CIBC Investor Forum

BMO Capital Markets, 1 October 2010

Scotiabank has been upgraded to Outperform, while Royal Bank’s rating slipped to Market Perform. Greater clarity on new bank capital rules has mitigated our concern they would hinder BNS’s international growth strategy. Moreover, we believe that the bank’s international operations provide a clear growth path, relative to its peer group, after credit costs have ``normalized. While the bank does trade at a premium valuation, this valuation not only reflects greater clarity in growth prospects, but also the bank’s much better-than-expected credit performance during the last cycle and better-than-average dividend growth potential. John Reucassel is forecasting an increase in earnings per share to $3.98 in fiscal 2010 and $4.40 in fiscal 2011.

We originally upgraded RY based on its leading franchise position in domestic banking, domestic wealth management, domestic investment banking, acquisition opportunities, growing global wholesale banking opportunities and strong capital position. However, we under-estimated the volatility in trading and have over-estimated the speed of the earnings recovery in wealth management, insurance and the international businesses. Since April, the shares have been the worst-performing shares in the sector by a wide margin. While we continue to believe that the bank’s franchises will ultimately reward Royal shareholders, the current valuation may provide better relative returns elsewhere.

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Scotia Capital, 1 October 2010

Summary CIBC Investor Forum - Retail Markets

• CIBC held an Investor Forum yesterday afternoon focusing on the bank's Retail Markets division. The bank highlighted its improving core revenue trends and net income growth, citing revenue growth 2010 YTD of 9% with net income growth of 16%. This is a significant improvement from underperformances in fiscal 2008 and 2009. Net income growth was driven by positive operating leverage of 2% and lower loan losses. Credit trends continue to be positive with both credit card and personal loan losses declining.

• Revenue growth was relatively balanced from all segments with Personal Banking and Wealth Management each up 9% with Business Banking revenue up 6%.

• The bank also recapped its recent investments for growth including the purchase of Citigroup's Canadian MasterCard business and CIT asset based lending business, as well as significant branch expansion and investment in its mobile banking application and brand.

• In terms of market position, CIBC highlighted it was #1 in cards, #2 in mortgages, retail brokerage (revenue & assets) and ABMs, #3 in branch network, personal deposits/GIC (up from #4), business deposits and mutual funds. The improvement in market positioning in personal deposits/GICs is due partly to branch expansion & relocation. CIBC lagged in business lending at #4 and personal lending at #5. The gap in share on personal lending is $8 billion.

• CIBC provided a three-year target for the retail bank at $3 billion versus its $2.16 billion YTD Q3/10 annualized, representing an 11.6% CAGR.

• In terms of investing in its branch network, CIBC has expanded evening and Saturday hours at 400 branches and is building, relocating and expanding 70 branches by 2011.

• The bank acquired $2 billion in MasterCard outstanding balances and 570,000 active accounts from Citigroup. The acquisition increased CIBC's credit card balances outstanding to $15.8 billion and market share to 18.7% from 16.6%. The Citigroup MasterCard purchase is immediately accretive to earnings. The bank is not taking on credit card delinquent accounts.

• Mortgage & personal lending growth have been driven by mortgages at 7% with personal lending lagging at 2% partially due to a conservative lending approach. The bank loan growth outlook varied by product with mortgages at 4%, personal loans 5%, credit cards 2%-4% and business lending 5%-8%.

• In Wealth Management, CIBC cited it was #3 among the banks and #5 in the industry and leading in managed solutions (wrap products). Mutual fund sales performance has improved with 2010 long-term sales the highest since 2004.

• The presentation in general provided guidance on the bank's overall strategies in each of its three segments, Personal Lending, Business Banking, and Wealth Management.

• Personal and business lending are two products where the bank is underrepresented, providing opportunity for market to above-market growth.

• The presentations were positive although financial information was light. We expect improved performance from CIBC Retail Markets going forward. However, major Canadian banks are focused on retail banking and with slowing volume growth, competition is expected to remain stiff.

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Barron's on TD Ameritrade

Barron's, Sandra Ward, 18 September 2010

Hard to believe amid all the hand-wringing about the direction of the economy and the markets, but day trading is alive and well.

A healthy number of individuals continue to indulge a passion for buying and selling stocks, and options and futures on those stocks, on a daily basis, in spite of the continued exodus from actively managed stock mutual funds and intensified interest in bond investments. For proof of these animal spirits, look no further than TD Ameritrade. A leader in online brokerage services based in Omaha, Nebraska, its clients placed a record 413,000 trades a day in the firm's fiscal third quarter, ended June.

Daily trading volume dropped during the summer months, as is typical for the season. But the seasonal drop was exacerbated this year amid renewed fears of a global slowdown brought into sharp relief by continued high unemployment, European debt troubles and looming financial reforms in the U.S. Nonetheless, the impact was softened by strong net inflows of new assets. TD Ameritrade continued to rake in new assets at a pace exceeding the firm's yearly target range of 7% to 11%. Indeed, the firm collected net new assets of $28 billion in the year through June 30, a 12% annualized rate of growth and up 32% from the first nine months of 2009. It now has a total of $324 billion in client assets.

TD Ameritrade appears to be benefiting as investors migrate from the big investment firms to a more self-directed approach to their portfolios, trading for their own account or enlisting the aid of a financial advisor, many of whom use TD Ameritrade as a platform for client accounts. The firm is also gaining from the "breakaway broker" phenomenon, as more and more brokers are choosing to operate independently as registered investment advisors and using TD Ameritrade for their "back office" needs. A sales force whose compensation is linked to bringing in new assets also has made a big difference.

The company's strong relationship with its 45% stakeholder and triple-A-rated Toronto Dominion Bank has also bolstered its asset-gathering efforts. And its 2009 acquisition of thinkorswim Group, the leader in the profitable and fast-growing options-trading arena (Barron's has named thinkorswim the No. 1 online broker two years in a row, and in four of the past five years), puts more capabilities into the hands of its big base of active traders and provides other customers with important tools for better managing their money. And thinkorswim is just the latest in a long line of acquisitions that TD Ameritrade has successfully integrated into its operations.

TD Ameritrade has taken itself beyond its role as simply a discount broker by offering an expanded line of wealth-management services that appeals to a wider audience, as suggested by the improvement in its ability to boost assets under management.

Reflecting this growth in assets, the company is on track to deliver earnings gains of 19% in fiscal 2011 and nearly 30% in fiscal 2012 based on consensus earnings estimates of $1.21 a share for next year and $1.56 the next. Yet, the company isn't getting a lot of credit for this increase, and that's resulted in a wide gap between its expected growth and its stock price: TD Ameritrade shares sport a P/E multiple of just 12.8 times fiscal 2011 estimates and 9.9 times 2012. Charles Schwab, in contrast, trades at 25 times this year's expected earnings and 15.3 times 2011 consensus estimates.

Asset managers typically trade at a 20% to 40% premium to the market multiple. TD Ameritrade wouldn't command the full premium because of its discount brokerage, but its fans argue a higher multiple is warranted.

Its valuation also overlooks a clean balance sheet, a recently authorized 30-million-share stock buyback program (it expects to purchase 12 million shares between now and the middle of November), the possibility of a dividend payout and the potential for a big earnings impact once interest rates begin to rise. Indeed, a 25-basis-point increase in the fed-funds rate would be the equivalent of a seven-cent rise in annual earnings.

"They have extraordinary leverage to interest rates," says Mac Sykes, a brokerage analyst at Gabelli & Co. He considers the stock attractively priced at current levels based on its normalized earnings growth, operating leverage from economies of scale and positive impact from increases in interest rates—widely seen as occurring by the end of next year. Sykes puts a private market value of $24 on the shares, based on a multiple of nine times his enterprise value to Ebitda estimate of $1.4 billion in 2011. It currently trades at 6.2 times EV/Ebitda.

Morgan Stanley's Celeste Mellet Brown recently reiterated an Overweight rating on TD Ameritrade shares after hosting a dinner meeting with management Sept. 7. She cited outsized growth in net new assets, upside potential from a rise in interest rates, the likelihood of return of capital to shareholders and a stock price at bargain levels. Brown attaches a price target of $25 to the shares, which would represent a 61% gain from the current $15.50.

TD Ameritrade has $63 billion in interest-sensitive assets, of which $42 billion is in higher-yielding insured deposit accounts with Canada's Toronto Dominion Bank. Low interest rates have been a problem for all financial institutions and there's no question they are hurting TD Ameritrade's net interest margin and, in turn, operating margins.

But the firm is less interest-rate-sensitive than most, including the granddaddy of all discount brokers, Charles Schwab. About 52% of TD Ameritrade's revenues came from trading in 2009, compared with 24% for Schwab, which has more customers in interest-bearing accounts. The near zero fed-funds rate has led Schwab to waive fees associated with its money-market funds to keep the funds' yield from slipping into negative territory. Schwab also said last week it will take a charge of $130 million in the third quarter to cover losses in its money-market funds related to a defaulted investment.

Another potential catalyst to move TD Ameritrade shares higher is the option Toronto Dominion Bank has to buy the rest of the shares it doesn't already own under a shareholder agreement inked in 2006, when Toronto Dominion's U.S. brokerage business, TD Waterhouse, merged with Ameritrade. Under the agreement, which runs through January 2016, its ownership is capped at 45% between now and 2016 but allows for the bank to make a tender or merger offer for the remaining shares prior to the agreement's end.

TD Bank hasn't commented on its intentions except to say it is happy with its ownership of TD Ameritrade. But it is instructive to note that it bought a stake in the former BankNorth in 2004 and integrated some operations before eventually buying the rest of the bank in 2007. Yet, TD Bank is important to TD Ameritrade's future in other ways. TD Ameritrade plans to tap into the 1,300 branches the bank operates on the East Coast, making its brokerage services—trading, investing and advising—available to the bank's customers.

A precursor of this plan has been in place on Sixth Avenue in Manhattan, where a TD Bank branch and a TD Ameritrade branch sit cater-cornered to each other and refer clients to each other's products.

Did somebody say animal spirits?

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A long string of acquisitions from September 2001 through June 2009 has helped TD Ameritrade bulk up.;

Review of Banks' Q3 2010 Earnings

Scotia Capital, 13 September 2010

Event

• Canadian banks' third quarter operating earnings were disappointing, missing earnings estimates, the first quarterly miss of the earnings recovery cycle. ROE: 15.9%, RRWA: 2.06%, Tier 1: 12.8%.

