Dundee Securities' Ratings on Banks

Financial Post, Jonathan Ratner, 21 Februaty 2007

Canada’s banks begin reporting first quarter results on Thursday with Toronto-Dominion Bank kicking things off. With several of the Big Six at or near 52-week highs, several analysts see more upside.

Desjardins Securities expects gains of 2% to 10% in the next 12 months, with TD as their “top pick” in the sector.

Analyst Michael Goldberg has a $75 price target on the stock, representing upside of roughly 7%.

He also has “buy” recommendations on shares of Bank of Montreal and Bank of Nova Scotia, while CIBC, National Bank, and Royal Bank are rated “hold.”

In the first quarter, Canadian bank stocks climbed 7.1% (quarter-over-quarter) following positive fourth quarter results, but fell short of life insurance companies, which gained 8.1%, Mr. Goldberg said in a research note.

CIBC was the top performer, up 15.2%, while BMO only gained 0.8%.

“We expect to see continuing positive operating leverage from the banks, driven by still-strong economic activity producing robust loan growth,” he said. “Even with margins that may seem compressed, we expect another quarter of double-digit year-over-year operating profit growth.”

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Dundee Securities

• BMO - market neutral, 12-month price target is $75.00
• CIBC - market outperform, 12-month price target is $115.00
• National Bank - market neutral, 12-month price target is $68.00
• RBC - market neutral, 12-month price target is $59.00
• Scotiabank - market outperform, 12-month price target is $57.00
• TD Bank - market neutral, 12-month price target is $76.00

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Financial Post, Jonathan Ratner, 20 Februaty 2007

Dundee Securites analyst John Aiken, who has taken over coverage of Canada’s banks from Susan Cohen, admits he is a fan of the sector.

Indeed, the track record for bank stocks has been stellar,thanks to earnings growth and the creation of shareholder value.

Mr. Aiken expects shares of CIBC, Bank of Nova Scotia and Canadian Western Bank will be the top performers in the sector during the next twelve months.

He has a $115 price target on CIBC, a $57 target for BNS and expects Canadian Western will reach $28.

However, he thinks Bank of Montreal could benefit most in the short term from an environment of deteriorating credit quality.

He also thinks Royal Bank and Toronto-Dominion have compelling risk-reward profiles for the next five to ten years due to their presence in the domestic personal and commercial banking market, as well as growth prospects in the U.S.

So given this broad bullishness, where should investors, who are likely searching for long-term stable earnings growth, put their money?

Mr. Aiken notes that Canada’s banks are no longer similar in their business strategies or in their exposure to various businesses and markets. As they continue along this path, he thinks they will become more and more different from each other.

He stresses the importance of quality earnings, but also likes banks that diversify.

“Although the downside is that a bank does not experience the same run-up if a particular area or line of business increases, over the longer-term diversification produces are more stable, respectable earnings profile,” he said.

Mr. Aiken also thinks the personal and commercial banking business, where he thinks TD, Royal and Canadian Western have the most positive leverage, offers relatively stable growth, less volatility, a profitable deposit business and the opportunity to boost business in other areas such as wealth management.

However, there is no shortage of other factors that differ substantially for each of Canada’s banks. These include their international exposure, revenue stream mix, interest rate sensitivity, foreign exchange positions and capital markets businesses.

So while picking a bank stock may present a tough choice, be grateful that there are many good options to choose from.

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Spanish Banks Become Global Players

The Wall Street Journal, Keith Johnson, 16 Feburary 2007

The Spaniards are coming, the Spaniards are coming -- and they want your deposits.

Spain's two main retail banks have moved from the bush leagues to become among the largest, most efficient, most profitable in the world. And one of them just made a big play to take on two U.S. giants in a lucrative American market.

Banco Bilbao Vizcaya Argentaria SA's agreement to buy Alabama-based Compass Bancshares Inc. for $9.6 billion, announced Friday, would give it hundreds of branches in the South and West, including 163 in Texas, a fast-growing market. That would pit Madrid-based BBVA against Bank of America Corp. and J.P. Morgan Chase & Co., the Lone Star State's two biggest banks.

That deal follows Spain-based Banco Santander Central Hispano SA's acquisition last year of a 25% stake in Philadelphia-based Sovereign Bancorp, which has almost 800 branches in nine states.

BBVA was all bluster in announcing the deal. BBVA "is much more advanced than the Citis or the J.P. Morgans" at nuts-and-bolts retail banking, said Chairman and Chief Executive Francisco González.

The U.S. rivals are expected to put up a fight. "They're competing against some of our best retail banks," said Jefferson L. Harralson, a bank analyst at Keefe, Bruyette & Woods. "It's going to be hard for them to move market share, and it's going to be hard for them keep market share."

The deal follows a string of acquisitions that have turned BBVA and Santander into the world's 15th-largest and ninth-largest banks respectively by stock-market value. Both reported record full-year profits this month.

Santander increased its assets eightfold over the past decade, thanks to massive expansion in Latin America and the United Kingdom. Despite the growth, the bank has boosted its return on equity, a key profitability measure, to about 21%, up from about 14% in 1996. BBVA is slightly smaller but even more profitable, with a return on equity of about 24%. On that score, both Spanish banks outperform Citigroup Inc., Bank of America and HSBC Holdings PLC, the big British bank.

Shares in BBVA and Santander have trailed their more sedate peers because the market expects them to keep making pricey acquisitions. The Compass deal sent BBVA's stock on Friday down 2.4% in Madrid and its American depositary shares down 2.5% on the New York Stock Exchange. Compass shares rallied 6.5% on the Nasdaq Stock Market (see chart on page B3).

The Compass purchase was BBVA's biggest ever, and Mr. González says he wants it to be one of the world's biggest banks by the end of 2008. Santander swore off acquisitions after the Sovereign deal, but it stoked deal fears anew this month by taking a 2% stake in Capitalia SpA, Italy's No. 3 lender.

The Spanish banks' efficiency stems from stiff home-market competition. To survive, they overhauled their businesses. Both invested heavily in new computer systems in the early 1990s that are just now being fully implemented. The new systems offer advantages over the traditional databases that scatter information on customers into various business "silos."

That helps BBVA and Santander sell more products to each customer than European and U.S. peers. BBVA sells almost five products to each customer, compared with about three products per customer at Compass.

As a result, for every €100, or about $130, of income, BBVA and Santander spend €43 and €48, respectively -- compared with €50 at HSBC and €55 for Compass, considered one of the Sunbelt's best-run banks. Both banks also have invested heavily in other areas, especially risk management. Both have impressive nonperforming-loan rates of less than 1%, even including their Latin American operations.

BBVA is using its computer system to change banking in Mexico, where it has attracted four million customers in the past two years. Recovering from the economic shocks of the 1990s, banking services there are trickling down to the broader population. BBVA has two million low-income "virtual" Mexican customers who deposit paychecks and spend money via credit accounts. Maintenance costs for such accounts are low, widening profit margins.

