.

In Canada, sharia-based banking is available, but on a limited basis. The issue sparked controversy earlier this year when the Canada Mortgage and Housing Corp. launched a study on Islamic banking, as Ottawa considered its first applications to start up Canadian banks operating within Islamic law.

The proposals drew fire from the secular Muslim Canadian Congress, which argued that faith-based banking had no place in Canada, and the presence of Islamic banks would pressure Canadian Muslims to subscribe to costlier products.

Walied Soliman, a Toronto-based lawyer at Ogilvy Renault, said “Canadian banks haven't been as quick either on raising money from the Middle East for financial institutions in Canada or in terms of offering up structured products or issuers for investment in the Middle East.”

But that may be changing, he said. “Canada is very quickly getting onto the radar of [sharia] investors and other issuers looking to engage in M&A transactions with Canadian issuers, and as a result we're going to see growing interest in Canada and the bankers will adapt to that and learn more about the sector as the demand grows.”

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2nd Reported Incident of Risk Management Failure at TD Securities' London Office in < 8 Months

The Globe and Mail, Tara Perkins & Paul Waldie, 4 July 2008

Toronto-Dominion Bank, which painstakingly avoided the subprime mortgage trouble that forced its peers to take massive subprime writedowns, said it was taking a $96-million hit on Friday after discovering that a London trader had deceived the bank about the value of securities he traded.

The bank will now join the ranks of its competitors pushed to review their risk controls in recent months.

Chief executive officer Ed Clark said TD has a strong culture of risk control and “we deeply regret this incident.” He has staked the bank's reputation on its ability to avoid exposure structured credit products that are too risky.

The writedown that TD revealed on Friday stems from a circumvention of controls, a spokesperson for the bank said. This is not an instance of complicated securities plunging in value, but of an individual mispricing the value of credit derivatives in which the bank trades openly.

“We will work aggressively to strengthen our controls,” the spokesperson said. “We are very disappointed, because we have a reputation for a very strong risk culture.”

The bank's examination indicates that the person was acting alone, she added.

Mike Peterson, managing editor of London-based Creditflux, an industry publication on structured credit, believes TD revealed the writedown Friday as a result of questions the publication put to the bank.

“We got a cryptic anonymous tipoff a few days ago, and a more specific anonymous tipoff at the beginning of our day today,” he said Friday.

Creditflux reported Friday that the book at the centre of the apparent mispricing is the structured credit element of TD's proprietary credit trading business.

TD would not identify the individual involved, citing individual privacy. In a brief statement Friday, the bank said it had “regrettably identified incorrectly priced financial instruments in its London office.” The office houses roughly 225 employees.

“This situation is associated with the activities of an individual who is no longer with the company,” the bank said.

TD spokeswoman Simone Philogène said the individual stopped working at TD as of June 23. When the bank was transferring the individual's responsibilities, it identified financial instruments that were priced incorrectly, she said.

The company has apprised the Financial Services Authority, which regulates financial services in Britain, and the Office of the Superintendent of Financial Institutions, which regulates Canadian banks.

“The bank is investigating the matter,” said Rod Giles, a spokesman for OSFI.

The financial instruments that were apparently mispriced are credit derivatives – a contract between two parties who agree to sell or buy credit risk. Specifically, the securities were investment grade indexes and index tranches, and prices should have been relatively easy to establish.

“We take this very seriously and will make every effort to ensure that this doesn't happen again,” Mr. Clark said.

Other banks have faced such a situation recently. Morgan Stanley suspended a London trader in June for overstating the value of credit securities on the books, forcing a $120-million (U.S.) writedown.

Last year, Bank of Montreal parted ways with a natural gas trader and his boss after discovering mispricing in its natural gas book, which cost the bank more than $800-million.

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Reuters, 4 July 2008

Toronto-Dominion Bank, Canada’s second-largest bank, said on Friday it will take a pretax charge of about C$96 million ($94 million) for the mispricing of derivatives by a senior trader who has left the London office of its investment dealer unit.

TD Bank said that the charge in its TD Securities unit was tied to credit derivatives that were not properly priced, and said the unnamed trader left the bank on June 23.

TD discovered the mispriced credit index swaps the same day, spokeswoman Simone Philogene said.

The bank said it was cooperating with regulators.

A spokeswoman for Britain’s Financial Services Authority said that it does not comment on individual firms.

TD Bank President and Chief Executive Ed Clark said the bank was ”very disappointed” with the loss.

”Our company has a strong risk culture and we deeply regret this incident. We take this very seriously and will make every effort to ensure that this doesn’t happen again.”

TD shares closed down 25 Canadian cents, or 0.4 percent, at C$63.09 a share on the Toronto Stock Exchange on Friday.

Analysts said investors would probably overlook the charge, even though it exceeds the C$93 million in wholesale banking profit that TD reported in the second quarter.

”I think in this case, TD has done extremely well through the credit crunch so far, and I don’t think people are going to change their assessment of the risk management culture yet,” said Ohad Lederer, a banking analyst at Veritas Investment Research in Toronto.

In June, Wall Street bank Morgan Stanley said it had suspended a London-based credit trader who had overvalued positions by $120 million, prompting a writedown of the same amount, and in May, Lehman Brothers Holdings Inc suspended two London equities traders after identifying a similar problem.

TD has largely steered clear of harm during the credit crisis, in part because retail banking in Canada and the United States makes up the bulk of its operations.

In the most recent quarter, which ended April 30, retail businesses produced about 90 percent of the bank’s total profit of C$852 million.

TD Securities does currency and international fixed income trading in London, as well as institutional equity sales and trading.

TD will swallow a relatively small loss from the mispriced credit derivatives, a second analyst said, compared with the billions of dollars in writedowns taken at U.S., European and other Canadian banks as a result of weak credit markets.

”That’s a pretty small hit,” said Douglas Davis, president at Davis-Rea. ”I think TD wants to be known as the most defensive bank with the cleanest balance sheet.”

TD’s Canadian peers, Bank of Montreal, Canadian Imperial Bank of Commerce, and Royal Bank of Canada, have reported bigger charges in the past year.

In the case of BMO, the culprits were commodity trading and structured-finance losses. CIBC has taken hits for various credit-market securities and hedges with downgraded bond insurers. And RBC’s charges covered a variety of asset-backed, structured credit and auction rate securities.

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The Canadian Press, 4 July 2008

Toronto-Dominion Bank has disclosed a $96-million loss caused by “incorrectly priced financial instruments” at the TD Securities office in London.