Implications

• The major collapse in trading revenue from record levels a year earlier cut wholesale earnings in half. Trading revenue as a percentage of total revenue declined to the lowest level in over a decade. Strong retail earnings and lower LLPs did not fully offset the wholesale earnings drag, resulting in a 4% YOY decline in earnings. We trimmed our 2011 earnings estimates 4% based on the tighter NIM outlook and expected slower retail loan growth.

Recommendation

• We continue to recommend an overweight position in bank stocks, with attractive valuation, signs of lower regulatory risk, and uncertainty partially offset by concerns about economic growth. The prospect of the resumption of dividend growth is key to a shift in investor sentiment and a catalyst for higher share prices and higher P/E multiples.

• We maintain 1-Sector Outperform ratings on TD, NA, CWB, and BMO, and 2-Sector Perform ratings on CM, BNS, LB, and RY. Our order of preference is: TD, NA, CWB, BMO, CM, BNS, LB, and RY.

Earnings Miss – First of Recovery – Tough Comps

• Canadian banks’ third quarter operating earnings were disappointing, missing earnings estimates, the first quarterly miss of the earnings recovery cycle. The major collapse in trading revenue from record levels a year earlier cut wholesale earnings in half. Trading revenue as a percentage of total revenue declined to the lowest level in over a decade. Strong retail earnings and lower loan losses did not fully offset the wholesale earnings drag, resulting in a 4% year-over-year (YOY) decline in earnings. Probably the biggest disappointment in the quarter was the sequential decline in both the overall net interest margin (NIM) and retail NIM.

• We trimmed our 2011 earnings estimates 4% based on the tighter NIM outlook and expected slower retail loan growth, particularly in mortgages, as concern about the housing market surfaces with lower economic growth. Economic growth estimates for 2011 have declined significantly (Scotia Economics recently reduced its 2011 GDP forecast to 2.3% from 2.6%).

• Our 2011 earnings estimate is for growth of 11% off a weaker 2010 earnings base. The risk to our earnings growth forecast is that capital market activity does not return to a more normalized level or economic growth slows further and the housing market has a sharp correction versus a moderate correction.

• The third quarter earnings decline of 4% YOY comes after three straight quarters of positive (although modest) earnings growth, which were the first since Q4/07. The earnings growth this recovery cycle is weaker than past cycles due to stronger cyclical bottom earnings, counter-cyclically strong wholesale earnings in 2009, weak economic recovery, the out-of sync housing cycle, lower earnings sensitivity to credit, and margin pressure (low level of rates/Basel III).

• The highest earnings growth in the third quarter were from CWB and CM at 26% and 22%, respectively, with CWB enjoying a major recovery in margin and solid loan growth and CM showing improvement in retail and easier comps. RY earnings declined 28%, as it had the most difficult comps of the group and recorded a massive drop in trading revenue due to its strong trading platform in the United Kingdom/Europe. RY seems to have suffered the most from the capital markets fallout from the Sovereign Debt Crisis, particularly in the month of May. NA and TD saw earnings decline a more modest 12% and 3%, respectively. BMO, LB, and BNS managed modest earnings growth of 9%, 5%, and 3%, respectively.

• In terms of beats this quarter, CM and NA led the group with modest beats on strong retail and relatively solid wholesale. TD and BNS were more or less in line, with RY the big miss on trading and BMO also missing on trading.

• Profitability for the bank group in terms of operating return on equity declined to 15.9%, the lowest level since the fourth quarter of 2002, reflecting the weakness in wholesale and the banks’ deleveraging of the past several years. The bank group ROE was led by CM and BNS.

• Return on risk-weighted assets (RRWA) remains near record levels at 2.06%, aided by deleveraging and active management of risk-weighted assets. TD and CM produced the highest RRWA of the group with TD at an impressive 2.65%. This quarter’s earnings level, assuming 30 bp in loan loss provisions, would result in ROE of 16.7% with RRWA of 2.20%.

• The weak earnings this quarter were due primarily to the 51% YOY decline in wholesale banking earnings. The wholesale banking earnings tumble was due to an astounding $2.4 billion decline in trading revenue to $1.2 billion from the record $3.6 billion a year earlier.

Trading revenue declined to 5.6% of total revenue, the lowest level since Q4/98

• In addition to the dreadful wholesale earnings, the net interest margin declined, putting further pressure on results. The net interest margin expansion, after stalling over the past few quarters, actually declined both sequentially and YOY. The margin was negatively impacted by higher liquidity costs, higher BAs, price competition, and perhaps higher costs due to extension of term. The overall net interest margin declined 8 bp YOY and 6 bp quarter over quarter (QOQ). The retail margin declined 4 bp QOQ and was flat YOY.

• The C$/US$ appreciated 9% YOY, negatively impacting earnings, although the impact declined from the 21% YOY appreciation in Q2/10 and is expected to decline further with 3% YOY appreciation expected in Q4/10.

• Domestic Retail and Wealth Management was the star business segment in the quarter, reporting record earnings and a 20% YOY increase. Retail banking loan growth was impressive at 10% and was the major driver in retail earnings.

• Domestic retail and wealth earnings growth was led by CM, NA, TD, and BNS at 45%, 28%, 24%, and 20%, respectively. RY and BMO lagged the bank group with moderate growth of 10% and 12%, respectively, and consequently recorded the weakest overall earnings performance of the bank group.

• RY’s and BMO’s trading revenues, significantly weaker than the bank group’s, were compounded by the lower growth in domestic retail and wealth.

• Credit trends remained positive as loan loss provisions (LLPs) declined $882 million YOY and $250 million QOQ to $1.6 billion or 50 bp of loans. LLPs have declined from the quarterly peak of 84 bp and are expected to trough in the 25 bp to 30 bp range in the next three or four years with our 2011 forecast at a conservative 46 bp.

• Gross Impaired Loan (GIL) levels were stable at $19.3 billion or 1.5% of loans. However, GIL formations were much improved as they moderated to $3.2 billion, the lowest since Q3/08, and nearly half the quarterly peak recorded in Q1/09.

• The bank group continued to build its capital positions with Tier 1 capital ratio improving 21 bp QOQ and 128 bp YOY to 12.8%. TCE as a percentage of RWA also improved 51 bp sequentially to 9.9%. Bank dividends remain frozen pending regulatory clarity or a nod from the regulator. Banks paid out 50% of operating earnings in the form of common dividends this quarter. Banks continue to generate strong earnings and actively manage risk-weighted assets.

• Bank balance sheets remain high quality with an unrealized security surplus, increasing to $3.1 billion versus $2.1 billion in the previous quarter.

Remain Overweight – Regulatory/Capital Clarity Pending – Prospects for Resumption of Dividend Growth

• We continue to recommend an overweight position in bank stocks, with attractive valuation and signs of lower regulatory risk and uncertainty partially offset by concerns about economic growth.

• Basel is expected to release capital ratio calibration shortly, with moderation expected from its original draconian proposals. We expect Canadian banks’ Tier 1 common ratio to comfortably meet requirements with negligible restrictions on dividend distributions. However, dividend increases are likely to be modest and limited in the near term (see Exhibit 14) based on our lower 2011 earnings estimates and current payout ratios versus the target range.

• NA, TD, CWB, and LB have the lowest dividend payout ratio and the most leeway to increase their dividends. We expect NA, CWB, LB, and perhaps TD to increase their common dividends as early as December 2, 2010, when they release their fourth quarter earnings.

• The prospects for the resumption of dividend growth is key to a shift in investor sentiment and a catalyst for higher share prices and higher P/E multiples. Bank P/E multiples at 13.0x trailing and 11.5x 2011E are attractive, in our opinion, and well below the high of 15x reached over the past 10 years.

• Bank dividend yield at 3.9% is 133% of the 10-year government bond yield versus the historical mean of 59%, representing three standard deviations above the mean.

• We maintain 1-Sector Outperform ratings on TD, NA, CWB, and BMO, and 2-Sector Perform ratings on CM, BNS, LB, and RY. Our order of preference is: TD, NA, CWB, BMO, CM, BNS, LB, and RY.

Third Quarter Highlights

• Third quarter operating earnings declined 4% YOY and 2% from the previous quarter. The main trends in the quarter were a continuing decline in loan loss provisions, strong Domestic Banking earnings, and very weak wholesale earnings driven by a collapse in trading revenue.

• CM and NA beat consensus estimates by 8% and 3%, respectively, with TD and BNS more or less in line and RY missing estimates by a wide margin of 15%. Third quarter earnings were led by CM and BMO, with YOY growth of 22% and 9%, respectively, due to strong domestic retail banking earnings and positive credit trends. BNS earnings growth was modest YOY, with TD, NA, and RY declining.

Domestic Banking & Wealth Management – Strong

• Domestic banking earnings, including wealth management, were very strong at $4.0 billion, up 20% YOY and an impressive 10% sequentially. Earnings growth was led by CM, up 45% (although boosted by treasury allocation), followed by NA, TD, and BNS up 28%, 24%, and 20%, respectively. BMO and RY retail earnings lagged the bank group with moderate growth of 12% and 10%, respectively, from a year earlier.

Wholesale Banking Earnings Weak

• Wholesale earnings were $1.0 billion in the third quarter, declining 37% QOQ and 51% from a year earlier. Wholesale bank earnings were weaker due to a collapse in trading revenue.

• Wholesale earnings represented 18% of total operating earnings from operations in the quarter, with NA having the largest portion of its earnings coming from wholesale at 34%, followed by BNS at 24%, BMO at 18%, CM at 17%, RY at 16%, and TD at 12%.

Trading Revenue Collapses

• Trading revenue in the third quarter collapsed to $1.2 billion from $3.6 billion a year earlier and from $2.6 billion in the previous quarter. Trading revenue in the third quarter was 5.6% of total revenue, down from the Q2/10 level of 11.7%, and below the five-year average of 9.6%.

• The trading strength indicator was highest for CM at 117%, followed by BNS at 84%, TD at 70%, NA at 61%, and BMO at 40%, with RY at a bank group low of 15%. This indicator was a factor in earnings underperformance this quarter.

Net Interest Margin Declines QOQ

• The bank group’s NIM declined 6 bp QOQ and 8 bp YOY to 1.84%, reinforcing our view of a moderating net interest margin. The compression in banks’ NIM has been affected by a narrowing of wholesale spreads (Prime, BAs), a flattening yield curve, and an increasingly competitive pricing environment. The retail NIM was flat from a year earlier, but declined 4 bp sequentially.