The bank originally entered the U.S. with acquisitions of Valley Bank, Laredo National Bancshares and Texas National Bancshares over the past two years, hoping to funnel money from Mexican immigrants in the U.S. to relatives' BBVA accounts in Mexico.

Now Mr. González wants to expand to more affluent American customers in Texas. The state has no major hometown player, making it one of the most competitive markets in the country. Several banks are buying and building branches there, including Capital One Financial Corp., of McLean, Va.; Wachovia Corp., of Charlotte, N.C.; and Washington Mutual Inc., of Seattle.

BBVA has taken on considerable risk with the Compass deal, which was put together by BBVA's advisers at Morgan Stanley, its lawyers at Cleary Gottlieb Steen & Hamilton LLP, Compass's advisers at Sandler O'Neill & Partners, and its lawyers at Balch & Bingham and Wachtell, Lipton, Rosen & Katz. The deal increases BBVA's exposure to dollar earnings, which could fall against the euro, the bank's home currency. Mr. González says it is a long-term play.

"If we can successfully introduce our model there, we will have reached an enormous milestone," he says.

--Valerie Bauerlein in Atlanta and Carrick Mollenkamp in London contributed to this article.

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Scotiabank to Buy 10% of First BanCorp in Puerto Rico

Bloomberg, Sean B. Pasternak, 16 February 2007

Bank of Nova Scotia, Canada's third-largest bank by assets, agreed to buy a 10 percent stake of First BanCorp for about $94.8 million to expand in Puerto Rico.

Scotiabank will buy about 9.25 million shares of San Juan-based First BanCorp at $10.25 a share through a private placement, the Toronto-based bank said in a statement today. That represents about 5 percent more than First BanCorp's average closing share price over the 30 days ending Jan. 30, First BanCorp said in a separate statement. First BanCorp shares closed yesterday at $10.64 in New York Stock Exchange composite trading.

Scotiabank under Chief Executive Richard Waugh has spent more than C$1 billion ($859.4 million) in the past year on acquisitions outside of Canada to boost international banking, which represented about a third of profit last year. The investment also sets the stage for a takeover of First BanCorp by Scotiabank as lenders in Puerto Rico seek buyers amid a slowdown in economic growth and borrowing, said Jason Bilodeau, an analyst at UBS Canada.

"We view the overbanked market as ripe for consolidation," wrote Bilodeau in a note to investors today. He has a "Neutral 1" rating on Scotiabank shares and doesn't own any.

First BanCorp shares rose 66 cents, or 6.2 percent, to $11.30 at 4 p.m. Shares of Scotiabank fell 24 cents to C$51.29 at 4:10 p.m. on the Toronto Stock Exchange.

As part of the agreement, First BanCorp said it will give Scotiabank notice if the company is to be sold during the 18 months after the private placement is completed. First BanCorp will also allow Scotiabank five business days to indicate whether it will present a counteroffer.

``We would not be surprised to see Scotiabank bid for First BanCorp in its entirety prior to the end of the 18-month period,'' wrote Genuity Capital Markets analysts Sumit Malhotra and Mario Mendonca, who have a ``buy'' rating on Scotiabank and don't own shares in the company.

Scotiabank is buying the stock as an investment, spokesman Joe Konecny said today. He declined to comment on whether the bank plans to increase its stake beyond 10 percent.

The private placement, which is subject to regulatory approvals, is expected to close within 90 days, First BanCorp said.

First BanCorp has 153 locations in Puerto Rico, Florida, and the U.S. and British Virgin Islands. Scotiabank has about 600 employees in 20 branches in Puerto Rico, the company said.

In March, First BanCorp and Puerto Rico-based financial companies Doral Financial Corp. and R&G Financial Corp. agreed to oversight by the Federal Reserve Bank and the Federal Deposit Insurance Corp. stemming from their improper accounting for mortgage loan transactions.

First BanCorp said today R&G Financial gave it about $50 million to pay down a commercial loan. First BanCorp said that in another transaction, it recharacterized $218 million in a commercial loan into sales. The agreement and accounting change completes First BanCorp's requirements to the regulators, spokesman Alan Cohen said.

Shares of First BanCorp declined 11 percent over the last year, compared with a 4.5 percent increase for the 31-member Standard and Poor's Small Cap Regional Banks Index. So far this year, the stock has gained 19 percent.

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Flaherty Demands CEOs to Explain ATM Fees

Financial Post, Paul Vieira, 16 February 2006

Jim Flaherty, the Finance Minister, has asked for a "direct" answer from the CEOs of the country's biggest banks regarding their ATM fee regime. But the best consumers can hope for is that Mr. Flaherty's pressure will force the banks to roll back fees. That's because Ottawa does not regulate the day-today pricing of financial services products, a department spokesman said.

The Minister said as much yesterday, noting his goal in this process is to ensure "competition and choice" for Canadians.

Mr. Flaherty told MPs on the House of Commons finance committee he was unimpressed with an answer provided by the Canadian Bankers Association (CBA) about why the banks charge non-customers a fee to take money out of their ATMs. It is the second time in three weeks he has openly questioned the issue, and it is a sign Canadian banking practices are under increased scrutiny from Ottawa -- especially in light of a minority government and a potential spring election.

Last month, Mr. Flaherty said he was, at the behest of the NDP, seeking answers from the banking industry about ATM fees. In particular, he said he wanted to know why Canadians were forced to pay a fee of $1 to $2 for withdrawing cash from a machine owned by a bank at which the customer does not have an account. He noted banks in other countries, such as Britain and the United States, charge no such fee.

He received an answer from the CBA, but said it was unsatisfactory. As a result, he said he has contacted the chief executives at the chartered banks to seek a "direct" answer.

"The banking association said they would be continuing doing business as they do," Mr. Flaherty told reporters after the committee meeting. "I told the bank [CEOs] that I want them to have another look at it."

During his appearance before the all-party committee, he repeatedly noted that the country's credit unions have established a network whereby customers are not charged a fee for using an ATM from a rival lender.

Mr. Flaherty said the goal from this ATM fee exercise is to ensure Canadians benefit from "competition and choice" from the country's financial services sector. "I am pleased that --after looking into the issue -- that I have found there is substantial competition given the network that some of the credit unions have put together."

Mr. Flaherty's approach to the CEOs comes as the NDP-- which holds the balance of power in the current Parliament -- call on the banks to scrap their ATM fees.

It is estimated that Canadians pay out about $420-million a year for the privilege of using ATMs. That represents about 5% of the revenue of the biggest banks in Canada, which turned in record profits of more than $19-billion in 2006.

The banking industry has argued it has invested more than $30-billion in the past 10 years in technology that provides convenience to customers. Banks charge fees on ATM withdrawals to ensure its customers are not subsidizing the use of their machines by customers from another lender. (Bank customers who use their bank's machines face no withdrawal fee.)

Moreover, banks argue that it is up to the customer whether to use an ATM from another bank, and the machine gives the person the option of paying the convenience fee or cancelling the withdrawal.).

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Financial Post, Duncan Mavin, 16 February 2007

New technology is transforming the bank machine into a financial vending machine, capable of dispensing everything from financial advice to movie tickets.