The bank blamed “an individual who is no longer with the company” and said Friday it is co-operating with regulators.

TD did not say whether the losses were linked to trading mistakes or whether any wrongdoing or criminal activity was involved.

The loss is nothing like the €5-billion ($8-billion) hit suffered in January by France's Société Générale SA and attributed to rogue activity by trader Jerome Kerviel. But it is an embarrassment for TD, which has prided itself on avoiding much of the trouble which has engulfed other banks worldwide since a global credit crunch swept the financial sector last summer.

“We are very disappointed that this has occurred,” TD chief executive officer Ed Clark said in a brief statement which offered no details of the malfunction.

“Our company has a strong risk culture and we deeply regret this incident. We take this very seriously and will make every effort to ensure that this doesn't happen again.”

A TD spokeswoman said the individual was a senior trader in the London office who traded credit derivatives. Discrepancies in his accounts were discovered after he left TD on Monday, June 23.

“We identified financial instruments that were priced incorrectly,” said Simone Philogène.

She declined to release the trader's name or where he went, saying she could provide very little information about the former employee due to privacy considerations.

“What I can tell you is we had a senior trader in our London office leave our employ on Monday, June the 23rd, and upon transitioning his accountabilities we identified incorrectly priced financial instruments,” she said.

The financial instruments were credit index swaps — complex futures or derivatives contracts used by traders to spread credit risks.

“It's an account we trade for the bank, so there's no client money involved,” Ms. Philogène said.

The bank is co-operating with Britain's Financial Services Authority which is investigating the incident.

The TD Securities division provides a wide range of capital market products and services to corporate, government and institutional clients, including investment and corporate banking and interest-rate, currency and derivatives instruments.

TD was widely hailed by analysts earlier this year for its tight risk-management practices, which helped the financial institution avoid the massive debt writedowns that dragged its five main Canadian rivals to post billions of dollars in losses linked to the subprime-mortgage market in the United States.

The charge the bank is taking is not a large one, amounting to only about 7 per cent of the bank's $852-million profit in the second quarter ended April 30. TD will report its fiscal third quarter results Aug. 28 and may include the latest charge in its finances then.

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• UK Regulator Fines TD Bank Over Rogue Trader, 16 November 2007

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3 of Top 10 North American Banks are Canadian

Financial Post, Zena Olijnyk, 30 June 2008

“Don’t hold your breath” is the verdict from Desjardins Securities banking analyst Michael Goldberg when it comes to mergers in the Canadian financial services sector, despite last week’s recommendation from the Competition Policy Review Panel that the ban be removed.

Among the 65 recommendations in the report from the committee was the removal of the de facto ban on bank, insurance and cross-pillar mergers of large financial institutions, but Mr. Goldbeg says in a research note that “investors should not expect its implementation for the foreseeable future.

Why? Well Mr. Goldberg cites two reasons. For starters, he notes that the ban was “politically motivted,” and the constituencies that oppose the idea of mergers are “still stronger and better organized” than those that favour them.

Secondly, Mr. Goldberg argues that the business case for the combinations is not compelling. While the argument for bank mergers has been made on the basis of greater scale,” the committee says that “reaching the scale of the world’s largest institutions will depend on how well Canadian banks fare in the contest to acquire foreign banks.”

He also points out that Canadian banks are once again showing up in the list of top 10 North American banks, based on market capitalization – Royal in fifth place, with TD and Bank of Nova Scotia in seventh and eighth spots, respectively - something that hasn’t been the case in well over a decade. (In 1989, the top 10 included TD, Royal Bank and CIBC. By 1998, just before the proposed merger or BMO and Royal - not one Canadian bank appeared on the list.)

While the rise in the rankings has come as a result as a great erosion in the valuation of US banks, thanks to the recent credit crunch, Mr. Goldberg notes that Scotia and TD have grown their banking businesses outside of Canada significantly through acquisitions and organic growth. “We believe that this history demonstrates the Canadian banks' ability to compete for foreign acquisitions has been more a function of business acumen, vision, courage and patience than it has been about scale,” he says.

So while he doesn’t rule out the possibility of Canadian bank mergers, Mr. Goldberg concludes: “The only merger scenario we can foresee for now is a bank bailout, described for public consumption (to protect public confidence) as a merger. Are any of the major banks in a position now where they need to be bailed out? No.”

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CIBC & RBC Likely to Increase Markdowns on Hedges with Financial Guarantors

RBC Capital Markets, 25 June 2008

Problems facing financial guarantors worsened recently as rating agencies downgraded several large players.

• We believe further large write-downs are likely as credit default swap spreads have widened considerably since the end of Q2/08.

• Banks have not been valuing their hedges with financial guarantors solely on credit ratings, but have also taken into consideration credit default swap spreads on the financial guarantors in determining valuation allowances on hedges.

• We also expect continued pressure on the valuation of hedged assets, which will increase the exposure to financial guarantors.

CIBC and Royal Bank have the largest exposures to financial guarantors among Canadian banks

• Due to the ratings actions, CDS spread widening and continued pressure on the value of CDOs of RMBS, we are increasing our write-down estimates at CIBC (from $1 billion to $1.5 billion) and Royal Bank (from $0 to $500 million).

• We have summarized our sensitivity analysis on the Tier 1 ratio of CIBC and Royal Bank in this report. We believe that each bank's Tier 1 ratios will remain above 9% using our expected write-down amounts in Q3/08E, and that the banks have enough capital even if we assume the hedges with financial guarantors are worthless.

• The other Canadian banks have much smaller exposures, if any.

Lowering 12-month target price for CIBC and Royal Bank

• We maintain our Underperform rating on CIBC's shares. We have lowered our 12-month target price for CIBC from $64 to $62 per share due to our higher write-down estimate. Our target price is based on a P/BV multiple of 2.0x, versus the current 2.1x multiple, and it implies a P/E on 2009E EPS of 8.4x, whereas the stock currently trades at 8.3x 2008E EPS.

• We maintain our Sector Perform rating on Royal Bank's shares. We have lowered our 12-month target price for Royal Bank from $50 to $49 per share, due to our higher write-down estimate. Our target price is based on a P/BV multiple of 2.3x, versus the current 2.5x multiple, and it implies a P/E on 2009E EPS of 10.8x, whereas the stock currently trades at 10.8x 2008E EPS.