Credit Losses Decline

• Loan loss provisions this quarter were $1.6 billion or 50 bp of loans, down 35% from $2.5 billion or 81 bp of loans from a year earlier, and down 13% from the previous quarter level of $1.9 billion or 61 bp of loans. LLPs for BMO, RY, and NA declined significantly from a year earlier, by 40%, 39%, and 39%, respectively. BNS, TD, and CM LLPs declined 36%, 31%, and 30%, respectively, from a year earlier. We believe that LLPs have peaked on a quarterly basis and on an annual basis in 2009.

• CM recorded the highest LLP levels this quarter at 64 bp, followed by RY at 58 bp, TD at 51 bp, BMO at 49 bp, BNS at 42 bp, and NA at a bank group low of 18 bp.

• Our 2010 and 2011 LLP forecasts declined to $7,330 million or 58 bp of loans and $6,140 million or 46 bp of loans, respectively, from $7,760 million or 62 bp of loans and $6,780 million or 52 bp of loans, respectively.

Gross Impaired Loan Formations Decline

• Gross impaired loan formations this quarter were $3.2 billion or 0.25% of loans, declining from $5.0 billion or 0.41% of loans a year earlier and from $4.1 billion or 0.33% of loans in the previous quarter. RY, TD, and CM formations declined sequentially by 23%, 2%, and 2%, respectively, while BNS formations increased 4%. BMO gross impaired loan formations declined 34% QOQ, excluding the impact of the FDIC-assisted AMCORE Bank acquisition. Including the impact of the acquisition, GIL formations declined 84% from the previous quarter.

Gross Impaired Loans Stable

• Gross impaired loans for the bank group were stable at $19.3 billion or 1.52% of loans from $19.2 billion in the previous quarter.

Capital Ratios Remain High

• Tier 1 capital ratio for the bank group hit another all-time high of 12.8%, led by CM at 14.2%, followed by BMO at 13.5%, NA at 13.0%, RY at 12.9%, TD at 12.5%, and BNS at 11.7%. Risk-weighted assets continued to decline, down 2.3% YOY, aiding capital ratio increases.

Profitability

• Canadian bank profitability declined in the third quarter to 15.9% ROE for the group. CM and BNS led the bank group with ROEs of 21.5% and 18.1%, respectively, while TD lags the group with an ROE of 13.6%. However, TD boasts the highest RRWA of 2.65%, followed by CM at 2.39% and NA at 1.97%. BMO lags the bank group at 1.62%.

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Dow Jones Newswires, Caroline Van Hasselt, 9 September 2010

Canada's banks topped their global peers as the world's soundest for third straight year, the World Economic Forum said. But, the country slipped in terms of its global competitiveness.

Canada ranked ahead of New Zealand, Australia, Lebanon, Chile and South Africa in bank soundness, the World Economic Forum said in its closely watched annual global competitiveness rankings. Panama was ranked 7th, while the U.S., which had to bail out major banks and Wall Street firms to avert a financial-system collapse, ranked 111th in terms of bank soundness, just ahead of Germany and Iran.

Canada's Finance Minister Jim Flaherty said effective supervision, not regulation, is the key to ensure financial system soundness. None of Canada's banks required bailouts during the 2007-2008 global financial crisis.

"Regulation alone is not necessarily the answer to the problem. Many of the institutions that failed around the world were regulated. The key is effective supervision," he said in a statement. "Today's ranking by the World Economic Forum is further evidence that Canada's model does work and is an example to the world."

But Canada still lags on plenty of other indicators.

In global competitiveness, Canada slipped to 10th from ninth, overtaken by the Netherlands.

With a population of 33.6 million, Canada is twice the size of the Netherlands, but it's far less productive. Canada's gross domestic product per capita is $39,669, compared to the Netherlands' GDP per capita of $48,223, the World Economic Forum said.

Canada could enhance its competitiveness and productivity by improving "the sophistication and innovative potential of the private sector, with greater R&D spending and producing higher on the value chain," the Geneva-based think tank said.

Canada also fell short in other rankings, placing 39th in restriction on capital flows, 22nd in securities-exchange regulations and 24th in terms of ease of access to loans and 14th in terms of affordable financial services.

Switzerland took top billing in global competitiveness for a second year, while the U.S. fell two places to fourth, overtaken by Sweden and Singapore.

World Economic Forum, which sponsors the annual gathering of world leaders in Davos, Switzerland, provides rankings on more than 100 indicators for 139 economies.

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TD Bank Q3 2010 Earnings

Scotia Capital, 3 September 2010

Event

• TD operating EPS declined 2% to $1.43, in line with expectations.

Implications

• Earnings were solid, driven by a strong performance at Canadian P&C (TDCT) with earnings up 24% YOY, followed by U.S. P&C up 19%, and Wealth Management up 10%, offset by a 45% decline in Wholesale. The bank viewed the Wholesale, earnings decline as normalization. The major weakness was in Wholesale driven by a decline in trading, although trading was solid in the context of the market. LLPs declined as credit trends improved. Retail margin was flat QOQ with overall margin declining. ROE was 13.6%, RRWA was 2.65%, Tier 1 Capital is 12.5%.

• TDCT continues to be the main driver in earnings with revenue growth of 8% driven by volume as the bank gained market share in both personal & business lending.

Recommendation

• Our 2010E EPS is unchanged at $5.85. We have reduced our 2011E EPS to $6.50 from $6.60 due to lower economic growth outlook and moderating net interest margin as the prospect for higher interest rates is delayed. Our one-year target price is unchanged at $90. We maintain our 1-SO rating based on strong retail franchise and improving earnings in the U.S.

Items of Note

• Reported cash earnings were $1.41 per share including a $9 million after-tax or $0.01 per share gain in fair value of CDS hedging the corporate loan book, $14 million after-tax or $0.02 per share loss in fair value of derivatives hedging the reclassified portfolio, and $5 million after-tax or $0.01 per share restructuring charge relating to U.S. P&C acquisitions.

Canadian P&C Earnings Increase 24%

• Canadian P&C (TDCT) earnings increased 24% to $841 million from $677 million a year earlier, with high revenue growth driven by strong volume, lower loan loss provisions, and controlled expenses.

• Real estate secured lending was strong increasing 12% (incl. securitization), with consumer loan volumes increasing 13% and business loans and acceptances increasing 5%.

• Deposit growth was also strong with personal deposits up 4% and business deposits increasing 14%.

• TDCT had solid revenue growth of 8.1% with expense growth of 4.4% for positive operating leverage of 3.7%.

• Retail net interest margin was flat sequentially and declined 4 bp from a year earlier to 2.92%.

• Card service revenues were solid at $216 million versus $197 million the previous quarter and $197 million a year earlier.

• LLPs declined to $236 million from $256 million in Q2/10 and from $290 million a year earlier.

• Insurance earnings were weaker this quarter with insurance revenue, net of claims, at $239 million versus $287 million in the previous quarter and $253 million a year earlier.

Total Wealth Management Earnings Solid

• Wealth Management earnings, including the bank’s equity share of TD Ameritrade, were solid at $179 million, an increase of 10% YOY.

Canadian Wealth Management Earnings Increase 23%

• Domestic Wealth Management earnings increased 23% YOY to $117 million.

• Operating leverage was positive 4.2%, with revenue increasing 9.6% and expenses increasing 5.4%.

• Mutual fund revenue increased 18% to $216 million from a year earlier.

• Mutual fund assets under management (IFIC, includes PIC assets) increased 11.1% YOY to $62.4 billion.

TD Ameritrade – Earnings Solid

• TD Ameritrade contributed $62 million or $0.07 per share to earnings in the quarter versus $56 million or $0.06 per share in the previous quarter and $68 million or $0.08 per share a year earlier. TD Ameritrade’s contribution represented 4% of total bank earnings.

U.S. P&C Earnings Increase 19% - Reg. E to Reduce EPS (est.) $0.03- 0.04/Quarter

• U.S. P&C earnings increased 19% YOY to $287 million or $0.33 per share from $242 million a year earlier, representing 19% of total bank earnings. Earnings were negatively impacted by $25 million due to a strong Canadian dollar. Earnings also increased 17% sequentially due to strong retail fee growth from new pricing structure post Commerce integration and the Riverside acquisition.

• Loan loss provisions in the U.S. declined to $131 million or 0.80% of loans versus $168 million or 1.10% of loans in the previous quarter and $183 million or 1.06% a year earlier.

• Net interest margin declined 12 bp from the previous quarter primarily due to lower prepayment speed on loans and securities. Spreads on deposits and loans remained stable.

• TD disclosed that Regulation E is expected to reduce revenue beginning in Q4/10 by approximately US$40 million-50 million a quarter after taking into consideration mitigation strategies. This is expected to reduce earnings by US$25 million-$35 million or $0.03-$0.04 per share per quarter. The reduction represents approximately 10% of U.S. P&C segment earnings or 2% of overall bank earnings.

• The amendment of Regulation E, Electronic Fund Transfer Act, prohibits financial institutions from charging fees to consumers for paying automated teller machine and point of sale transactions that result in overdraft.

• The negative impact of Reg. E, net of mitigation strategies is slightly greater than expected but not significantly material overall.

U.S. Platforms Combine to Represent 23% of Earnings

• U.S. P&C and TD Ameritrade contributed $349 million or $0.40 per share in the quarter, representing 23% of total bank earnings from operations in the third quarter, down from a high of 29% in Q4/08.

Wholesale Banking Earnings Weaken

• Wholesale banking earnings were $179 million, down 45% from $327 million a year earlier, although down only 19% from $220 million in the previous quarter. The bank views these wholesale earnings as a more normal level.

Trading Revenue Declines but Doesn't Collapse

• Trading revenue declined to $300 million versus $402 million in the previous quarter and a record $633 million a year earlier.

• Interest rate and credit trading revenue was weak at $107 million versus $440 million a year earlier and $193 million in the previous quarter. Equity and other trading revenue increased to $94 million from $39 million a year earlier but declined from $105 million in the previous quarter. Foreign exchange trading revenue declined to $99 million versus $154 million a year earlier and $104 million in Q2/10.

Capital Markets Revenue Stable

• Capital markets revenue was $318 million versus $368 million in the previous quarter and $342 million a year earlier. Underwriting and advisory included in capital markets revenue was down at $77 million versus $83 million in the previous quarter and $105 million a year earlier.