Banks in the United States have experimented with functions that enable ATM users to view stock quotes, purchase store gift certificates or postage stamps, and even pay parking fines.

Two U.S. banks are piloting more advanced ATM functions -- Wells Fargo customers in San Francisco can use their ATMs to make donations to five participating charities, while U.S. Bank account holders can top up their cellphone minutes via the ATM.

Much of what ATMs are dispensing beyond cash is still in the experimental stage, and additional functions in Canada are minimal. But, in fact, what holds back the use of ATM technology is not what can be done, but what customers want, experts say.

ATMs have been around for decades and usage continues to grow -- 81% of Canadian adults used an ATM at least once a month last year, up from 78% in 2005, according to a survey by market research firm TNS Canadian Facts.

Nine out of every 10 withdrawals are now made at a bank machine, and deposits of cheques and cash at ATMs outnumber in-branch deposits two to one.

But can other ATM functions really become as commonplace?

"Our view right now is that in spite of 30 years of living with ATMs, there's not a new killer application," said Alec Morley, vice-president of business transformation at Toronto-Dominion Bank.

"People want two things -- they want their money quickly and they want to check their balance and get an accurate statement."

In Canada, TD is one of the leaders in ATM technology, having overhauled its entire system at a cost of hundreds of millions of dollars.

"At the beginning of the ATM era, they ran off an IBM operating system, but we've upgraded that so they're now running on Windows XP, not unlike your home computer," Mr. Morley said.

"We can do an awful lot more with our ATMs than we could before. It's like we had a 1980s-era IBM desktop with a green screen, and suddenly 20 years later we've brought ATMs into the user-friendly Windows era."

"In theory, there's not a lot we can't do no w," Mr. Morley said. "The question is whether we want to, and more importantly, do our customers want it?"

Making the machines "stickier" with more functions will slow down users and that could make ATMs less convenient, not more so, Mr. Morley said.

There are also some questions about how far Canadian regulations will allow banks here to sell non-banking products -- they cannot sell insurance from their branches, but what about cellphone minutes or targeted gift certificates?

But ignoring the importance of a strong ATM network could be perilous -- ATMs are the third-most-important factor in a consumer's choice of financial institution in the United States, according to a report from California-based Javelin Strategy.

"Availability of financial services that consumers desire at the ATM can result in heightened customer satisfaction and loyalty, repeat transactions, expansion into additional products and new customer referrals," Javelin's Jean Garascia noted.

Still, although ATM innovation is limited in Canada compared with the United States, there are new developments on the way.

TD, for instance, is looking into following Wells Fargo's lead by allowing customers to make charity payments at the ATM, Mr. Morley said.

The bank's machines can already print out consolidated receipts to show customers all their financial data.

TD also operates machines in five languages with the capacity to add more, and its ATMs have audio capability for sight-impaired customers.

Streaming video, third-party advertising and ticket sales are also possible, though it's less likely we'll see those functions soon.

In particular, there are lots of "behind the scenes" improvements in ATM security and accessibility.

All of the new TD machines, for instance, have frontal wheelchair accessibility, and some have mirrors to help prevent "shoulder-surfing" -- people looking at another customer's personal information over their shoulder.

Banks in Canada and the United States are looking into technology that will enable customers to scan cheques at the ATM, doing away with envelopes and potentially speeding up cheque clearance times.

Perhaps more important for banks that want to make the most of their ATMs, the machines could become more interactive and more personalized, and capable of selling more of the banks' products, said Madhavi Mantha, a banking analyst at technology consultants Celent LLC in Montreal.

When an account-holder with a low balance withdraws some cash, for instance, the machine could be programmed to prompt that customer to ask for an overdraft.

Cheque book reordering, credit card applications and special offers could all become more prevalent, too, she said.

"Given the ubiquity of the ATM and its importance to consumers, banks that can leverage this channel to provide a greater number of products and services in a more creative way stand to transform the ATM from a cost of doing business to a competitive differentiator," Ms. Mantha said.

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Credit Cards Pulled as Banks Fear Fraud

The Toronto Star, Tara Perkins & Dana Flavelle, 15 February 2007

Banks are issuing thousands of new credit cards to Canadians whose card numbers were stolen or exposed to potential fraud in a security breach at the company that owns the Winners and HomeSense retail chains.

The banks say they are issuing the cards as a precaution.

But one banking source said there are indications that some fraudulent purchases have been made on Canadian cards as a result of the breach. An increase in fraud has been noted on some compromised Visa cards but it's too early to relate it to the breach, the source said.

The Canadian Imperial Bank of Commerce, the Bank of Nova Scotia, and Bank of Montreal confirmed yesterday that they are mailing out new credit cards to customers.

The Royal Bank and Toronto-Dominion Bank said they prefer to boost their monitoring of the cards that might have been affected, rather than issue new ones. That means their customers might notice more frequent phone calls asking them to confirm that they made any large or unusual purchases.

"Given recent breaches involving a number of retailers, CIBC is taking prudent steps on behalf of our clients to proactively replace their Visa cards where we have identified that they may be at higher risk of having their accounts used fraudulently," said CIBC spokesperson Rob McLeod.

The banks pointed out that they regularly issue new cards to customers as a result of security concerns, but this appears to be one of the larger incidents.

A consumer advocate says many consumers find it frustrating that they aren't being told why their cards need to be replaced except for vague references to the risk of fraud.

Beverley McKee is one of the cardholders whose MasterCard was cancelled and replaced.

"We were in Florida on vacation when our card was refused at a WalMart store despite having a high credit limit, no balance, and frequent use," she wrote in an email to the Star yesterday. A call to MasterCard revealed the card was on hold and a new one was on the way.

"Upon our return, the new card was in the mailbox with a form letter stating that security had been breached and, while they were unable to reveal how, when, or any other details, as a precaution they cancelled the old card.

"This is, of course, a nuisance since newspapers, utility bills, insurances, etc., are automatic monthly charges and each one has to be notified."

A non-profit agency that helps Third World children said it has noticed a growing number of clients registering new credit cards this month.

"In the past 24 hours, we've had 61 people call in to switch, and about 325 since Feb. 1. So it does seem to be accelerating," said Jay Hooper, vice-president of marketing for Plan Canada, formerly called Foster Parents Plan.

Winners and HomeSense owner, The TJX Companies, Inc., revealed last month that some card numbers were stolen and thousands more may have been compromised when hackers broke into computers that contained records of credit and debit cards transactions for all of 2003 and part of 2006.

"There are compromises out there all the time," noted RBC spokesperson Beja Rodeck.

The banks said thousands of new cards are routinely issued to customers each year as a precaution against fraud.

Canadian companies aren't required to disclose security breaches. Winners and HomeSense are owned by a U.S. firm. The Consumers' Association of Canada was scheduled to appear before the House ethics committee in Ottawa today to discuss the need for tougher disclosure laws.

"The privacy commissioner has really got no tools to enforce accountability," said association president Bruce Cran.

The consumers' association said it has fielded hundreds of calls from people in the past week wondering what to do because they got a BMO MasterCard in the mail without requesting one.