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RBC Capital Markets, 24 June 2008

We prefer Manulife's stock ($36.60, Outperform, $41 price target) to Scotiabank's ($48.79, Sector Perform, $49 price target). BNS is not our least favourite bank stock but it shares many similarities with MFC that reduce basis risk. The reasons why we would take money out of Scotiabank and allocate it to Manulife stock are:

• MFC trades at a more attractive valuation relative to historical averages than BNS.

• MFC trades at 11.5x NTM EPS, in line with BNS. Over the last 7 years, MFC has traded at an average premium of 1.4x.

• MFC trades at a 1.3x P/E premium to the lowest valued Canadian lifeco, while BNS trades at a 3.3x premium.

• On a P/B basis, MFC's current 2.2x multiple is in line with its 7-year average, while BNS current 2.7x multiple is higher than its 7-year average of 2.5x.

• We expect greater core EPS growth from MFC in 2008 and 2009 (5% and 13%) than we do for BNS (4% and 2%).

• The macro environment is shifting in a way that advantages MFC.

• The Canadian dollar has settled in a range of about $0.97-$1.03 since mid-November. The rising Canadian dollar had been more negative for MFC than BNS, as it generates 75% of its earnings from outside of Canada versus 45% for BNS.

• The economic and credit quality outlooks continue to deteriorate, which we believe will have a greater negative impact on BNS's loan book than MFC's bond portfolio in 2009. For BNS, we are expecting a 9% earnings growth drag from increasing provisions for credit losses. MFC's investment portfolio has a conservative allocation to riskier bonds (13.8% in BBBs and 2.6% in BBs and below).

• Long term interest rates are up from their lows on rising concerns about inflation. MFC and other insurers benefit from higher interest rates as the duration of their liabilities is longer than that of their assets.

• New business momentum is better at MFC. Sales of insurance products are less dependent on the economy than is loan growth, in our view. We expect loan growth to slow for banks and pressure on retail margins. MFC's Q1/08 value of new business was up 35% YoY, driven by sales of both insurance and wealth management products.

We believe that a pairs trade between MFC and BNS reduces basis risk as these two companies match up well.

• Both companies are best established outside of Canada among their Canadian peers.

• Both management teams are willing to make acquisitions.

• We view both companies as having a "quality" perception among their peers, which should help their stocks in turbulent times.

Details

We have an Outperform rating on Manulife shares as the company has a well-established record of consistent earnings growth and embedded value growth, and has become a world leader among insurers. We believe that Manulife deserves a premium valuation to Canadian financial services companies and life insurers worldwide, based on the company's sales and earnings growth track record, excess capital holdings, growth prospects in Asia, and a lower credit risk profile versus U.S. lifecos and Canadian banks.

• Diversity of operations limits downside earnings risk, in our view, and reserves appear conservative, with large provisions for adverse deviations relative to reserves and a track record of booking experience gains.

• Our 12-month price target of $41 is a combination of our P/B, P/E, and embedded value methodologies. Our P/B target is 2.4x, our target P/E multiple is 12.0x 2009E earnings and our target multiple on embedded value is 1.8x.

We have a Sector Perform rating on Scotiabank shares to reflect our expectations for benign credit deterioration near term, strong domestic retail momentum coming out of Q2/08 results and continuing strong asset growth in international banking, which are offsetting rising loan losses in Mexico, and the negative impact of currency.

• We continue to believe that deterioration in business lending and lower recoveries will lead to a material increase in loan losses in 2009 but to reduce our exposure to the stock today on that basis only is premature in our mind, especially since the retail division is performing well.

• Our 12-month target price of $49 is based on a P/BV multiple of 2.3x, versus the current 2.6x multiple, and it implies a P/E on 2009E EPS of 11.5x, whereas the stock currently trades at 11.8x 2008E EPS.

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Review of Banks' Q2 2008 Earnings

Scotia Capital, 23 June 2008

Earnings Resilience Continues - Grinding It Out

• The Banking Siege is now into its 11th month and still counting, although it continues to show signs of easing. The bank index has rebounded 16% from the lows reached on March 17, The Bear Stearns Rescue, which we believe is the beginning of a major bull market in bank stocks.

• The Canadian banks, except for CM, have avoided the carnage that has besieged many of the global banks. Canadian banks cumulative writedowns as at Q2/08, including BMO’s natural gas trading losses, have totalled $10.9 billion, with CM representing 60% of these writedowns. Thus excluding CM, Canadian bank cumulative writedowns represented less than one quarter of earnings or 3% of book value. TD and RY have stood out from their global peers and Canadian competitors with cumulative writedowns at 0% and 4% of book value, respectively. We expect this quarter will be the last quarter of noticeable mark-to-market (MTM) writedowns with recoveries not out of the question over the next few years.

• The earnings performance of Canadian banks has been relatively resilient in a very difficult environment as they have been grinding it out. On an operating basis after a five-year run of successive 15%+ growth, we expect earnings to decline a modest 2% in 2008 before growth returns to 11% in 2009. On a quarterly basis Q2/08 represented the second straight quarter of modest negative earnings growth, with -2% in Q1 and -5% in Q2, with Q3 expected to be - 7% before earnings momentum is expected to turn positive in Q4 with growth estimated at 6%. Thus the bank group is grinding through three quarters of modest negative earnings momentum while maintaining strong capital positions and near-record profitability. Retail banking earnings have remained very strong with wholesale earnings tumbling, especially in Q2/08.

• The banks earnings performance is actually quite admirable given the 15% year-over-year appreciation of the Canadian dollar, which impacts approximately one-third of bank earnings and the 10 to 15 basis points (bp) year-over-year decline in the retail net interest margins, as well as the difficult wealth management and wholesale banking operating environment.

• The solid underlying earnings for the bank group have resulted in at least one Canadian bank increasing its common dividend in every single quarter since the credit crisis began. Although the increases have been modest, it bodes well. The dividend payout ratio is 46% on 2008 operating earnings and 42% on 2009 earnings estimates. We expect Q4/08 positive earnings momentum to be a catalyst for broad-based dividend increases for the bank group.

• Canadian bank market capitalization declines have been extreme compared with writedowns and relatively low exposure to high-risk assets. Canadian bank market capitalization has declined $40 billion (excluding CM) on writedowns of $6.7 billion after tax, for a market capitalization decline ratio (MCDR) of 15.9x. MCDR is market capitalization decline as a multiple of after-tax writedown. We believe the MCDR at 15.9x is high versus the modest 8.4x MCDR for a group of global banks, especially when Canadian banks have much lower residual risk in their balance sheets. The MCDR is also high compared to levels of 1.8x to 2.3x during the LDC and CRE crisis of the 1980s and 1990s.