Security Gains Low - Unrealized Security Surplus Modest

• Security gains were low at $10 million or $0.01 per share versus $47 million or $0.04 per share in the previous quarter and a loss of $90 million or $0.07 per share a year earlier. Unrealized security surplus declined to $269 million from $285 million in the previous quarter.

Securitization Revenue and Economic Impact

• Loan securitization revenue declined to $110 million from $123 million in the previous quarter.

• Securitization economic impact was positive $68 million pre-tax, or an estimated $0.05 per share after-tax, versus $0.07 per share in the previous quarter and $0.04 per share a year earlier. Securitization activity is recorded in the Corporate segment.

Loan Loss Provisions

• Specific loan loss provisions declined to $339 million or 0.51% of loans from $425 million or 0.67% of loans in the previous quarter and from $492 million or 0.76% of loans a year earlier.

• We have reduced our 2010 LLP forecast to $1,650 million or 0.61% of loans from $1,800 million or 0.67% of loans. Also, we have reduced our 2011 LLP forecast to $1,300 million or 0.47% of loans from $1,600 million or 0.56% of loans due to improving credit trends.

Loan Formations Decline

• Gross impaired loan formations before debt securities and FDIC covered loans declined to $835 million versus $852 million in the previous quarter, the lowest it has been since Q4/08. U.S. gross impaired loan formations declined to US$375 million from US$393 million in the previous quarter.

• Gross impaired loan formations were $1,181 million in the quarter, including $346 million in debt securities classified as loans and FDIC covered loans versus $1,273 million including $421 million in debt securities classified as loans in the previous quarter.

• Gross impaired loans increased to $3,337 million (including $1,160 million in debt securities reclassified as loans and FDIC covered loans) or 1.25% of loans from $3,032 million (including $814 million in debt securities) or 1.16% of loans in the previous quarter.

• Debt securities gross impaireds increased in the quarter, however the fair value of this portfolio (Commerce acquisition, March 2008) is greater than the book value or carrying value.

• Net impaired loans increased to $758 million from $430 million the previous quarter due mainly to the debt securities reclassification.

Tier 1 Capital – 12.5%

• Tier 1 ratio increased to 12.5% versus 12.0% in the previous quarter and 11.1% a year earlier. Total capital ratio was 16.0% versus 15.5% in the previous quarter.

• Tangible common equity to risk-weighted assets (TCE/RWA) increased to 11.7% versus 10.3% the previous quarter.

• Book value per share increased 7% from a year earlier to $43.41.

• Risk-weighted assets were flat from a year earlier at $189.2 billion and increased 1% QOQ.

• • • • • • • • •

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Scotiabank Q3 2010 Earnings

TD Securities, 1 September 2010

Investment Thesis. The quarter was largely inline with updated expectations in terms of the bottom-line number and key themes.

Domestic Retail turned in another good quarter despite softer margins on good volumes and improving credit. Overall, credit came on much better than expected. Wholesale was soft, but not materially disappointing relative to reduced expectations. To us, International had a decent quarter and continued to earn through some headwinds reasonably well.

From here, we expect growth in Domestic retail on modest volumes and improved credit, and better Wholesale on a potential bounce back in Trading. International remains the key variable in our view. We believe we have been conservative, but expect to see some improved trends in the coming quarters with the potential for a much stronger earnings contribution.

Scotia remains among the best positioned of any of the Canadian banks to capitalize on a recovery scenario in our view (i.e. superior growth in International, easing credit costs, a return of Business lending). Despite some strong recent performance, on our unchanged Target Price we see good upside. Reiterate Buy.

Reaction to Q3/10 Results. There appeared to be very little to get overly worried or excited about in Scotia’s results this quarter. Investors continue to note the strength of the volume trends in the bank’s Domestic Retail operations, having been among the best in the group for the last 2-3 quarters. However, the notable down tick in margins is somewhat worrisome (more on that below).

There was a fairly muted response in the stock initially, but it closed the day down just over 1% amid a mixed tape for the Canadian banks.

Better than expected credit trends were encouraging, relative to concerns that Scotia’s PCLs might run higher for longer, given the bank’s International and Commercial/Business focus. However, improving credit has really ceased to be much of a catalyst for higher expectations.

The wildcard in our view, and in the view of many clients, continues to be International. Through some noise on the quarter, the bottom-line result seems to have been largely inline with broad expectations (it was better than our number) and it is encouraging that the segment can continue to earn through some headwinds.

However, underlying volume trends (to the extent they can be deciphered) appear to be fairly modest. This is not entirely surprising, and we still hold a fairly constructive outlook, but at this stage it does require some faith/optimism that trends will eventually pick-up; which we find some investors continue to doubt.

Key Issues

Time to worry about Domestic Retail trends? In looking across the Q3 results so far, the incremental news for us has been evidence of some slightly worse than expected pricing and competitive pressure in the domestic market as evidenced by the margin trends.

To us, certainly part of the pressure reflects the rate environment of low absolute rates, the compression in the Prime-BA spread on the quarter and the general strength in the mid-part of the yield curve.

However, against this backdrop, commentary suggests that the big wave of re-pricing has now largely washed through the results. Instead, we are now seeing an incremental increase in competitive activity, particularly in residential housing (both traditional mortgages and HELOC products). Likewise, the banks have stepped up competition in the deposit market.

At this stage, we do not see evidence of irrational behaviour (which tends to correct relatively quickly in any case). Although we had not factored into our numbers, we had previously noted the potential for margins to expand in a world of increasing reference rates. At this point, we are more inclined to say margins will be flat to up (very) slightly, with a lower probability of a notable up-tick from here.

Outlook

We have made next to no changes to our model. In our outlook for next year, we see earnings running north of C$1.10 per quarter as PCLs decline and International starts to show some modest acceleration (and even further acceleration heading into 2012).

Justification of Target Price

In determining our Target Price we establish a Fair Value P/BVPS multiple based on our expectations regarding long-term sustainable ROE, growth and COE. Our expectations currently stand at 17.5%, 4.5% and 10.0% respectively implying a Fair Value P/BVPS multiple on the order of 2.60x.

Key Risks to Target Price

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

The bank basically delivered an in-line quarter consistent with the key Q3 themes to date with good Domestic, strong credit and softer Wholesale results. We see potential upside in International. Reiterate Buy.

;

RBC Q3 2010 Earnings

• BMO cuts price target to C$53 from C$63; rating outperform
• CIBC cuts price target to C$56 from C$62; rating sector performer
• KBW cuts price target by C$2 to C$58; rating outperform
• Macquarie cuts target price to C$56 from C$60; rating neutral
• UBS cuts price target to C$66 from C$68; rating buy

__________________________________________________________

Scotia Capital, 27 August 2010

Event

• Royal Bank (RY) cash operating earnings declined 28% YOY to $0.87 per share significantly below expectations due to lower-than-expected trading revenue and lower net-interest margin, which offset strong earnings from Canadian Banking and Wealth Management. Operating ROE was 14.8% with RRWA of 1.95%.

Implications

• RBC Capital Markets earnings declined 68% YOY to $202M as trading revenue collapsed. Trading revenue plummeted to $188M from $1,022M in the previous quarter and $1,656M a year earlier. Canadian Banking earnings were strong increasing 14% YOY to $766M.

• We have reduced our 2010 and 2011 earnings estimates to $3.85 per share and $4.40 per share from $4.15 per share and $4.80 per share, respectively, due to lower earnings from wholesale banking, lower economic growth outlook, and moderating net interest margin as the prospect for higher interest rates is delayed.

Recommendation

• We have reduced our one-year share price target to $60 from $68 based on our lower earnings estimates. We maintain our 2-Sector Perform rating.

Canadian Banking Earnings Increase 14%

• Canadian Banking earnings increased 14% to $766 million from $671 million a year earlier, due to solid loan volume and revenue growth and lower LLPs. Canadian Banking average loans and acceptances increased 8% YOY and 2% QOQ.

• Revenue growth was solid at 5.9% although muted by a 1 bp YOY decline in retail net interest margin to 2.70%. Retail NIM declined 6 bp sequentially. Expenses increased 6.3% reflecting higher performance related compensation, higher pension costs, and investment in business growth. Efficiency ratio was flat at 47.3%.

• Loan loss provisions (LLPs) declined 6% to $284 million from $302 million in the previous quarter.

Overall NIM

• The bank's overall net interest margin declined 18 bp from the previous quarter and 35 bp from a year earlier to 2.01%.

RBC Capital Markets Earnings Plummet

• RBC Capital Markets earnings declined 68% YOY and 60% QOQ to $202 million from $622 million a year earlier and $502 million in the previous quarter due to a collapse in trading revenue.

Trading Revenue Collapse

• Trading revenue in RBC Capital Markets plummeted to $188 million versus $1,022 million in the previous quarter and $1,656 million a year earlier. This is the lowest operating trading revenue since the third quarter of 1997. Trading revenue was negatively impacted by losses on MBIA and BOLI and difficult market conditions. The impacts of MBIA and BOLI were a loss of $100 million and $73 million respectively, which negatively impacted earnings by $0.05 per share.

• The major weakness in trading revenue was in interest rate trading, which had a loss of $19 million versus positive $650 million in the previous quarter and $1,056 million a year earlier. The weakness in interest rate trading was centered in the bank's U.K./European trading operations.

• On the conference call, RBC guided that it is reasonable to expect annual trading revenues to be in the $3 billion to $4 billion range.

Wealth Management Earnings Improve

• Wealth Management cash earnings increased 20% to $197 million from $164 million in the previous quarter and increased 10% from $179 million a year earlier.

• Revenues increased 2.6%, with operating expenses increasing 3.7% from a year earlier for negative operating leverage of 1.1%.

• U.S. Wealth Management revenue declined 5%, with Canadian Wealth Management revenue increasing 9% and Global Asset Management revenues increasing 15%.

• Mutual fund revenue increased 7% from a year earlier to $388 million. Mutual Fund assets (IFIC) declined 1% from a year earlier to $101.1 billion, including PH&N.

Insurance

• Insurance earnings were $153 million versus $107 million in the previous quarter and $167 million a year earlier. Strong premiums and solid investment income helped offset higher claims in the quarter.

International Banking Remains in Loss Position

• International Banking continued to report a loss at $52 million versus a loss of $3 million in the previous quarter due to weaker net interest margin, higher LLPs, and operating expenses.

• LLPs were $192 million, up slightly from $185 million in the previous quarter but down from $230 million a year earlier.

• Net interest margin declined 8 bp from a year earlier and 28 bp sequentially to 3.78%.