The new credit cards came with a letter that told customers to phone to activate their card, but customers could not get through when they dialled, Cran said. "The phone lines were jammed, so people were wondering what the heck was going on."

Also, "we've had maybe 10 or 12 calls by people who've gone to make purchases and found that their MasterCard actually has been cancelled without them knowing," Cran added. "Why that would be, I have no idea. It would seem to be related to the same thing."

Neither Scotiabank, CIBC nor BMO would say how many cards they are reissuing, but BMO spokesperson Michael Edmonds said, "It is a large number. We understand that some customers have been inconvenienced as a result of our proactive security measure, and we certainly apologize for that."

Both RBC and TD said they have not yet seen any fraudulent use of their credit cards as a result of the security breach at TJX. Spokespeople for the other banks declined to say whether or not there had been fraudulent activity on affected cards.

CIBC's McLeod said it's still too early to tell whether any fraudulent purchases are a result of the TJX breach because it takes some time to find out exactly how a credit card number got into a fraudster's hands.

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DBRS Comments on Banks' Trading Revenue

Investment Executive, James Langton, 14 February 2007

Ratings agency DBRS says that the banks’ trading revenue is growing, and risk has been growing alongside it, too.

DBRS reports that the big five banks saw their trading revenue grow by an aggregate 13% in 2006 to $5.7 billion. Royal Bank saw the biggest growth, with revenues up 26%. CIBC was the only bank that saw revenues decline, down 9% in the year, it notes.

RBC also had the highest revenue contribution from trading-related activities at 11.2%, whereas Bank of Montreal had the lowest at 6.6%, it reported. “RBC has had exceptional growth as a result of its platform, which is the most diversified, by product, client and geography, of all the five Canadian banks,” it adds.

“Ongoing strength in the North American capital markets, volatility in both commodities and interest rates and investor confidence have been major contributors to the continued robustness of the Canadian banks’ proprietary and agency trading businesses,” DBRS explains.

“It has taken five years to build trading revenues to amounts that are equal to the peak levels in 2001, which was the height of the technology bubble. DBRS believes the growth in trading revenue is due in part to the increased diversification of the banks trading businesses relative to five years ago,” it says. However, it notes that the contribution of trading revenue to total revenue was just 8.7% in 2006, compared with 10.3% in 2001. “This is primarily due to revenue growth for the Canadian banks in all non-trading business segments, such as retail banking and wealth management, which are typically more reliable sources of revenue.”

DBRS says that it is difficult to predict how long the strength in these trading markets will endure, “but as long as investor confidence remains intact, DBRS does not expect a substantial deterioration in trading environments. DBRS believes trading-related revenue will increase in the medium term given the high return on capital in certain trading businesses (such as equity underwriting, mergers and acquisitions and structured products).” It also expects the contribution from trading-related revenues to increase in the mid to high single digit range over the near term.

The rating agency also notes that the rise in trading revenue in 2006 has been accompanied by higher risk, as measured by average aggregate global trading value at risk (VaR). “Within VaR, the interest-rate and credit-spread risk and the commodity risk components have increased the most, followed by equity risk,” it says. “The growth was partially offset with a slight decline in foreign exchange risk and a higher diversification factor compared with three years ago.”

“VaR as a percentage of average common equity has remained relatively steady over the last three years as growth in average common equity has kept pace with the increase in VaR,” DBRS says, but it expects this risk to increase over the near term. “Nonetheless, as long as the trading businesses are diversified and there is no dramatic decline in common equity, the effect on VaR and VaR as a percentage of average common equity should remain stable,” it says.

For now, DBRS does not consider trading-related revenue to affect the ratings of the banks by itself. “DBRS also takes into account the impact of trading revenues on the earnings, credit fundamentals and financial risk profiles of each bank. DBRS’s outlook for the Canadian banking industry as a whole remains fairly strong and is supported by a strong national banking system, earnings diversification, strong levels of capital and reasonable credit quality relative to the last economic downturn,” it says.

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Manulife Q4 2006 Earnings

Scotia Capital, 14 February 2007

• Net of one-timers the EPS reported was generally in-line - but growth was certainly supported by better than expected investment gains and excellent credit experience. Manulife reported Q4/06 EPS of $0.70, with about $0.05 per share in one-timers ($0.04 tax related and $0.01 due to a net recovery on credit in the quarter, as confirmed by management). Net of the one-timers the EPS was $0.65, $0.01 above our estimate and in-line with consensus. Excluding the one-timers EPS growth was 13% YOY.

• Once again, exceptional growth in the Fixed Products segment continues to drive growth - as this returns to average levels suggested by management, EPS growth should decelerate. The company once again noted that earnings in the U.S. Fixed products segment (primarily spread-based business, about 1/3 of the company's U.S. earnings and about 15% of the company's bottom line), were unusually strong, and that, consistent with prior comments, it does not expect the segment's results to continue to contribute to earnings at this current level. Earnings in this segment were up 69% in Q4/06, and were up 54% in 2006. With earnings of US$75 million per quarter indicated by management to be the expected average, well below the US$132 million earned in Q4/06, and well below the US$140 million average over the last three quarters, we certainly expect earnings growth in the U.S. division to decelerate. Assuming the Q4/06 earnings in the segment were the US$75 million suggested as the average by management, we put EPS growth at 9%, and 12% excluding f/x. See Exhibit 1 below for an outline of the growth excluding the tax gains, credit recoveries and exceptional results in the Fixed products segment.

• We're reducing EPS by $0.03 in 2007 and 2008 to reflect this "guidance" with respect to the Fixed Products underlying earnings power.

• Top-line growth in all-important U.S. market was weaker than we expected. After rapidly gaining market share in the all-important U.S. market in 2005 and through the first half of 2006, we were of the belief that MFC would maintain its share through the end of 2006 and throughout 2007. Now we're not so sure. U.S. variable annuity sales continue to slide, down 9% in Q4/06, after declining 8% in Q3/06. Albeit the comparison is off a strong second half of 2005, the sales growth we're seeing from other U.S. variable annuity players in the quarter (Hartford up 26%, Prudential up 34%, Lincoln up 22%, Ameriprise up 54%, Sun Life up 52%, Nationwide up 60%) suggests to us the company may be losing share, despite efforts in Q4/06 to rejuvenate sales with new enhanced riders to its products. Management suggests that we're in an intensely competitive stature in the market, and in order to gain share the company will need to introduce new product. We remain cautious, but look to the addition of new distribution arrangements with Morgan Stanley (wirehouse channel) and JP Morgan Chase (bank channel) as possible ways the company may be able to stop its current decline. Individual insurance sales were also down (10% YOY). Given the company's high ranking market position in individual insurance, we would expect sales in this segment to remain in the low single digit level at best, in-line with the growth in market.