• The Banking Siege has presented one of the best buying opportunities in decades to participate in the major bull market in bank stocks. Canadian bank stocks have been impacted, not surprisingly, by the negative sentiment towards the financial services sector. Investors have a heightened awareness of systemic risk and are pricing for it.

• We believe sentiment, although negative, is beginning to shift, as global players are taking major writedowns and shoring up capital positions. We believe Canada has a structural advantage versus U.S. banks and other global players. The solid fundamentals in our residential mortgage market set Canada apart from many countries. The dominance of Canadian banking franchises in a number of business lines and the extremely low penetration from monolines presents a competitive advantage.

• Higher loan losses, we believe, through an economic downturn are absorbable. We expect loan loss provisions to peak in the 65 bp or $7 billion range in 2010/2011 versus our 2008 and 2009 forecasts of $4.6 billion and $5.3 billion, respectively. The earnings drag is expected to be 8% over a two- or three-year period, which we believe is readily absorbable. The retail net interest margin is arguably a more important earnings variable as a 10 bp shift in the retail margin impacts earnings 3%. Interestingly, the retail net interest margin has declined from 3.65% in 2001 to the recent level of 2.88% for a significant 77 bp decline. Thus bank earnings would have been over 20% higher today all things being equal, which of course they are not. The margin decline was driven by loan and deposit mix shifts, competition, deposit cost floors, and spikes in wholesale funding costs. Of the positives from Q2/08 earnings was the firming up of the retail net interest margin, which actually increased 2 bp sequentially although it was down 12 bp year over year. We expect a firmer to perhaps expanding margin to be a catalyst for positive earnings surprises in 2009.

• Bank valuations in our view are already discounting a recession. Bank P/E multiples are at extremely attractive levels at 11.2x, 11.2x, and 10.0x, trailing, 2008 and 2009 operating earnings estimates, respectively. The bank P/E multiples appear to have bottomed at 9.4x trailing, on March 17 (Bear Stearns Rescue), slightly above the 9.0x level during the Asia crisis in 1998 and below the 10.9x bottom during the Telco/Cable/Power crisis in 2001. We believe the trend line for bank P/E multiples continues to be 16x, and the current stress testing (credit crisis and recession) is in fact needed to push the multiple through previous highs. The 16x target multiple is based on a 5% ten-year government bond yield. If bond yields were to increase to 6% based on inflation concerns, the target multiple would be in the 14x range, 25% higher than current valuation.

• Canadian bank P/E multiples relative to U.S. banks have improved to a 7% premium versus a discount of 5% to 10% since the credit crisis began. We continue to believe Canadian banks should trade at a 10% to 15% premium based on lower balance sheet risk, high profitability, and a less volatile and risky banking system.

• The bank P/E multiples relative to the TSX are 63%, in line with the historical mean but below our 80% to 90% target, which is based on periods of similar bank fundamentals.

• Bank dividend yields relative to bonds remain at unheard-of levels (until the current credit crisis) at 109% or 4.6 standard deviations above the mean. The peak was 7.0 standard deviations above the mean on March 17, when fear and panic were at their highest. The market was beginning to discount a total global financial collapse. We continue to believe dividends are safe and broad-based dividend growth will begin in Q4/08.

• Bank dividend yield versus the overall equity market is an astounding 2.3x versus a historical mean of 1.4x and not far off the spike to 2.8x from the Nortel/High-Tech bubble in 2000. Bank dividend yields are also at record levels versus Pipes & Utilities and Income Trusts.

• We continue to recommend aggressively buying bank stocks at these levels. As fear subsides, we expect share prices to move up sharply. We expect the negative drag from flow of funds to reverse. Flow of funds has not been helpful for bank share price performance as $12.7 billion has gone into money market funds in the first five months of 2008, with domestic equities recording net redemptions of $3.4 billion and domestic balance inflows anaemic at $207 million. In addition, the resource sectors have been red hot attracting funds, which is not expected to last forever. The short interest in Canadian banks that peaked in late 2007 and early 2008 continues to decline, removing some downward share price pressure.

• In terms of stock selection we continue to favour RY and TD, which we consider to be the high-quality banks with the strongest operating platforms, and which consistently and continually reinvest in their businesses. These banks have the highest profitability, strongest balance sheets, and growth prospects. These three banks substantially outperform over the long term.

• They have also performed exceptionally well through the recent crisis operationally and share-price wise. TD, and RY share prices are down 11%, and 18%, respectively, from their all-time highs. CM, BMO, and NA share prices have declined 40%, 37%, and 19%, respectively, from their all-time highs.

• We continue to recommend maximum allowable weightings in bank stocks based on overall fundamentals and valuation. Even the weakest bank looks compelling from an investment perspective. We have only BUYS and STRONG BUYS in the bank group with no SELLS or HOLDS on an absolute return basis. High-quality balance sheets, strong funding and liquidity, high profitability, compelling valuation, and the major structural advantages from our banking system and economy support our very bullish stance towards bank stocks.

• We maintain our 1-Sector Outperforms on RY and CWB, 2-Sector Performs on TD, NA, and CM, with 3-Sector Underperforms on BMO and LB.

• Our order of preference is: RY, CWB, TD, NA, CM, BMO, and LB.

RY 1-Sector Outperform – Canadian Banking Earnings Momentum; U.S. & International Represents 5% of Earnings

• RY reported solid domestic banking results up 15% year over year. Insurance earnings doubled from a year earlier while banking-related earnings increased a respectable 7%. U.S. & International earnings were disappointing this quarter, declining 30% due to increased loan loss provisions related to the banks' Builder Finance portfolio. Although U.S. & International earnings were disappointing, the segment only represented 5% of the bank’s total earnings. We believe that RY will continue to achieve above-average profitability based on the strength of its retail and wealth management platform, and that increases in LLPs will be absorbable.

CWB 1-Sector Outperform – High Growth Prospects – Lower Premium

• CWB continues to have a high growth profile, generating loan and deposit growth of 20%+ in the high growth economies of Alberta and British Columbia. Despite the high growth profile, CWB’s P/E premium has narrowed versus the bank group. In fact, CWB’s relative valuation is the most attractive it has been in five years.