Capital Markets Revenue Stable

• Capital markets revenue was $608 million versus $565 million in the previous quarter and $636 million a year earlier. Securities brokerage commissions declined 7% to $313 million from $337 million a year earlier, with underwriting and other advisory fees at $295 million, declining by 1%.

Security Gains - Modest Loss

• AFS security gains were a loss of $14 million or $0.01 per share versus a loss of $0.01 per share in the previous quarter and a loss of $0.03 per share a year earlier. Unrealized security surplus was a surplus of $188 million versus a surplus of $125 million in the previous quarter.

Securitization Loss Declines

• Securitization net income impact declined to a loss of $10 million, or $0.00 per share, versus a loss of $55 million, or $0.03 per share, in the previous quarter.

Loan Loss Provisions Decline

• Specific loan loss provisions (LLPs) declined to $432 million or 0.58% of loans from $477 million or 0.67% in the previous quarter and from $709 million or 0.98% of loans a year earlier.

• We have reduced our 2010 LLP estimate to $1,850 million or 0.63% of loans from $2,000 million or 0.69% of loans, due to lower-than-expected loan loss provisions in the third quarter. Our 2011 LLP estimate is reduced to $1,600 million or 0.53% of loans from $1,800 million or 0.59% of loans.

Gross Impaired Loan Formations Decline Modestly

• Gross impaired loans were unchanged at $5,020 million or 1.69% of loans versus $5,064 million or 1.74% of loans in the previous quarter. Net impaired loans were flat at $1,841 million, or 0.62% of loans, versus $1,841 million, or 0.63% of loans, in the previous quarter.

• Gross impaired loan formations declined to $868 million from $1,131 million in the previous quarter. Net impaired loan formations increased slightly to $519 million from $475 million in the previous quarter.

• Average loan and acceptances increased 3% YOY and 2% QOQ. International Banking average loans and acceptances declined 13% YOY and were flat QOQ. RBC Capital Markets average loans and acceptances declined 19% YOY but increased 1% QOQ.

Tier 1 Ratio 12.9%

• Tier 1 capital declined to 12.9% from 13.4% in the previous quarter due to higher risk-weighted assets.

• Risk-weighted assets increased 4% sequentially and 6% YOY to $258.8 billion. Market-at-risk assets increased 55% YOY and 21% QOQ to $27.3 billion. The common equity to risk-weighted assets (CE/RWA) ratio was 13.0% versus 13.3% in the previous quarter and 12.8% a year earlier.

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National Bank Q3 2010 Earnings

• BMO raises target price to C$71 from C$70; rating outperform
• Canaccord Genuity raises price target to C$69 from C$68
• Credit Suisse raises target price to C$69 from C$68
• Macquarie cuts price to C$67 from C$68; rating neutral
• RBC raises price target to C$74 from C$71; rating sector perform.

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Scotia Capital, 27 August 2010

Event

• NA reported a 12% decline in operating EPS to $1.57, above expectations. Earnings were better than expected due to very strong retail earnings, which increased 15% sequentially, high security gains, and lower loan loss provisions at 18 bp, which offset the weak results from Financial Markets (significant decline in trading revenue).

Implications

• Retail earnings increased 32% YOY and 15% QOQ to $162M. Retail earnings were driven by revenue (increased 6% YOY) and volume growth, a decline in LLPs, and controlled expenses (flat YOY).

• Financial Markets earnings declined 42% YOY to $98M due to a collapse in trading revenue. Trading revenue was $89M, down from $168M a year earlier and $150M in the previous quarter.

Recommendation

• We are increasing our 2010E EPS to $6.25 from $6.15 due to the beat this quarter. However, we are reducing our 2011E EPS to $6.80 from $6.90 due to a lower economic growth outlook and moderating net interest margin as the prospect for higher interest rates is delayed. Our one-year share price target is unchanged at $70. We maintain our 2-Sector Perform rating.

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Canadian Banks Confident Ahead of New Basel Rules

Thomson Reuters, 27 August 2010

Canada's banks appear set to handily absorb stiffer global capital and liquidity rules being developed by the Basel banking committee, meaning they could soon begin raising dividends and making acquisitions.

While the new regulations won't be released until November, the CEOs of Canada's big six banks have begun speaking more confidently about their ability to adopt the rules, which will redefine how much capital banks have to hold on their balance sheets.

"Based on what we know and the work we've done to date, we're well positioned on both an absolute and relative basis, to adopt the new rules," Bank of Montreal Chief Executive Bill Downe said on a conference call after the bank released its quarterly earnings this week.

Louis Vachon, CEO of smaller rival National Bank of Canada went a step further in terms of specifics, predicting that the rules will reduce National's Tier 1 capital ratio by 2.5 percentage points, a level that would still leave the lender well capitalized on a historical basis.

"Suffice it to say, that our level of comfort over the last few months has increased significantly," Vachon said.

The language marks a shift from the cautious tone of previous commentary on the Basel III rules, which are being developed to help avoid another banking crisis.

The uncertainty has prompted Canada's bank regulator -- the Office of the Superintendent of Financial Institutions -- to put a moratorium on big capital outlays such as dividend hikes and sizable acquisitions until the new rules become clear.

But the banks' confidence has been helped by signs the new rules may not be as strict as some had worried.

Last month, the Basel committee scaled back some of the toughest proposals, particularly those concerning the definition of Tier 1 capital, which is a key measure of a bank's stability.

The CEOs have also likely taken comfort from the robust levels of capital that Canadian banks have built up over the past year, as they have essentially stockpiled profits.

National's Tier 1 ratio was 13 percent on July 31, well above its normal 9 to 11 percent range and easily capable of withstanding a 2.5 percentage-point hit. A level of 10 percent is well above most global peers.

BMO's ratio was 13.55 percent, while Canadian Imperial Bank of Commerce was at 14.2 percent. Royal Bank of Canada, the country's largest bank, had a ratio of 12.9 percent.

Toronto-Dominion Bank and Bank of Nova Scotia will report their quarterly results next week.

The increasing comfort with the regulatory changes has bank CEOs looking past the November G20 meeting in Seoul, when the rules are expected to be released.

"I think that capital allocation becomes the story in 2011," said John Aiken, an analyst at Barclays Capital.

National Bank's Vachon noted that the bank's dividend payout ratio -- the level of earnings committed to the dividend -- was at the bottom end of its normal range.

"I think it's quite clear what our next step would be," he said.

National, TD, Royal, and Scotiabank are expected to be quick off the mark with dividend hikes, while BMO and CIBC could wait a few quarters.

Acquisitions are also expected, as the banks struggle to grow revenues in the crowded Canadian bank space. The lingering effects of the financial crisis have left attractively priced targets in the United States and Europe, observers say.

"I think all of them are likely to really monitor where else they can use their capital," said Juliette John, portfolio manager at Bissett Investment Management in Calgary.

RBC, for instance, has signaled it is looking to expand its wealth management operations in Europe, while TD has been adding to its retail banking presence on the U.S. East Coast.

BMO's Downe also flagged M&A as a possible focus, pointing to Federal Deposit Insurance Corp-assisted deals in the U.S. Midwest, where BMO already has an established presence with its Harris Bank unit.

"I think there should be some opportunity there," he said.

"BMO views the current environment as an opportunity to strategically expand our U.S. footprint.

;

CIBC Q3 2010 Earnings

Scotia Capital, 26 August 2010

Event

• CIBC (CM) reported an increase in cash operating earnings of 22% YOY to $1.66 per share beating expectations due to surprisingly strong trading revenue/wholesale earnings and slightly higher security gains. Operating ROE was 21.5% with RRWA of 2.39%.

Implications

• Wholesale Banking operating earnings declined 33% YOY to $123 million, but remained surprisingly strong against $134 million in the previous quarter due to resilient trading revenue (lower exposure to fixed income trading).

• CIBC Retail Markets earnings increased 40% YoY and 23% QoQ to $604 million. Retail earnings were boosted by treasury allocation and lower loan losses.

Recommendation

• We have increased our 2010 earnings estimate to $6.40 per share from $6.15 per share due to the beat this quarter and solid retail banking results. Our 2011 earnings estimate remains unchanged at $7.00 per share. Our one-year share price target is unchanged at $80 per share. We maintain our 2-Sector Perform rating.

Items of Note

• Reported cash earnings were $1.55 per share, including net one-time charges of $0.11 per share. One-time items included a loss of $138 million ($96 million after-tax or $0.25 per share) on structured credit run-off activities and a reversal of $76 million ($53 million after tax or $0.14 per share) of general provisions.

Retail Markets Earnings Improve

• Earnings at CIBC Retail Markets were $604 million, an increase of 40% year over year, which were boosted by treasury allocation and lower loan losses. Other Retail Markets revenue (assisted by treasury allocation) was $40 million versus a loss of $54 million the previous quarter, representing a positive $94 million sequential swing in revenue (after-tax $64 million or $0.16 per share).

• Specific LLPs declined to $304 million from $417 million a year earlier and from $334 million in the previous quarter.

• Retail Markets revenue increased 6.6% with non-interest expense increasing 3.2% for positive operating leverage of 3.4%. Wealth Management revenue increased 6%, with FirstCaribbean revenue declining 17%. Wealth Management and FirstCaribbean represented 14% and 6% of Retail Markets revenue, respectively.

• Average loans & acceptances increased 4% YOY and 2% QOQ to $215.2 billion.

• Deposit and payment fees declined 3% year over year to $194 million. Card fees were $72 million compared with $83 million in the previous quarter and $80 million a year earlier.

• Mutual fund revenue, which is contained in Wealth Management revenue, increased 13% from a year earlier to $188 million. Mutual fund assets (IFIC) increased 7.6% YOY to $46.2 billion. Investment management and custodian fees increased 14% from a year earlier to $117 million.

Canadian Retail NIM Declines Sequentially

• Retail net interest margin (NIM) declined 1 bp sequentially but increased 2 bp from a year earlier to 2.79% (as a percentage of average loans and acceptances).

Overall Net Interest Margin

• The overall bank net interest margin declined 7 bp sequentially but improved 7 bp from a year earlier to 2.05%.

CIBC Wholesale Banking

• CIBC Wholesale Banking operating earnings were surprisingly strong at $123 million (excluding structured credit run-off) due to resilient trading revenue. This compares to $185 million a year earlier and $134 million in the previous quarter. Corporate and investment banking revenue declined to $146 million from $232 million a year earlier but increased from $132 million the previous quarter.