• Japan top-line growth slower than expected. In Japan, the company indicated that, after the new variable annuity product was launched mid-November 2006, the ramp-up in new variable annuity sales has been slower than originally expected (sales down 64% YOY in constant currency), due to increasing competition. With Hartford (over twice the market share of Manulife in Japan variable annuity sales) recently releasing a new product in early 2007, we expect the level of competition in this market will remain intense. In addition, individual insurance sales continue to decline, down 17%, after declining 22% in Q3/06, with 2006 sales levels down 22%. While earnings growth in Japan will benefit to some extent from growth in variable annuity assets, favourable markets, and a much improved investment climate, we believe a catalyst for the division could be a potential deal with Bank of Tokyo Mitsubishi (BOTM) to distribute individual insurance products via the bank's branches when the industry further deregulates at the end of 2007. We continue to watch this carefully, but remain somewhat sceptical as to whether in fact this will happen (competition in Japan continues to intensify) and how it might translate into significant sales and earnings growth.

• Premium multiple to the group is likely to continue to decline to levels closer to long term average, as top-line growth slows and earnings momentum decelerates. Manulife's forward P/E premium to the group is coming down, and we believe it is more likely to decline a little further, closer to its long term average. The premium was above 10% in May 2006, is now 5%, but is still above its 2% long term average. We believe any expansion in Manulife's multiple versus the group is highly contingent on its ability to gain market share, as opposed to merely maintaining share, or worse, lose share. We believe any further growth in the company's premium relative to the group is less likely, in fact the opposite is more likely, as the rapid gains in market share the company made in the 12 months leading up to June 30, 2006 will almost certainly be not repeated in the next 12-18 months. Add to this the expected earnings deceleration propelled by the Fixed products segment (a segment we believe the company somewhat reluctantly accepted from John Hancock and has looked to de-emphasize), and we believe the company's EPS growth, expected to be 12% annually through 2008, will certainly be more in-line with the others. We have an EPS CAGR for GWO at 14% through 2008, with 12% for Sun Life.

• European windstorm Kyrill adds a small element of uncertainty in near term. The company indicated that if losses for European windstorm Kyrill were in excess of US$10 billion the company could face a loss up to $130 million or about $0.08 per share, and if losses were slightly below US$10 billion the loss would be around $0.04 per share. From what we gather, early estimates indicate losses from Kyrill could be as high as US$10 billion. • Canadian division was a bright spot in the quarter - but it's likely not a catalyst. With individual insurance sales up 17%, individual wealth management sales up 16% helped by the introduction of the new GMWB product (which helped individual segregated fund sales increase 36%), the Canadian division had a strong quarter, with earnings up 13%, excluding the impact of tax gains. However the Canadian division, in our opinion, is not a catalyst to the story (less than one-quarter of the bottom line, a mature market that despite being an oligopoly does not behave as one, organically remains challenged to grow earnings significantly above 10%).

• Focus likely to continue to be on organic growth with no significant increase in buybacks or dividend payout ratio. When asked about acquisitions CEO Dominic D'Alessandro suggested that values are pretty high, and, with excellent credit and buoyant equity markets, there is no compulsion for others to sell. We get the impression this company prefers to wait for "blood in the streets", and, not seeing that now, will focus on its primary goal over the last several years, that of growing the business organically. We also see no immediate indication of a significant increase in share buybacks (run-rate is about 3% of outstanding shares annually), nor an increase in the payout ratio (currently 29% of 2007E EPS, target is 25%-35%).

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Financial Post, Jonathan Ratner, 14 February 2007

Investors continue to flock to Manulife Financial Corp.. And why not? The company just unveiled fourth quarter earnings that topped $1-billion for the first time, rising 21% from a year earlier.

While the stock is just shy of its 52-week high, analysts remain somewhat mixed on where shares in Canada’s largest life insurance company may be heading.

On the bullish side, Desjardins Securities analyst Michael Goldberg hiked his price target on Manulife shares to $48 from $41, representing upside of roughly 18%.

He has a “top pick” rating on the stock, but notes that market reaction could be tempered by what he calls “a lacklustre recovery” in Japanese variable annuity sales – products that typically offer a range of investment options, under which the insurer agrees to make periodic payments to the holder throughout their lifetime.

Manulife’s earnings were up 13% quarter-over-quarter, while the value of its new business rose sharply, 25% on an annual basis, “which we believe is attributable to strong growth in both the insurance and wealth management businesses,” Mr. Goldberg said in a research note, adding that new business should be a focus when analyzing life insurance companies.

UBS analyst Jason Bilodeau is also optimistic about Manulife shares, hiking his price target to $46 from $44, while maintaining his “buy” rating following the results.

While variable annuity and life insurance sales trends may continue to change course, what matters most is Manulife’s position as a top industry operator in terms of delivering profitable sales growth through the cycle, Mr. Bilodeau said in a research note.

“Competition remains intense and the market backdrop is unlikely to get much better, but we look for product innovation to rejuvenate Manulife’s sales trends in 2007,” he said.

Merrill Lynch’s Andre-Philippe Hardy has a “neutral” rating on Manulife shares, noting that his valuation on the company is the highest among its peers.

He also pointed to management’s focus on reinvigorating sales growth through an array of new products set to be launched.

Genuity Capital Markets analyst Mario Mendonca downgraded hit rating to "hold" from "buy" with a $45 price target.

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Dow Jones Newswires, Monica Gutschi, 13 February 2007

Manulife Financial Corp. reported record fourth quarter earnings, citing consistent operating results, favorable investment experience, strong equity market performance and the benefits of tax-related items.

The financial services company earned C$1.11 billion or 70 Canadian cents a share in the fourth quarter, up from C$900 million or 56 Canadian cents a year earlier. The latest period is the first quarter in which Manulife has topped C$1 billion in net income.

"I am very pleased with our performance in 2006 and look forward to our progress in the years ahead," Manulife Chief Executive Dominic D'Alessandro said on a conference call.

Manulife sold more insurance policies in Canada in the fourth quarter of 2006, helping offset a slump in the U.S. and Japan. Earnings were also given a boost by the strong performance of its U.S. Wealth Management unit, and analysts said a tax change added between 2 Canadian cents and 4 Canadian cents to the bottom line.

It was a good quarter "with predictable strength in U.S. Wealth Management and Canada" helped by the tax gains, and offset by weaker results in Asian and U.S. insurance, said John Reucassel of BMO Capital Markets. "Asset quality and capital ratios remain quite strong."

BMO Capital Markets has an investment-banking relationship with the company, but it wasn't immediately clear if the analyst holds shares.

Return on common shareholders' equity improved to 18.0% from 15.5%, while revenue rose to C$9.19 billion from C$8.40 billion last year.

Total funds under management were C$414 billion at the end of the year, up 11% from C$371.5 billion.

However, premiums and deposits fell 2% to C$15.8 billion from C$16.2 billion after the company suspended variable annuity sales in Japan.

As with its rival, Sun Life Financial Inc., Manulife saw earnings at its U.S. insurance division fall in the period. Net income from that business unit was C$168 million, down 6% from C$178 million a year earlier, primarily due to unfavorable claims experience at John Hancock Long Term Care. Mitigating that impact were better margins and fewer mortality claims at John Hancock Life.