TD 2-Sector Perform – Wholesale Represented 9% of Earnings; ROE Dilution from CBH Acquisition

• TD is well positioned with its strong domestic retail banking platform, nominal exposure to high-risk assets, and low reliance on wholesale earnings. The Commerce Bancorp acquisition is dilutive to return on equity with some integration risk, although we expect the company to manage through the integration and difficult U.S. operating environment. We maintain a 2-Sector Perform on the shares of TD as we expect higher earnings growth from RY and BNS. TD also has a significantly lower Tier 1 ratio pro forma fiscal year-end 2008.

NA 2-Sector Perform – Reliant on Wholesale

• NA remains heavily reliant on wholesale earnings. In Q2/08 wholesale earnings represented 34% of total earnings, the highest of the bank group. Growth in retail and wealth management has been modest. Asset quality remains relatively strong with very low impaired loan formations.

CM 2-Sector Perform – Retail Earnings Decline

• We believe the second quarter represented the last quarter of meaningful writedowns on U.S. sub-prime CDOs. However, after the dust settles we are concerned about the earnings power of CIBC World Markets and to a lesser extent CIBC Retail Markets. CM’s restructured wholesale platform has contributed a modest 10%-15% over the last two quarters versus 20%+ prior to Q1/08. CM’s retail banking earnings were disappointing this quarter despite a higher retail net interest margin and slightly lower loan losses.

BMO 3-Sector Underperform – Off-Balance Sheet Risk High; Low Profitability

• We maintain a 3-Sector Underperform on BMO based on the bank’s lower earnings growth outlook, lower profitability, higher off-balance sheet risk, and relatively weak operating platforms. BMO’s loan loss provisions have recently spiked to 36 bp of loans and are expected to remain at these elevated levels. Impaired loan formations also spiked. We believe a 15%-20% discount to the bank group is warranted.

LB 3-Sector Underperform – High Securitization Gains; Underlying Earnings Weak

• We maintain a 3-Sector Underperform on LB based on the bank’s lower profitability, moderate loan growth outlook, and relatively high P/E multiple versus the bank group. Year-to-date, LB has had very large securitization gains representing 22% of earnings. We believe earnings growth from securitization gains is not sustainable at these levels and that earnings momentum is slowing after a number of years of recovery.

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Financial Post, Duncan Mavin, 23 June 2008

Canadian Imperial Bank of Commerce may be forced to raise more capital after another of the bank’s monoline counterparties ran deeper into trouble, said Blackmont Capital analyst Brad Smith.

CIBC has already taken $6.7-billion in writedowns on structured products linked to the U.S. subprime mortgage market. It will likely take another $1-billion hit in the third quarter of 2008 after XL Capital Assurance was downgraded by rating agency Moody’s, Mr. Smith said.

XLCA is a subsidiary of monoline SCA, with which CIBC has about $3.3-billion in exposure. In addition, the bank has about $25-billion in structured products that are not related to the subprime mortgage market.

Mr. Smith notes that the bank can withstand further losses on its remaining subprime exposure, and has a strong balance sheet after raising $2.9-billion in dilutive equity earlier this year. But additional losses in its $25-billion book of of non-subprime investments could push the bank to go back to the market for more capital, he said.

Blackmont Capital rates CIBC stock “hold” with a 12-month target price of $74.00

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TD Commerce Bank Investor Day

Financial Post, Duncan Mavin, 23 June 2008

Toronto-Dominion Bank has achieved critical mass in the U.S. with the acquisition of Commerce Bancorp, and although TD is now significantly more exposed to the weakening U.S. economy than its Canadian peers, there is plenty of upside from the deal, says National Bank analyst Rob Sedran.

The combination of Commerce and TD’s existing platform, TD Banknorth, will see TD rank in the top ten for deposit market share in eight states in the U.S., including New York, New Jersey and Massachusetts. It also increases TD’s existing branch platform from 626 branches to 1,071 branches, and positions the bank to do more deals.

“As a result of this larger footprint, future acquisitions are more likely to carry expense synergies, allowing TD to compete for assets on a more equal footing with the large U.S. banks,” Mr. Sedran said in a note.

The National Bank analyst also points out that TD appears to be committed to Commerce’s high-service level culture — what executives call the “wow” factor — which is a strong source of competitive advantage. The bank has already done a lot to bring Banknorth up to the high-service level model, he notes. Also, although TD now has more at stake in the U.S., it is mostly located in the northeast, where recent negative trends have not been as dramatic as in other parts of the country.

TD’s capital position is looking tight after the Commerce deal, but unlike its Canadian rivals, “the fact TD’s balance sheet has been stretched not by writedowns and losses, but by deployment, is a crucial distinction,” Mr. Sedran said.

Although all the Canadian banks have suffered a fairly lacklustre performance so far this year, that outlook could brighten in 2009 for TD at least. If TD hits or even beats its targeted earnings from the U.S. of $1.2-billion in 2009, there is potential upside to earnings estimates, Mr. Sedran said.

National Bank rates TD “outperform” with a $77.00 target price.

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Financial Post, Janet Whitman, 21 June 2008

Commerce Bank customer Corey Singer was a little worried when he heard Toronto-Dominion Bank was taking over. But he soon got some reassurance after the newly named TD Commerce sent him a letter and an e-mail saying his bank-- which has built up one of the most powerful customer-centric U. S. brands with its free red lollipops, coin-counting machines and Sunday hours -- won't be changing.

"I trust Commerce," Mr. Singer, who works in public relations, said one recent evening outside a Commerce branch in Manhattan's East Village. "It appears that all of the major benefits are going to be the same--at least I hope."

Investors and analysts aren't so sure.

Since Cherry Hill, N. J.-based Commerce Bancorp agreed to accept a US$8.5-billion takeover offer from TD in October, the chief concern among analysts and investors has been whether the charismatic, customer-first culture at Commerce will slip.

"The $64,000 question of the Commerce transaction is what percentage of customers are at risk of losing should they scale back certain services to make an attempt at lowering expenses," said Gerard Cassidy, an analyst with Royal Bank's RBC Capital in Portland, Me. "Instead of opening up at 8 in the morning to capture commuters, they could, in certain locations, say now we're opening at 9:30. It's really a balancing act: how to increase the profitability of Commerce while at the same time lowering costs and not alienating their customer base."

Analysts don't doubt TD will be looking to cut costs.