Underlying Trading Revenue Surprisingly Resilient

• Trading revenue (excluding structured credit run-off) was very strong given the difficult trading environment particularly in fixed income. Trading revenue actually increased sequentially to $181 million versus $150 million in the previous quarter although declined from $219 million a year earlier. Interest rate trading was surprisingly resilient at $41 million versus $60 million in the previous quarter and $81 million a year earlier.

Capital Markets Revenue Stable

• Capital markets revenue was $216 million versus $207 million in the previous quarter and $254 million a year earlier.

• Underwriting and advisory fees were $108 million, increasing 24% from $87 million the previous quarter but declining 18% from $132 million a year earlier.

Security Gains High

• Security gains (AFS/FVO) included in operating earnings were $52 million or $0.09 per share versus $37 million or $0.06 per share in the previous quarter and $32 million or $0.05 per share a year earlier.

• The security surplus increased to $629 million from a surplus of $386 million in the previous quarter and a surplus of $270 million a year earlier.

Corporate and Other Business Segment

• The corporate and other segment recorded a loss of $37 million versus a loss of $16 million in the previous quarter and a loss of $52 million a year earlier.

Higher Securitization Net Income

• Securitization revenue increased in Q3/10 to $150 million from $120 million in the previous quarter and from $113 million a year earlier. The net income statement securitization impact was a gain of $48 million in Q3/10 versus a loss of $7 million in Q2/10, representing a positive swing of $0.09 per share sequentially.

Loan Loss Provisions Decline

• Specific LLPs declined to $297 million or 0.64% of loans versus $316 million or 0.71% of loans in the previous quarter and from $422 million or 0.97% of loans a year earlier. Retail LLPs were $304 million, with wholesale LLPs at $29 million, and the corporate segment recording a $36 million recovery (excluding $76 million release of general allowance).

• Our 2010 and 2011 LLP estimates are unchanged at $1,300 million or 0.70% of loans and $1,000 million or 0.52% of loans, respectively.

Impaired Loans Increase Slightly

• Gross impaired loans increased slightly to $2,042 million or 1.10% of loans in the quarter versus $1,968 million in the previous quarter and $1,668 million a year earlier. Net impaired loans were $5 million versus negative $102 million in the previous quarter and negative $312 million a year earlier.

• Gross impaired loan formations declined to $557 million this quarter from $566 million in the previous quarter and from $967 million a year earlier.

Tier 1 Ratio 14.2%

• Tier 1 ratio increased to 14.2% from 13.7% in the previous quarter and 12.0% a year earlier. The common equity to risk-weighted assets (CE/RWA) ratio was 11.4% compared with 10.8% in the previous quarter and 9.2% a year earlier.

• Total risk-weighted assets declined 1% sequentially and 7% YOY to $107.2 billion, while market-at-risk assets increased 5% sequentially and 18% YOY to $2.0 billion.

;

BMO Q3 2010 Earnings

Scotia Capital, 25 August 2010

Event

• BMO cash operating EPS increased 9% to $1.14, below our estimate of $1.20 and consensus of $1.21. Earnings were lower-than-expected due to extremely weak trading revenue and lower security gains, partially offset by lower than expected LLPs. Operating ROE was 13.9%.

Implications

• Positives for the quarter were credit and strong operating results in core businesses: P&C Canada and Wealth Management (excl. insurance).

• P&C Canada earnings were strong at $428M, up 17% YOY with retail NIM increasing 9 bp YOY and 5 bp QOQ. BMO Capital Markets hit a cyclical low due to extremely weak trading revenue. Trading revenue fell to $145M from $410M in Q2/10.

Recommendation

• We have reduced our 2010E and 2011E EPS to $4.75 and $5.20 from $4.85 and $5.60, due to continued low capital market activity, weak trading revenue, lower economic growth outlook, and expected persistence of low interest rates. Our one-year share price target is unchanged at $70.

• We maintain our 1-SO rating based on continued leverage to recovery in Canadian retail franchise and expected improvement in U.S. banking operations.

P&C Canada Earnings Increase 17%

• P&C Canada earnings increased 17% from a year earlier to $428 million, driven by an improvement in the retail net interest margin (NIM), strong operating leverage, and solid loan volume growth.

• Retail net interest margin improved 9 bp from a year earlier and 5 bp sequentially to 2.96%.

• P&C Canada revenue growth was very strong at 9.3%, with expenses increasing 3.8% for strong operating leverage of 5.5%.

• Loan growth was 5.9% with personal loan growth strong at 16% and mortgage loan balances increasing only 1% due to run-off of broker channel loans. Personal deposits were down 1% from a year earlier, with market share declining due to a highly competitive environment. The productivity ratio was 51.1% versus 53.8% a year earlier.

P&C U.S. Net Loss on Actual Loss Experience Basis

• P&C U.S. cash earnings declined 31% YOY to $45 million (using expected loan loss provisions) from $65 million a year earlier. If we use actual loan loss provisions of $103 million versus $31 million expected loan losses, P&C U.S. earnings would have been a loss of $4 million versus a loss of $9 million a year earlier.

• The P&C U.S. retail NIM improved 59 bp YOY and 15 bp sequentially to 3.70%.

Overall Net Interest Margin Flat

• The bank’s overall net interest margin on average earning assets was flat sequentially and up 14 bp YOY to 1.88%.

Private Client Group Earnings Strong Excluding Insurance

• Private Client Group (PCG) earnings in Q3 declined 5% YOY and 8% sequentially to $109 million. PCG earnings included $34 million from insurance versus $67 million a year earlier. Excluding insurance, PCG earnings were $74 million, increasing 61% YOY.

• Mutual fund revenue improved 17% YOY to $139 million. Mutual fund assets under management (as reported by IFIC) increased 8% YOY to $35.1 billion.

BMO Capital Markets Earnings - Cyclical Low

• BMO Capital Markets earnings were very weak, declining 58% YOY and 50% QOQ to $131 million from $310 million a year earlier and $260 million in Q2/10, respectively due to extremely weak trading revenue. Average loans & acceptances declined 26% YOY to $24.3 billion.

Trading Revenue Declines 64%

• Trading revenue declined 64% to $145 million versus $410 million in the previous quarter and $407 million a year earlier, the lowest level since Q2/08 and Q4/06. The major weakness in trading revenue was concentrated in interest rate products which declined to $20 million from $225 million in the previous quarter and $288 million a year earlier. Equity trading revenue declined to $91 million in the quarter from $107 million in Q2/10 but increased from $87 million a year earlier. FX trading revenue declined to $62 million versus $69 million in the previous quarter and $85 million a year earlier. Trading revenue declined to 5.0% of revenue from 13.7% a year earlier.

Capital Markets Revenue Stable

• Capital markets revenue was $349 million versus $358 million in the previous quarter and $341 million a year earlier. Underwriting and advisory fees declined 10% YOY to $91 million, while securities commissions and fees increased 8% to $258 million.

Security Gains Negligible

• Security gains recorded in the quarter were $9 million or $0.01 per share versus $0.07 per share in the previous quarter and a loss of $0.01 per share a year earlier. Unrealized security surplus increased to $767 million from $378 million in the previous quarter and $381 million a year earlier.

Loan Loss Provisions Decline More Than Expected

• Specific loan loss provisions (LLPs) were below expectations at $214 million or 0.49% of loans, declining from $249 million or 0.60% of loans in the previous quarter and from $357 million or 0.82% of loans a year earlier.

• The lower-than-expected loan losses were due to a recovery at BMO Capital Markets and lower commercial LLPs in P&C Canada.

• We are reducing our 2010 and 2011 LLP forecast to $1,040 million or 0.59% of loans and $900 million or 0.48% of loans, from $1,100 million or 0.63% of loans and $1,000 million or 0.53% of loans, respectively, to reflect the improving credit trends.

Impaired Loans Decline

• Gross impaired loan (GIL) formations declined to $242 million from $366 million (excluding acquisitions) in the previous quarter. Including acquisitions, GILs declined to $132 million from $803 million the previous quarter. Net impaired loan (NIL) formations declined slightly to $113 million from $124 million in the previous quarter, excluding the impact of acquisitions.

• GILs declined in the quarter to $3.1 billion or 1.80% of loans. Net impaired loans were $1.2 billion or 0.72% of loans.

• The coverage ratio (Allowance for Credit Losses as a percentage of GILs) improved to 60% versus 55% in the previous quarter, but declined slightly from 62% a year earlier.

Capital Ratios Strong

• Tier 1 Capital increased to 13.5% from 13.3% in the previous quarter due to a 2% sequential decline in risk-weighted assets (RWA) and internal capital build. Tier 1 Capital was 11.7% a year earlier. Tangible common equity to RWA was extremely high at 10.4%.

• RWA declined 9% YOY and 2% quarter over quarter to $156.6 billion. Market-at-risk assets declined 24% YOY to $5.5 billion.

• The total capital ratio was strong at 16.1% at the end of the quarter versus 15.7% in the previous quarter and 14.3% a year earlier.

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Credit Suisse: Revenue Growth to Slow for Banks

Credit Suisse, 19 August 2010

As Canadian bank earnings/returns on equity (ROE) benefit from declining credit charges, slowing revenue growth represents a headwind.

We forecast provisions for credit losses (PCLs) to decline 35% and 36% in 2010 and 2011, respectively, providing a substantial boost to group profitability. However, as this earnings/ROE driver loses momentum, the onus falls on revenue growth to drive the bottom line. On this front, we believe: (1) domestic retail lending is poised to slow; (2) wholesale revenues are falling as trading revenues normalize; and (3) competitive forces will restrict margins. Given our cautious outlook on the revenue front, we are forecasting the pace of group ROE expansion to fall to 37 basis points in 2012 from 61 basis points in 2010.

Capital regulation, capital management and (potentially) economic stability represent the most important near-term stock drivers. Uncertainty toward the regulatory capital landscape represents an overhang for the sector. Clarity should come at the end of 2010, allowing banks to revisit capital-management programs. We forecast the group to have $28 billion of excess capital by the end of fiscal 2012 under Basel III and our sector 2011 estimated dividend payout ratio is 44%. This cushioning should allow banks to raise dividends over the next 12 months.

A bias toward banks with significant foreign operations is counter intuitive given the strength of the Canadian economy. Our rationale is that top-line growth in Canada is slowing, while foreign activities are either tied to secular growth trends or are underappreciated by the Street.