On the other hand, premiums and deposits in the U.S. grew by 7% on strong sales, and higher in-force business growth at John Hancock Long Term Care.

As well, net income at the U.S. Wealth Management division rose 39% to C$300 million from C$216 million a year earlier as investment income soared on strong equity markets. On a U$basis, earnings increased 43%.

UBS said the U.S. wealth-management division was "the key driver" in the fourth quarter on the strength in equity markets. However, Scotia Capital said in a note that the 7% growth in premiums and deposits was "well below what we're seeing from other U.S. players."

Scotia doesn't have an investment-banking relationship with the company but the analyst owns the stock. UBS makes a market in the securities.

The Asia and Japan division also underperformed, with net income slipping 16% to C$191 million from C$228 million a year earlier. Excluding the impact on actuarial liabilities in 2005 from reducing equity exposure in Japan's Daihyaku block, earnings rose 8%.

The decrease was partly caused by a decline in variable annuity sales due to the temporary suspension of a product in Japan, pending clarification of its tax treatment. A replacement for the suspended product was launched in November.

Funds under management, however, grew by C$6.3 billion to C$38.0 billion from C$31.7 billion a year earlier.

It was a much better story in Canada, where net income rose 24% to C$247 million from C$199 million, driven in part by changes to Ontario tax rules. Excluding the C$20 million boost to earnings from that change, income rose 14% on growth in bank assets, segregated funds, and the rising stock markets. Poor claims experience offset some of the gains.

Premiums and deposits for the quarter were C$3.5 billion, up 4% from C$3.3 billion a year earlier.

However, Ken Zerbe at Morgan Stanley said that excluding the tax benefit, " Canadian earnings would have fallen well below expectations on the back of unfavorable claims in its Group Benefits business."

In fact, he said, the upside in Manulife's earnings "came almost entirely from its corporate segment", which reported C$40 million in favorable tax items, " most of which will not recur and should be excluded from its core run rate."

Morgan Stanley has an investment-banking relationship with Manulife, but the analyst doesn't own shares.

After Manulife launched a new guaranteed minimum withdrawal product last year, segregated fund deposits in its Individual Wealth Management division rose 36%. "The product launch looks to be off to a great start," UBS said.

On the other hand, mutual-fund deposits continue to disappoint and Manulife said it launched four new funds in the third quarter of 2006 to try to increase its competitive position. It plans further enhancements.

The property and casualty reinsurance division, which lost C$29 million last year due to Hurricane Wilma, reported net income of C$68 million. Premiums were C$307 million, up from C$249 million in the fourth quarter of 2005.

Michael Goldberg at Desjardins Securities, who had predicted Manulife would earn 69 Canadian cents a share in the quarter, noted in an earnings preview that strong equity markets would help boost life insurance company earnings in the fourth quarter.

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Canadian Banks at Highest Valuation Against US Peers

Bloomberg, Doug Alexander, 12 February 2007

The best may be over for the shares of Canada's banks after a rally that made them the most expensive in 15 years compared with their U.S. peers.

Beset by a slowing economy and fewer share sales, the six largest Canadian banks probably will see earnings rise by 10 percent in 2007 and 8.5 percent in 2008, said Brad Smith, an analyst with Blackmont Capital in Toronto. The rate was 15 percent in 2006.

``The business is obviously going to get a little rougher than it has been for awhile,'' said Stephen Jarislowsky, 81, chief executive officer of Jarislowsky Fraser Ltd., which has about a third of its $53.6 billion in financial stocks. The Montreal-based money manager pared its holdings in four of Canada's biggest banks in the fourth quarter, U.S. regulatory filings show.

Canada's top six largest banks trade at almost three times the value of their net assets, compared with 1.96 for the 24 U.S. banks in the Philadelphia Stock Exchange KBW Banks index. Based on this measure, Canadian banks became more expensive than U.S. lenders in 2004, the first time that has happened since at least 1991, according to Bloomberg data and Blackmont Capital research.

Royal Bank of Canada, Bank of Nova Scotia, Bank of Montreal, National Bank of Canada and Canadian Imperial Bank of Commerce beat all U.S. consumer bank stocks over five years, posting average annual returns of more than 17 percent since 2002, according to data compiled by Bloomberg.

Earnings for U.S. banks in the Standard & Poor's 500 Index will rise 7.2 percent this year and 9.3 percent in 2008, based on data compiled by Bloomberg.

The Bank of Canada forecast in a Jan. 18 report that the country's economic growth would slow to 2.3 percent this year, from 2.7 percent in 2006. A weaker economy will cut loan growth for the banks to 8.1 percent this fiscal year, down from 12 percent last year, and to 6.6 percent in 2008, Smith said.

Economic growth is falling off as prices for oil, natural gas and metals decline. Commodities represent 54 percent of exports and 12 percent of gross domestic product. Oil is down 28 percent, natural gas 17 percent and an index of six primary metals 14 percent from their 2006 peaks.

Mergers and new stock sales hit records in 2006. The value of mergers involving Canadian companies almost doubled to $291.6 billion last year, led by takeovers of miners such as nickel producers Inco Ltd. and Falconbridge Ltd.

Demand for initial public offerings may decline after the government announced in October it would tax income trusts for the first time. The high-yield securities accounted for a third of the record $28.4 billion in equity offerings last year that produced combined bank fees of about $1.36 billion.

Canada's six biggest banks trade for 14.3 times earnings per share on average, according to Bloomberg data, higher than the 13.4 multiple of 24 banks in the Philadelphia index. European financial shares trade at 11 times earnings.

Canadian banks' ``relative valuations are not compelling,'' compared with European lenders, said Eric Bushell, who helps manage $17 billion as chief investment officer at Signature Funds in Toronto. His firm has reduced its holdings of the five largest Canadian banks in favor of European banks.

CIBC World Markets Chief Strategist Jeffrey Rubin recommended in a Feb. 5 note that investors pare Canadian bank stocks by a half percentage point to 18.9 percent of their holdings. That's higher than the 15.9 percent weight for banks in Canada's benchmark Standard & Poor's/TSX Composite Index.

Still, the six biggest Canadian banks each posted record profits in the fiscal year ended Oct. 31, with combined net income of C$19.1 billion ($16.1 billion). The banks have increased earnings by at least 15 percent in each of the last four years, the first time they've done that in half a century, according to research by Kevin Choquette, an analyst at Scotia Capital in Toronto. Earnings growth will fall to 10 percent this year, Choquette said.

Canadian banks have a wider range of services than many U.S. companies. In addition to consumer lending, they offer investment banking, insurance and trading, and they're gaining share in the C$669 billion mutual fund market.

``Many international investors are now commenting that they missed the boat and wished they had looked at Canadian banks sooner,'' Royal Bank Chief Executive Officer Gordon Nixon said in an e-mail.

Jarislowsky Fraser bought Bank of Montreal shares even as it sold the other banks, according to the filings with the U.S. Securities and Exchange Commission.

Even with the earnings slump this year, Canadian bank stocks may fare better than their U.S. rivals, Rubin and Bushell said. The U.S. firms will be hit harder from a rise in mortgage defaults from higher-risk borrowers with low credit ratings.