For every dollar it takes in, Commerce lavishes around 75¢ on its customers. TD, which has built up a strong reputation for customer service in Canada since its 2000 acquisition of Canada Trust, spends only about 50¢.

Ed Clark, TD chief executive, and Bharat Masrani, TD Commerce CEO, acknowledged at TD's annual investor day in suburban New Jersey on Thursday that expenses at Commerce are high.

But they added that the free ballpoint pens, lollipops and dog biscuits handed out at the Commerce branches account for very little of that spending.

A big chunk of the expenses goes toward opening new branches, which, down the road, should fuel profits.

Aggressive growth has been a cornerstone of Commerce Bancorp's success since Vernon Hill II founded the bank in 1973 at the age of 27.

Mr. Hill, who owned Burger King retail franchises and modelled the bank on retail outlets such as Starbucks and Home Depot, had expanded to 470 branches before he was ousted last year amid a scandal over regulatory scrutiny involving deals with his family members and other company insiders.

Speaking with reporters following the investor meeting, Mr. Clark and Mr. Masrani said they'd be loath to slow the pace of opening new branches.

"If we stopped new branch growth, we could get our expenses way down, but that's not our strategy," said Mr. Masrani. "Commerce has shown it can go into markets and take share."

The executives pointed to the bank's foray into Manhattan's Chinatown as an example. When Commerce opened in the neighbourhood, it gave away rice cookers and offered 7,500 safety deposit boxes built around the number eight, considered a lucky number by many Chinese. Commerce opened a whopping 10,000 accounts there in the first month, a rate unheard of in the U. S. banking business.

The TD executives noted that they've already found a way to lower costs considerably -- without skimping on services -- by spending 25% less money on building each new Commerce branch.

"We can source materials cheaper and we've modified certain aspects," said Mr. Masrani.

The executives also said they can improve profitability at Commerce by selling new services to customers at higher profit margins.

Throughout Thursday's meeting, which included a tour of a local bank and call centre and five hours of powerpoint presentations, executives took pains to assure analysts and investors that they see the value in protecting and expanding the "wow-the-customer" cul-ture at Commerce. The bank's slogan, "America's Most Convenient Bank," is "not just a tagline," said Mr. Masrani. "It is the essence of our brand and who we are as a company."

TD, which began its foray into U. S. retail banking in 2005 when it took a stake in Banknorth, faces a lot more competition down here than in Canada, where five banks dominate the landscape.

Nevertheless, TD executives said they expect to dominate the "hassle-free" convenience banking space from Maine to Florida when its 1,100 Commerce and Banknorth branches are converted to the TD Commerce brand in 2009.

"As you well know, in the financial-services industry, products and price can be matched in a millisecond," Mr. Masrani told the dozens of investors and analysts gathered for the investor day at "Commerce University, " a training ground for bank employees in Mt. Laurel, N. J. "But providing a legendary 'wow' customer experience -- founded on unparalleled convenience -- cannot be easily replicated by our competitors who simply do not have the locations we do, the customer conveniences we offer, the people we have, or, frankly, the hours we keep -- including seven-day banking across much of our network."

This year, TD plans to replace the prominent red "C" logo at Commerce with its new green TD Commerce colour scheme. The TK Banknorth branches will be converted next year.

The rebranding effort hasn't come without hiccups.

In parts of Massachusetts, a federal judge blocked some Banknorth branches from switching to the TD Commerce Bank name after another Commerce bank -- Commerce Bank & Trust Co. -- filed a lawsuit arguing the name change would confuse customers.

Beyond the dozen branches held up in the legal spat, the naming rights of the sports arena where the Boston Bruins and Celtics play is in limbo. The arena, sponsored by TD Commerce, is currently called TD Banknorth Garden.

Mr. Masrani said the dispute is giving him more grey hair. "Our name is TD Commerce. It has the globally known TD shield in front of it. We think that's a significant differentiator."

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RBC Capital Markets, 20 June 2008

Integration on track

The integration of Commerce Bancorp is underway with the leadership team announced and legal entities consolidated under one national charter. The bank has also started to close overlapping branches while continuing to open others in optimal locations, and still intends to meet its systems conversion target in H2/09 and cost synergy target of $310 million.

The bank reiterated its guidance for TD Commerce to contribute at least $750 million to earnings in 2008 and $1.2 billion in 2009 despite the tough economic environment and an expected increase in loan losses. Initiatives to grow earnings from the Q3/08 estimate of $250 million include organic balance sheet growth, improved spreads on loans and securities, expense initiatives and synergies from integrating TD Banknorth and Commerce. Total U.S. earnings currently make up about 20% of total earnings, and management expects this to grow to up to 25-30% of total earnings in upcoming years.

A smooth integration is key to TD's stock price since our forecast Tier 1 ratio of 8.1% at the end of Q4/08 gives TD very little room for slippage against profitability estimates, particularly when considering ratios based on tangible equity. TD's Tier 1 ratio of 9.1% is lowest of its peer group and the excess capital the bank generates between now and Q4/08 will be offset by a negative impact of 1.3% on the bank's Tier 1 ratio (given changes to the way the bank accounts for its investment in TD Ameritrade). However, if the year goes as management plans for TD, then we believe it can improve the ratio quickly after Q4/08 because TD generates about 20-30 basis points of Tier 1 capital per quarter.

Management reiterated that its #1 priority is integration related, but that a compelling acquisition would be considered. We believe this is reflective of the environment in U.S. banking, which may lead to banks being sold at attractive prices. We do not believe that TD could execute two integrations at the same time and any acquired bank would have to be left alone for a few years while the integration of TD Banknorth and Commerce Bancorp continues. We understand management's reluctance to categorically state that it will not participate in acquisitions, but do not believe that a transaction would be initially well received by investors.

We are still concerned about U.S. credit quality

TD Commerce has not yet seen major problems in its loan portfolio as some other U.S. banks have, and management believes that TD Commerce will be a positive outlier relative to peers. TD's management acknowledged the worsening economic environment but believes that it has adequate reserve coverage, and even if loan losses were higher, it would still expect to meet its earnings guidance unless the U.S. entered into a deep recession.

We are not as concerned about TD's loan losses as we are with other banks in the U.S., but we expect credit quality deterioration in the U.S. will continue especially in HELOCs, credit cards, automobile lending, construction lending, commercial real estate and leveraged lending.