Stock selection favors a basket of growth potential and defense. Our stock selection emphasizes: (1) relative growth positioning; (2) dividend growth potential; (3) relative valuation; (4) revenue mix tilted toward P&C [personal and commercial] banking; and (5) excess capital and/or deployment opportunities.

We've assigned Outperform ratings to the Bank of Nova Scotia (BNS) and Toronto-Dominion Bank (TD), as they play well into our offensive themes of growth positioning and capital-deployment opportunities, while also offering a favorable mix of personal and commercial-banking revenue.

We also rate National Bank of Canada as Outperform, as it screens well against our criteria of dividend growth and relative valuation.

We are Neutral on Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CM) and Royal Bank of Canada (RY).

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Preview of Banks' Q3 2010 Earnings

Scotia Capital, 12 August 2010

Banks Begin Reporting Third Quarter Earnings August 24 - Uninspiring

• Banks begin reporting third quarter earnings with Bank of Montreal (BMO) on August 24, followed by Canadian Imperial Bank of Commerce (CM) on August 25, Royal Bank (RY) and National Bank (NA) on August 26, Bank of Nova Scotia (BNS) on August 31, Canadian Western (CWB) on September 1 (after market close), with Toronto Dominion (TD) and Laurentian Bank (LB) closing out reporting on September 2.

• Our earnings estimates are highlighted in Exhibit 1, consensus earnings estimates in Exhibit 2, and conference call information in Exhibit 3.

Third Quarter Earnings - Momentum Stalls

• We expect third quarter operating earnings to decline 1% year over year (YOY) and be flat from the previous quarter. Bank earnings momentum is expected to stall in the third quarter as improvement in credit costs (loan loss provisions expected to decline 24% YOY) and retail net interest margin improvement is being offset by perhaps a cyclical low in the banks' wholesale business, driven by an expected nearly 50% decline in trading and 20% decline in capital markets revenue, as well as higher short-term wholesale funding costs (BAs up 26 bp YOY) and 9% appreciation YOY in the C$.

• We are trimming our Q3 earnings estimates by $0.04/$0.05 per share for RY, NA, and TD mainly due to lower trading revenue expectations.

• RY and NA are expected to record the weakest earnings momentum of the bank group this quarter with declines of 17% and 16% YOY, respectively, due to tough comps and higher trading revenue reliance. BMO and CM are expected to have the highest earnings momentum of the major banks with growth in earnings of 14% and 10% YOY due to lower bases a year earlier and some recovery in their underlying businesses. CWB earnings are expected to be up 21% YOY due to significant recovery in their net interest margin.

• Bank profitability this quarter is expected to remain solid, although with a lower return on equity at 16.4% (Exhibit 8) due to expected wholesale banking weakness and deleveraging. However on RRWA, profitability is trending at near record levels of 2.14% (Exhibit 9).

• Bank earnings have beaten Street expectations for most of fiscal 2009 and the first quarter of 2010, with Q2/10 earnings the first quarter since the earnings recovery began in which banks did not exceed expectations, as heightened expectations were greeted by softer capital markets, a stalled net interest margin (NIM), and negative earnings impact from a strong C$. Impressive retail and wealth management earnings were the main drivers in the second quarter.

• Third quarter earnings are expected to be uninspiring with no growth, although earnings levels remain respectable, especially given the very difficult quarter expected from wholesale banking. We expect the earnings trend to resume its positive track, perhaps as early as Q4/10 after pausing with a relatively weak Q2 and Q3E negatively impacted by the economic and sovereign debt uncertainty.

• Quarterly earnings variables (Exhibits 4 & 5) remain mixed this quarter with positives such as wider mortgage-treasury spreads, credit trends, higher retail spreads offset by negatives such as flatter yield curve, lower wholesale spreads, higher short-term funding costs, lower trading volume, weak equity and fixed income underwriting, and no growth in mutual fund assets.

• We expect retail bank earnings to remain strong although growth is expected to begin to slow as volume growth moderates from a very strong pace (off cycle) and net interest margin improvement may begin to moderate. Wealth management earnings growth is also expected to moderate due to lack of sustained asset growth. Wholesale earnings could be at a cyclical low this quarter as trading revenue is expected to decline 46% YOY and 23% sequentially (Exhibit 5, row #24), with underwriting and advisory revenue down 20% YOY and 6% sequentially (Exhibit 4, row #33).

• We expect trading revenue to decline to $1.9 billion in the third quarter versus $2.5 billion in the previous quarter and $3.6 billion a year earlier. Loan loss provisions are expected to be $1.9 billion in the third quarter, similar to the previous quarter but down from $2.5 billion a year earlier. Loan loss provisions in the second quarter were 61 bp and are expected to decline to less than 30 bp through the cycle. However, loan loss provisions can be lumpy on the descent.

• The one trend that remains solidly intact is balance sheets continuing to strengthen. We expect capital levels to continue to build based on internally generated capital and management of risk-weighted assets. Balance sheet strength and solid earnings are expected to lead to the resumption of dividend growth.

Basel Rules Less Onerous - Uncertainty on Details to be Resolved by Year-End

• The Basel Committee on Banking Supervision on July 26 reached a broad agreement on the overall design of the capital and liquidity reform package (see July 28, 2010 Daily Edge note titled "Euro Crisis/Partial Reality Check for Basel - Tone Improves - Positive for Canadian Banks"). The agreement in general seems to be more balanced and constructive than the December 2009 document. Capital definitions have been eased and liquidity design softened with transition time frames extended. We estimate that the July agreement increases bank capital by 100 bp versus Basel's December 2009 consultative document. The July agreement is positive and the tone has improved; however, calibration risk and uncertainty will likely persist until the detailed rules are released later this year

Valuations Attractive - High Dividend Yield - Low P/E Multiples - Building Base

• Bank valuations remain very attractive with a dividend yield of 4.0%, which is 135% of the 10-year bond yield and 166% of the TSX dividend yield versus historical means of 59% and 145%, respectively. Bank earnings yield relative to corporate bond yields is 187% versus the historical mean of 131%.

• Bank P/E multiples, we believe, are attractive at 10.7x 2011 earnings estimates and are poised for expansion. Bank P/E multiples, we believe, have formed a base and support at 12x, which we expect to expand to the 15x-16x range, similar to the post-2002 cyclical recovery. The resumption of dividend growth is expected to be the catalyst for higher P/E multiples.

Major Bank Stock Rally Pending - Maintain Overweight

• We continue to recommend an overweight position in bank stocks as they grind out some outperformance with a modest 1% increase versus a 1% decline for the TSX as well as higher return of 1.6% from dividends.

• Bank share price performance has been muted in the past quarter based on sluggish earnings, concerns about the economic recovery, nervousness about sovereign debt, and regulatory uncertainty (slight relief with July Basel agreement).

• We continue to believe that a key catalyst for a sustained rally in bank stocks and higher P/E multiples are dividend increases. The first prospect for a dividend increase is expected to arise with the banks' release of Q4 earnings late November/early December. The timing of dividend increases is dependent on Basel capital ratio details due out later this year and OSFI consent.

• We are hopeful that the overreaction stage fraught with noise and drama from politicians and regulators will subside and banks will increase dividends with the release of fourth quarter earnings, significantly improving investor sentiment. Thus, we believe a major bank stock rally is pending.

• We have 1-Sector Outperform ratings on TD, CWB, BNS, BMO, and 2-Sector Perform ratings on CM, LB, RY and NA. Our order of preference is: TD, CWB, BNS, BMO, CM, LB, RY, and NA.

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Manulife Q2 2010 Earnings

Citigroup Global Markets, 5 August 2010

2Q10 a miss – Operating EPS of (C$1.36) compared unfavorably to 2Q09 EPS of C$1.09, and was well below our estimate of $0.00 and FC of (C$0.62). While disappointing, we did not find much during our initial review of the results with respect to business line performance that came as a surprise in terms of sales or underwriting trends. But, Canadian GAAP incorporates a more mark-to-market present valuation of liabilities which dictates the present value of the impact of equity market or long-term interest rate movements flow through earnings much more rapidly than U.S. GAAP. While this results in the book value of Canadian life insurers being closer to their underlying “economic” value, it can also cause considerably greater swings in quarter-to-quarter earnings. For MFC in 2Q10 the cost of the decline in global equity markets was (C$1.7B) plus continued low interest rates cost added a charge of (C$1.5B). Absent these, along with a couple of other minor items, and normalized adjusted operating earnings were $658M or about $0.37/share; down modestly from their adjusted level of $0.42 in 1Q10.

Capital remains an issue – Although Manulife’s statutory MCCSR (Minimum Continuing Capital and Surplus Requirements) ratio of 221% at 2Q10 was still strong, it did decline from 250% in 1Q10. In light of management’s acknowledgment on the earnings call that charges from its annual actuarial assumption review in 3Q10 may exceed C$1 billion, we expect that MCCSR will fall further. The pending 3Q10 charges came on top of the (C$2.4B) net loss for 2Q10 and because of this, we continue to anticipate a common equity raise in the C$1.5B – C$2.0B range by YE10. The pricing mistakes made on variable annuities, secondary guarantee universal life (SGUL) and individual long-term care (LTC) at Manulife’s U.S. John Hancock operations will materially depress overall corporate ROE for decades to come. The cost of fully reserving for what we estimate are roughly US$35 billion of largely un-hedged variable annuities written in 2005-07 with generous living benefits, along with the $18.2B of reserves backing LTC and an estimated $15 billion of reserves behind SGUL will be very painful. But, we believe Manulife’s CEO Don Guloien is moving towards finally stepping up to do so in order to allow his company to begin to move forward from the legacy issues he was left by his predecessor. All three of these lines are also candidates to be put into run-off and we would note rival Sun Life, as part of its 2Q10 results, announced it had formally exited SGUL. At 2Q10, MFC had $32.3B in capital and in the last 12 months has raised $3.5B of new capital split between $2.5B of common equity and $1.0B of Tier 1 notes. The company maintained its $0.13 quarterly dividend and we do not believe it is at risk.

Expect another difficult quarter in 3Q10/4Q10 – Management could not provide an estimate of what the charge in 3Q10 would be as part of its annual actuarial assumption review. Instead they guided for a “material charge” which we believe help to spook the market and precipitate the approx. 15% sell-off in the shares. We believe it will be at least as big as the 3Q09 C$783M after-tax charge experienced from changes to actuarial morbidity and policyholder lapse assumptions. If this wasn’t enough, the pending adoption by Canadian life insurers of phase 1 of International Financial Reporting Standards (IFRS) is likely to bring with it several billion dollars worth of additional charges. Most notable of this will be a material impairment of the company’s C$7.2B goodwill asset that equaled 25.9% of equity at 2Q10. However, unlike Sun Life that was able to offer some insight as to what the accounting impact of the transition costs to IFRS would be, Manulife CFO Michael Bell was considerably less precise when asked on the earnings call.