Royal Bank, the country's biggest lender by assets, was the top performer among North American bank stocks, with a 21 percent average annual return, including dividends, over five years to Jan. 31. The survey covers 37 North American consumer banks with a market value of at least $8.5 billion, including Montreal-based National Bank of Canada, the country's sixth-biggest bank.

National Bank ranked second, followed by Bank of Nova Scotia, Bank of Montreal, and Canadian Imperial Bank of Commerce, all based in Toronto. Toronto-Dominion Bank, the second-largest bank, ranked 11th, the lone Canadian lender outside the top 10. Philadelphia-based Sovereign Bancorp Inc. was the best-performing U.S. bank stock, ranking sixth with a 16 percent average annual return.

``The banks have had a very good run,'' in Canada, said Marc Lalonde, who oversees $1.1 billion at Louisbourg Investments Inc. in Moncton, New Brunswick. ``There's an argument for some U.S. banks over Canadian banks - they're cheaper.''

Best Performing North American Bank Stocks Over 5 Years (US$):
Company name                  Country   5-year returns
1. Royal Bank of Canada       Canada    20.5%
2. National Bank of Canada    Canada    20.2%
3. Bank of Nova Scotia        Canada    19.5%
4. Bank of Montreal           Canada    17.9%
5. CIBC                       Canada    17.0%
6. Sovereign Bancorp Inc.     U.S.      16.0%
7. U.S. Bancorp               U.S.      16.0%
8. UnionBanCal Corp.          U.S.      15.5%
9. Bank of America            U.S.      15.2%
10. Wachovia Corp.            U.S.      15.0%
11. Toronto-Dominion Bank     Canada    13.8%
12. KeyCorp                   U.S.      13.8%

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Enron's Banks Request Delay of Trial

Bloomberg, Laurel Brubaker Calkins and Jef Feeley, 12 February 2007

Merrill Lynch & Co. and Credit Suisse First Boston asked for a trial delay in the $40 billion lawsuit brought by Enron Corp. shareholders until an appeals court decides whether investors may continue to sue as a group.

In court papers filed Feb. 9, the banks asked U.S. District Judge Melinda Harmon to postpone the April 9 trial to allow all parties in the case to adjust to a pending ruling by the U.S. Court of Appeals in New Orleans. Harmon also needs time, the banks said, to make a final ruling on whether Barclays Plc, which also was sued by the Enron investors, will stand trial alongside Merrill and CSFB in case involving lead plaintiff Mark Newby.

The appeals court's ruling ``will significantly affect what must be proven at the Newby trial,'' the banks told Harmon. ``The court and the parties should take every reasonable precaution to ensure that the case is tried only once.''

The trial, which the banks call ``one of the largest, most complicated securities-fraud cases in United States history,'' will determine whether Enron's former lenders bear financial responsibility for helping the now-bankrupt energy trader disguise debt and boost revenue through improper financial transactions. More than 5,000 jobs and $2 billion in employee pensions were wiped out by Enron's 2001 collapse following the revelation of widespread accounting fraud.

Harmon ruled in August that thousands of Enron investors could sue the banks as a group, consolidating litigation that, in some cases, had been pending for as long as five years. The banks appealed that ruling this month, urging the New Orleans appellate panel to force shareholders to sue individually.

CSFB spokeswoman Victoria Harmon didn't immediately return a phone message seeking comment. Merrill Lynch spokesman Mark Herr declined to comment beyond what was said in the filing. He said the bank has no indication of when Judge Harmon will schedule a hearing on the request.

Bill Lerach, lead attorney for the plaintiffs, wasn't immediately available to comment.

Merrill Lynch and Credit Suisse First Boston claim they aren't liable for investors' losses because they didn't participate directly in the fraud that destroyed what had been the world's largest energy trader. Earlier court rulings bar investors from suing those who may have aided fraudulent schemes rather than executed them.

In July, Harmon dismissed Barclays from the Newby case, then changed her mind in December and allowed investors to reassert their claims under a revised legal theory. Harmon has yet to rule on Barclays' final status in the case.

Barclay's spokesman Peter Truell said the bank had no comment on the banks' request or the possibility that Barclays could be included as a defendant at trial.

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Enron's Enablers May Slip Through Legal Opening

Bloomberg, Ann Woolner, 9 February 2007

When the full scope of Enron Corp.'s duplicity began unfolding, fingers pointed at an array of apparent accomplices.

Accountants who concocted hiding places for losses. Investment bankers who financed sham deals. Lawyers who approved all of it. Without such complicity, the primary schemers at Enron would have been stopped in their tracks.

Blame for the Enron scandal was spread far and wide in outraged press releases from politicians, exhaustive reports by Enron's bankruptcy examiner and statements by consumer and shareholder advocates.

``Not one of the watchdogs was there to prevent or warn of the impending disaster,'' concluded a Senate Government Affairs Committee report.

Reforms were passed. Prosecutions mounted. Lawsuits filed.

So you might imagine that by now shareholders would have hauled the enablers into court and emptied their pockets. That turns out to be more difficult than you might think because, even with all the shouting and finger-pointing in Congress, no one got around to amending the law to make sure that shareholders can sue errant watchdogs.

True, some of Enron's investment banks, accountants and lawyers have settled rather than fight. The settlements come to more than $7.3 billion so far, mostly from banks, well short of the $40 billion investors say they lost.

Whether the suit goes any further is now in the hands of a trio of federal judges in New Orleans. The issue, made tougher because Congress failed to clarify it, is whether the law lets shareholders sue the banks they say were architects of some of Enron's trickery.

``To let the secondary actors out who designed it would be a tragedy,'' Patrick Coughlin, who represents shareholders, pleaded to a Fifth U.S. Circuit Court of Appeals panel this week.

Blocking a clear shot at the second tier of alleged cheaters is a 1994 U.S. Supreme Court ruling, which said investors can't sue those who only aid and abet. The secondary actors must have played a primary role in the fraud, the court said.

Congress could have restored the shareholder rights when it passed the Private Securities Litigation Reform Act of 1995. Instead, that law restricted shareholder rights.

So when Enron went under at the end of 2001, there were those who blamed the watered-down investor protections.

``The Enron collapse proves the importance of holding anyone who aids and abets securities fraud responsible for their actions,'' the Consumer Federation of America and Consumers Union said in a joint statement in 2002.

Congress ignored that plea, leaving lawyers for shareholders to ask for help this week from the three federal judges. Attorneys for the banks argued the Supreme Court decision spares them from being held to account.

Even if they knew they were financing or designing deals to deceive Enron shareholders, lawyers for Merrill Lynch & Co. and Credit Suisse Group said, the 1994 ruling protects them. Unless secondary actors lie publicly or remain silent when they have an obligation to disclose, they can't be sued, the lawyers said.

``The Supreme Court has been clear,'' Merrill lawyer Stuart Baskin told the court. ``A deceptive act requires either a misstatement or an omission where you have a duty to speak.''