• We believe TD's U.S. exposures (26% of total loans) are worth paying attention to, but we believe that issues are more likely to arise in 2009 than 2008 as TD fair valued Commerce Bancorp's loan book as at the acquisition closing date. The bank would have had a fair bit of visibility on potential near term impairments, in our view, and would have fair valued the loans that had the potential to become impaired in the near term.

• TD has been a positive outlier so far from a credit perspective, which management attributes to a focus on in-market lending, underwriting to hold, not participating in loans originated by brokers, avoiding the sub-prime market and exotic types of real estate lending, not having had to "reach for assets" to generate earnings growth since deposit growth was more rapid than average, and being located in a geographic segment that has held up better than other areas of the U.S.

• Provisions for credit losses have so far exceeded write-offs.

• Non-performing loans of 68 bps in Q1/08 compared to an average of 116 bps for retail banks with assets of $50-$250 billion while non-performing assets of 33 bps compared to an average of 83 bps. Both measures improved slightly from Q4/07 to Q1/08, although we expect deterioration in the upcoming year given the moribund state of the U.S. economy and broadening of credit losses to sectors other than those tied directly to residential real estate..

• The U.S. commercial lending portfolio has $29.7 billion outstanding as at March 31, 2008.

• Management believes it has adequate reserves as long as the U.S. avoids a deep recession.

• Geographic exposures are concentrated in the U.S. Northeast (Massachusetts 22%, New Jersey 18%, Northern New England 17%, Metro New York 14% and Metro Pennsylvania 14%) with only 2% exposure in Southeast Florida.

• Sector exposures included Investment real estate (36%, of which appears to be diversified by property type and geography), Manufacturing (8%), Health care (8%, Retail trade (7%), Wholesale (6%), Finance/Insurance (5%) and Other.

• The U.S. consumer lending portfolio has $15.9 billion outstanding as at March 31, 2008.

• The average FICO score is 745, and the bank states that rising delinquencies are within acceptable levels.

• The geographic distribution is mixed in the Northeast with only 1% in Florida.

• The product mix is 31% home equity 2nd lien, 30% residential mortgage, 17% home equity 1st lien, 14% indirect auto, 4% credit card and 4% other.

• Average loan to value in the HELOC portfolio is 62% while it is 67% in the first mortgage portfolio.

TD will maintain the core attributes that made Commerce Bancorp successful

Management spent a considerable amount of time conveying the importance of preserving many of the attributes that made Commerce Bancorp successful and taking advantage of its convenience advantage. Prior to the merger, both TD Bank and Commerce Bancorp had "owned the convenience space" and we expect them to leverage the brand further to maximize customer loyalty and to grow business.

• The high standards for customer service lead to an expensive model to execute but it leads to a high level of employee engagement and customer satisfaction, and ultimately attractive profitability in mature branches.

• Commerce Bancorp has ranked first in JD Power's customer satisfaction survey in recent years, and TD Banknorth's customer surveys showed satisfaction results that were comparable to TD Canada Trust.

• Commerce Bancorp has higher deposits per branch than its peers ($110 million versus an average of $71 million in spite of having many "immature" stores in its network while deposit growth has also outpaced the competition).

Successful features that the bank intends to maintain and leverage include:

• Longer branch hours and open 7 days per week / 360 days per year in many metro markets;

• Timely service on the phone and in the branch (Commerce completes 6,095 monthly transactions per teller, almost double its peers while its call centers are less automated than the competition's);

• Fast turnaround on account openings including on site issuing of debit cards;

• A refined product suite with fees that are lower than the competition's

• Upgrading legacy TD Banknorth branches with customer friendly designs and in branch services such as penny arcades for free coin counting and a friendly environment for kids and pets. The bank will initially target the branches in areas where there was overlap between Banknorth and Commerce;

• Building distinct "cookie-cutter" retail branches in key metro markets. TD believes it can open 300+ branches in Long Island, Metro Boston and New York/New Jersey, although we believe that the pace of expansion will be muted until the integration of TD Banknorth and Commerce is completed in H2/09. Management stated that 33 stores are set to open in 2008, with another 22 projected in 2009.

TD highlighted multiple growth initiatives

TD management acknowledged the tough operating and economic environment in the U.S., but it does not appear that it will slow down initiatives to add customers and share of wallet. The following are highlights of some opportunities and initiatives underway at TD Commerce.

• The commercial banking group will leverage TD Securities resources by providing new products for legacy Commerce's 150+ clients such as foreign exchange, interest rate derivatives and trade finance. With over 3,000 potential client prospects, it will look to add more debt capital markets, investment banking and private equity products and services. TD has shown that it can successfully bring some of TD Securities' expertise to U.S. banking clients in TD Banknorth.

• The retail banking group is focusing on:

• Cross-platform referrals. For example, insurance referrals, which are not limited by regulatory constraints in the U.S., rose 8% at TD Banknorth after TD introduced new sales practices and incentives, of which 36% were sold products;

• Extended branch hours in the legacy TD Banknorth branches to strengthen the convenience brand. TD Banknorth extended hours in 253 of 580 stores since early 2007, which helped increase the number of chequing accounts by 21,000 versus stores that maintained their operating hours;

• Sales initiatives. In addition to brand and marketing campaigns, TD Commerce is implementing sales revenue tracking to improve employee engagement, and surveys customers to continue improving products and services.

• Management intends on leveraging the best of both Commerce and Banknorth models. For example, penetration of home equity loans are 50% higher for TD Banknorth customers than Commerce Bancorp. The bank has already run pilot programs that showed similar results can be accomplished in Commerce branches. Growing credit cards is also something the bank plans on doing in the early years as a relatively easy way to take advantage of existing customer relationships.

• Retail deposit growth opportunities via new household origination and cross-sell initiatives. TD Banknorth's new household origination rate was 10.7% versus 21.7% at Commerce Bank (November 2006 – 2007). Conversely, the average deposit balance per household at Commerce Bank was $9,459 as at November 2007 versus $19,074 at TD Banknorth. Marrying the deposit growth capabilities of Commerce Bancorp as well as some of the attributes of TD Banknorth, and the maturing of recently opened Commerce Bancorp stores would lead to above-industry deposit growth.

• The business banking group intends to leverage product and distribution in order to grow its customer base and deepen relationships. For example, TD Commerce has a 16% share of 2.2 million potential customers in its footprint and would like to improve penetration to 20%. In addition, opportunity exists to increase the penetration rate of loan balances per business customer (6% penetration at Commerce and 19% at TD Banknorth) and deposit balances per business customer (99% penetration at Commerce and 92% at TD Banknorth). Initiatives to achieve these goals include enrolling more clients in BusinessDirect online banking and streamlining and automating underwriting processes.