Regulatory update - As announced by Office of the Superintendent of Financial Institutions (OSFI) on July 28/10, existing capital requirements related to new (but not in-force) segregated fund/VA business written starting in 2011 will change.

VA hedging remains a primary valuation risk issue – It was clear again from today’s call that Manulife’s CEO Mr. Guloien plans to continue what is largely his company’s very large un-hedged investment in equity markets. While he stated that by YE12 he intends to hedge or reinsure at least 70% of the company’s VA guarantees vs. 51% as at 2Q10, it was clear no formal program for averagingin has been adopted. Rather it will continue to be done on an “ad-hoc” basis with management essentially hoping equity markets cooperate and rise. Mr. Guloien anticipates this will reduce the company’s equity market sensitivity by 15% relative to June 30/10 but we would point out the hedge program will continue to largely avoid addressing the deeply in the money 2005-07 vintages whose estimated US$35 billion of guarantees appear to us to be over 35% in the money. And, per the step-up features on these contracts, their guaranteed amount will continue to rise at a minimum rate of 5% net of fees annually.

Sales results mixed:

Insurance –On a constant currency basis sales were up 9% to $648M. Asian insurance sales were driven by 41% upside in Japan to US$117M, a 36% rise in Hong Kong to US$45M, and 41% growth in China & Taiwan to US$27M. In Canada, individual insurance and affinity sales grew 12% to $73M but consistent with peers, group benefits declined 20% to $70M. US life sales fell 9% to US$154M following the steep price increases in term and guaranteed universal life products. LTC sales jumped 72% to US$62M, reflecting good gains in group sales.

Wealth management - Sales excl. VA rose 12% Y-O-Y to $7.1B, led by 19% upside in Hong Kong to US$175M, Other Asia increase of 35% to US$520M, and new products launched in Japan. In Canada, mutual fund deposits jumped 175% to $297M and MFC bank sales rose 6% to $1.1B. But, consistent with peers, this was offset by a 37% drop in fixed products to $247M and 51% decline in group retirement sales to $175M. Similarly, in the US, mutual fund sales rose 51% to US$2.4B, and retirement plan services rose 24% to a record $1.1B, driven by the acquisition of larger cases, improved markets and expanded distribution relationships.

Investment strategy

Our Buy/Medium Risk (1M) rating on the shares of Manulife reflects our view that despite near term challenges including the risk of another common equity raise it continues to be one the premier global life insurance franchises. That said, the combination of weak risk management poor product pricing discipline over the past few years along with rising investment losses has measurably weakened its financial condition. However, we believe CEO Don Guloien is committed to putting MFC’s problems at its troubled U.S. John Hancock operations behind it once and for all.

We also have growing confidence MFC is beginning to regain its former sales momentum led by its high growth Asian businesses. An important factor behind our upgrade is recent management changes and our belief these reflect that CEO Don Guloien is finally getting a full handle on the significant product pricing and risk management mistakes made in the U.S. In our view the issue for MFC is not regulatory capital, but rather the economic cost of the VA and UL pricing mistakes made in the U.S. We expect these will limit the company’s long-term earnings growth rate and ROE to somewhere in the 12%-13% range for each. That said we believe its Asian operations offer superior growth potential and expect them to play a steadily rising role in future earnings growth and possible M&A.

Valuation

When deriving valuations for life insurers, we primarily utilize a peer comparison of P/B regressed against ROE. In support of this we also use a relative P/E assessment, sum-of-the-parts analysis and PV of excess returns. To arrive at our C$22/US$21 target price for Manulife’s shares we performed a P/B vs. ROE regression for a peer group of North American life insurers. We adjusted this to allow for the historical 10%-15% premium Canadian life insurers have traded above their U.S. peers which we attribute to differences in accounting. Longer-term we look for ROE to stabilize in the 12%-14% range and EPS growth to be 10%-12%.

Price-to-book value – Our target price was established using a 1.4x P/BV multiple of projected year-end 2010 book value of C$15.97. While above the level inferred by our industry price/book versus ROE regression model based on a 2010 projected ROE of 7.6%, it factors in what we forecast will be a significant 60-70 bps annual improvement over the next two years. This compares to an average for the large-cap peer group of 1.03x and range of 0.64x–2.1x, with ROEs of 9.2%-27.9%.

Relative P/E – Our target price utilizes a multiple of 18.3x our 2010E of C$1.20 and 11.0x our 2011E of C$2.00. This compares to the 2010 peer average of 9.0x and range of 7.6x-10.8x and 2011 average and range of 7.9x and 6.6x-8.7x.

PV of Excess returns – Infers share value of C$22.76.

Risks

We rate Manulife Financial as Medium Risk for several reasons. The first is liability risk related to variable annuities, no-lapse and individual long-term care. These products were significantly under-priced industry wide by insurers and MFC was a leading writer of each of them. Along with the Japanese VA line they may all require further reserve strengthening. A second risk factor is interest rates. We estimate over half of earnings come from individual life insurance products and are meaningfully impacted by the level of long-term interest rates. Management est. a 100bps upward shift in rates would benefit capital by C$1.6B while a similar drop would reduce it by C$2.2B. A third risk factor relates to the general account long term investment portfolio that equaled C$188.3B at 1Q10. While we consider it conservative with only 4% held in bonds rated below investment grade, its sheer size means it is not immune to the general credit environment. A fourth factor is earnings sensitivity to equity market movements. These impact fees generated off segregated and mutual fund AUM which totaled C$194.1B and C$36.8B, respectively, at 1Q10. Management est. an immediate 10% equity market drop would reduce capital by C$1.2B. A final risk factor is currency as over half of earnings originate outside of Canada, primarily the U.S., and are influenced by changes to the Cdn/$ exchange rate. Our forecasts assume an exchange rate of 0.96x. If any of these factors has a greater/lesser impact than predicted, the shares could have difficulty achieving our target price or could exceed it.

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Basel Tone Improves - Positive for Canadian Banks

Scotia Capital, 28 July 2010

• The Basel Committee on Banking Supervision reached broad agreement July 26, 2010 on the overall design of the capital and liquidity reform package including definition of capital, the treatment of counterparty credit risk, the leverage ratio, and the global liquidity standard.

• In general, the agreement seems to provide a more balanced and constructive approach to capital and liquidity. Capital definitions have been eased and liquidity design softened with transition time frames extended. It seems the increase in systemic risk (Euro crisis) and broad consultation may have caused Basel to moderate its very aggressive stance on bank regulation. Adopting more of a going concern approach along with effective regulation (accountability) will likely have a better outcome for economic growth and the health of the banking system.

• The tone is improving, however calibration risk and uncertainty still persists until the detailed rules are released later this year. Basel is expected to issue the details of the capital and liquidity reforms later this year together with the Quantitative Impact Study. Basel is expected to issue its economic impact assessment in August. Basel is expected to finalize the calibration and phase in arrangements at their meeting in September and finalize the regulatory buffers by year-end.

• In reaching the broad agreement July 26, 2010, Basel has made a number of amendments to the December 2009 consultative document. It concluded that certain deductions could have potentially adverse consequences for particular business models and provisioning practices, and may not appropriately take into account evidence of realizable valuations during periods of extreme stress.

• The July 26 agreement, we estimate, improves Canadian banks' Tier 1 common ratio by 100 BP versus the December 2009 proposal. If we adjust for the July 26 agreement and continue with conservative assumptions on market at risk and off balance sheet consolidation, our pro forma 2012 Tier 1 common for Canadian banks is 8.0%, which we estimate to be at the high end of the range that will be calibrated by year-end; perhaps providing some flexibility for Canadian banks to increase dividends.

Definition of Capital - Eased - Canadian Banks Capital Pick Up Est. 100 bp

• The most significant amendment certainly for Canadian banks is the definition of capital, particularly the treatment of significant investments in unconsolidated financial institutions, mortgage servicing rights, and deferred tax assets from timing differences. Instead of full deductions, each may receive limited recognition capped at 10% of banks' Tier 1 common equity with aggregate 15% limit.

• This amendment, we estimate, would increase Tier 1 common ratios for the Canadian banks by 100 BP (Exhibit 2, row #12) versus the Basel December 2009 Consultative Documents.

The Tier 1 common impact for BMO, BNS, CM, NA, RY and TD is estimated at 70 BP, 100, 110, 30, 130, and 100, respectively.

• Our pro forma 2012 Tier 1 common ratio for bank group has improved to 8.0% (Exhibit 5, row # 11) with BMO, RY, and TD a high of 8.5% with NA at 8.0%, CM 7.7% and BNS at 6.6%.

Leverage Ratio - Design/Calibration - Business Model Appropriate - 2018

• In terms of the leverage ratio, the committee is proposing to test a minimum Tier 1 leverage ratio of 3% during the parallel run. The transition period is expected to be used to assess whether the proposed design and calibration is appropriate over a full credit cycle for different types of business models (e.g., originate to hold versus sell models).

• The supervisory monitoring period begins January 1, 2011 with parallel run commencing January 1, 2013 until January 2017. Bank disclosure of the leverage ratio and its components will start January 1, 2015. The view is to migrate to a Pillar 1 treatment January 1, 2018 based on appropriate review and calibration.

Regulatory Buffers, Provisions, and Cyclicality - Consultation Pending

A consultative document has been issued with comments due by September 2010. Buffers could be run down to absorb losses during a period of stress.

Systemic Risk, Contingent Capital, and a Capital Surcharge - Further Discussion

• The Committee will review a fleshed-out proposal for the treatment of 'going concern' contingent capital in December 2010.

Global Liquidity Standards - LCR Softened - NSFR - Time Frame Extended

A. Liquidity Coverage Ratio (LCR)

• The Committee made revisions to the definition of qualifying liquid assets, easing some of the liquidity requirements.

B. Net Stable Funding Ratio (NSFR) - Introduction 2018

• The Committee is committed to the introduction of NSFR as a longer term structural complement to LCR. However, the Committee acknowledges the calibration as set out in December 2009 proposals needs to be modified. A number of adjustments are under consideration and with a long transition and observation phase with introduction by January 1, 2018.

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