• Other divisions such as wealth management, insurance and TD Ameritrade are also working on initiatives to leverage TD Commerce's distribution infrastructure and client relationships.

Valuation

TD (Sector Perform, Average Risk): Our 12-month price target of $69 is based on a price to book methodology. Our P/B target of 1.7x in 12 months is slightly lower than our target for banks given a lower ROE offset by its relatively lower exposure to headline risks and leading domestic retail franchise. It implies an approximate P/E multiple of 10.9x 2009E earnings, compared to the 5-year average forward multiple of 12.2x.

Price Target Impediment

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

Company Description

TD Bank Financial Group is Canada's second-largest bank by market capitalization. TD currently has more than 1,110 retail branches in Canada, 1110 branches in the U.S. and 250 retail brokerage offices. Our estimated 2008 earnings mix is as follows: TD Canada Trust (54%), US Personal & Commercial (16%), TD Securities (13%), TD Wealth Management (10%), and TD Ameritrade (7%).

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Scotia Capital, 20 June 2008

TD Commerce Bank Integration On Track

• The TD Commerce Bank Investor Day was positive as the bank reaffirmed its earnings target from TD Commerce Bank at $750 million and $1,200 million for fiscal 2008 and 2009.

• The bank indicated that integration is on track. Cost synergies of $310 million were affirmed.

Systems conversion is scheduled for the last half of 2009.

• Multiple state and federal charters were merged into one national charter. The bank emphasized its focus on successfully integrating its two legacy brands into TD Commerce Bank (green).

Strong Market Presence in Attractive Markets - Strong Brand

• TD Commerce Bank highlighted its strong market presence in attractive markets of metropolitan NY, Boston and Philadelphia. The bank's competitive advantage is branch location, branch design, customer service and brand.

• High customer service is driven by efficient tellers, free services such as a Penny Arcade, branches open seven days a week and branch experience.

• The bank is positioned for organic growth with market turmoil providing growth opportunities.

Minimal Real Estate Exposure Outside North-East U.S.

• Real estate exposure is 98% in the North-East U.S. and only 2% in Florida. The bank expects to be a positive outlier in credit quality and loan losses. Very little lending was done out of the bank's footprint.

Recommendation

• The Investor Day tone was very positive. We believe TD Commerce Bank has positioned itself for growth and has a high probability of being successful in the U.S. market.

• Our 2008 and 2009 earnings estimates remain unchanged at $5.70 per share and $6.60 per share, respectively. Our share price target is unchanged at $95 per share representing 16.7x our 2008 earnings estimate.

• We maintain a 2-Sector Perform on share of TD.

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Reuters, Lynne Olver, 19 June 2008

TD Commerce Bank, the U.S. unit of Toronto-Dominion Bank, has its hands full in integrating its recent Commerce Bancorp purchase, but would be "foolish" to ignore potential acquisitions along the East Coast, its chief executive said on Thursday.

"Obviously integration is our top priority," Bharat Masrani, president and CEO of TD Commerce Bank, told analysts at an investor briefing in New Jersey. "We're busy right now."

But if a "compelling" acquisition opportunity popped up because of turmoil in the U.S. banking market, "we'd be foolish not to look at it seriously," Masrani said.

He noted that this was the same answer he had given a year earlier, but stressed that TD has "a big integration" on its plate -- merging New Jersey-based Commerce Bancorp, which it acquired in March, into TD Banknorth, creating a larger retail bank with 1,100 U.S. branches, or "stores."

"From my perspective, in the U.S. we have now got scale, we think we can expand the model we have," Masrani said.

Ed Clark, president and chief executive of Canadian parent TD Bank, said that asset quality would be a big worry in any U.S. acquisition right now.

"I'm more inclined to see the knife bounce off the floor than try to catch it before it hits the floor, because I'm not a hedge fund manager," Clark said.

He also said TD would not go to the effort of building a customer-focused U.S. bank and then "dismantle it" by adding a new culture that did not fit.

Asked whether TD would try to increase its stake in 40 percent owned discount brokerage TD Ameritrade, Clark said it was "probably not" economically attractive to do so, given the capital the bank would have to put up

He called the existing Ameritrade set-up "a wonderful relationship" that was working well.

And executives said there is plenty of scope to cross-sell products and services between customers of Ameritrade and TD Commerce, to the benefit of both businesses.

Bank clients will be encouraged to open Ameritrade brokerage accounts, while Ameritrade customers will be encouraged to open new deposit accounts at the bank.

"We really believe there's a significant opportunity by leveraging the scale and distribution strengths of each other's businesses to reach these new audiences," said David Boone, TD Commerce's corporate development executive.

TD Commerce will put Ameritrade kiosks in various Boston-area branches as a pilot project this month.

During the investor briefing, executives highlighted TD Commerce's customer-friendly ways, including long branch hours, Sunday openings in urban areas, free pens and piggy banks, pet treats, and a coin-counting service known as Penny Arcade.

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Reuters, Phil Wahba, 17 June 2008

TD Ameritrade Holding Corp on Tuesday said it expected earnings in the current quarter to be at the high end of its previous forecast, as the discount brokerage also reported that average daily trading volume in May had risen by 3 percent from the previous month.

TD Ameritrade had previously said it expected to earn 27 cents to 33 cents a share in the quarter, up slightly from 26 cents in the year-ago period.

Growth in the company's monthly volume numbers was in line with that reported by Charles Schwab Corp last week. That led some analysts to attribute the gains, which came amid stagnant equity markets, to resilient retail investor trends than efforts by specific retail brokerages.

Analysts had expected industry volumes to decline in April and May with lower market volatility.

TD Ameritrade has said that asset management is now the focus of its business development. It reported client assets rose 9 percent in May from the previous year to $326 billion, a gain of 2 percent over April. Some of that growth came from its acquisition of Fiserv, completed in February.

In May, average fee-based investment balances shot up 55 percent to $79.2 million from a year ago.

Analysts say developing asset management is more important for the company's growth prospects than trading volumes.

"The market for online equity retail trading is not a high growth market given high penetration rates and Ameritrade needs to evolve its model more in terms of serving the investor versus being a place to trade," said Michael Hecht, an analyst with Banc of America Securities.

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