Credit Suisse ``was Enron's No. 1 bank,'' Coughlin pointed out. And Merrill arranged to ``buy'' some Nigerian barges from Enron specifically and solely to help the company make its earnings numbers in exchange for a promise from Enron to buy back the barges and pay a premium to Merrill.

``They did more than just knowingly provide assistance,'' Coughlin told the judges.

But neither bank made public misstatements about their dealings with Enron, their lawyers noted. And because they have no duty to protect Enron shareholders, their silence can't make them liable, either, they said.

Enron executives were the ones reporting phony numbers that could only be supported by the sham deals.

``So tell me, who is Merrill Lynch and the other defendants, who are they defrauding?'' Judge Grady Jolly asked Coughlin. ``Who do they owe the duty to?''

``To the Enron shareholders,'' Coughlin answered. The whole arrangement was aimed at fooling them, he said.

``We know that Merrill Lynch on the face of it has no duty to Enron shareholders,'' Jolly said.

The judges sounded divided on how badly secondary actors must behave to be sued.

U.S. District Judge Melinda Harmon in Houston, who would preside at a trial of the shareholders' claims, previously ruled that Merrill and Credit Suisse helped Enron hide its financial picture and can be sued.

Appellate courts have taken a harder line for the most part. The Fifth Circuit, with jurisdiction in Texas, Louisiana and Mississippi, hasn't previously decided the issue.

The mish-mash might have been avoided if Congress had acted after the corporate scandals of 2001 and 2002 to say when secondary actors could be sued for security fraud.

``There was a real sense at that time that this was the moment to finally make some progress,'' says Barbara Roper of the Consumer Federation of America.

Yes, there was a wave of reforms, but none of them hit this point.

Nor is it likely to happen now. All the momentum in Washington is going the other way, rolling back investor safeguards.

(Ann Woolner is a columnist for Bloomberg News. The opinions expressed are her own.

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Sun Life Q4 2006 Earnings

Scotia Capital, 9 February 2007

Event

• Sun Life reported Q4/06 with $0.94 EPS, $0.01 above our estimate and $0.01 above consensus.

What It Means

• Another steady quarter, once again ahead of consensus. Excellent topline growth in the U.S. (insurance sales up 40%, variable annuity sales up 52%) is very encouraging, as is another solid quarter from MFS (earnings up 63%). We believe the compelling valuation, combined with a new fresh look to the senior management team, and more quarters like these, should help the stock eat up some of its forward P/E discount relative to the group (which currently is 6%, versus its 2% average over the last three years).

• We've increased our EPS estimates by $0.02 in 2007 and $0.03 in 2008 to reflect better-than-expected margin improvement at MFS and strong results in both Asia and Reinsurance, offset to some extent by increased new business strain in the U.S. We've increased our target to $58 from $55.

Another good steady quarter - better than consensus

• Another good steady quarter - $0.01 above consensus. Sun Life reported Q4/06 with $0.94 (fd) EPS, $0.01 per share above our estimate, and $0.01 above consensus. After modest "misses" in Q1/06 and Q2/06, the company has now reported two straight quarters modestly surpassing consensus (Q3/06 was $0.02 per share above consensus), which, when combined with the solid top-line growth and very encouraging results from MFS, should help the stock "catch-up" in terms of valuation relative to its peers, namely Manulife and Great-West Lifeco.

• Strong momentum in top-line growth in the U.S. continues. The distribution arrangements established earlier this year with the M Group and National Financial Partners (two large and well-established distributors in the U.S.) are certainly bearing fruit in terms of top-line growth in U.S. individual insurance, where sales were up 40% in Q4/06, after more than doubling in Q3/06 and Q2/06. U.S. variable annuity sales continue to gain momentum, with domestic sales up 52% in Q3/06, as the company continues to gain market share. We expect the trend to continue with a new product slated for a March 5, 2007 roll-out.

• Solid quarter from MFS. US$1 billion in net sales, margin improvement from 23% a year ago to 34% in Q4/06, and up from 30% in Q3/06 - MFS had another strong quarter. This has been an impressive story, and should continue to help drive earnings growth.

• Some noise, as is usually the case, but the reported number reflects the underlying growth of the company. In Exhibit 1 below we outline the variances versus our quarterly estimates by segment. As outlined in Exhibit 1, we believe a large portion of the better-than-expected results are due to recurring causes, such as MFS, where margin improvement is progressing faster than we anticipated, and Asia, where the integration and associated accretion of CMG is better than we thought, and Reinsurance, where mortality improvements and a very favourable pricing environment are producing higher margins than expected. On the other hand, we believe only about one-half to one-third of the "misses" by segment are recurring. In the U.S. Individual Insurance segment, a new funding arrangement, likely put in place in the next six months, should reduce the new business strain, the contributor of the "miss", by at least one-half. In the U.S. Annuity segment, at least one-half of the shortfall versus our estimate was caused by largely one-timers (reserve strengthening and credit reversals), with the rest due to diminishing reserve relief on GMDB reserves as markets improve (somewhat recurring). All in this nets to an additional $0.02 in EPS in 2007 and an additional $0.03 in EPS in 2008.

• Increasing EPS estimates by $0.02 in 2007 and $0.03 in 2008. As outlined above, our EPS estimate increase reflects better-than-expected margin improvement at MFS, higher profitability in Reinsurance, in what is apparently a much more favourable market than we originally anticipated, and better-than-expected accretion in the CMG acquisition in Asia. This is offset by increased new business strain in U.S. Individual Insurance (although an expected funding arrangement in the next six months should help alleviate this to some extent) and slightly lower than originally expected margins in U.S. annuity (largely due to the fact that the GMDB reserve hedge, while protecting the downside, does not yield an equal and offsetting earnings lift should equity markets improve).

• If the Canadian dollar stays at its current level versus US dollar through 2008 we could likely add $0.03 EPS in 2007 and $0.09 in 2008. We're assuming an US$0.86 Canadian dollar this year and US$0.89 next year, and each 5% change in our estimate is worth $0.09 or 2% of earnings. We forecast a 7% increase in yearly average levels of the S&P500 and the S&P/TSX in 2007, with Sun Life being more sensitive to changes in the S&P500. We estimate each 10% change in the growth rate for equity markets impacts our EPS estimate by approximately $0.20 per share.

• Multiple versus the group looking attractive - while valuation is certainly a "catalyst" a fresh look to the management team and 13% EPS CAGR through 2008 (ex f/x) should help. Sun Life is trading at a 6% discount to the average forward (NTM) P/E multiple of the Canadian lifeco group, well below its 3.5% average discount over the last seven years and its 2% average discount over the last three years. With what we believe a series of steady and consistent quarters, a fresh look to the management team, not to mention 13% average EPS growth through 2008 (ex f/x), close to the 14% we see for GWO and MFC, we believe the stock should "catch-up" to some extent in terms of its valuation relative to its peers.

• Canadian division (45% of bottom line) in-line with our expectation - up just 1% over exceptionally strong Q4/05 - we look for 7% growth through 2008 - in line with mid-to-high single digit target. The Canadian market continues to be very competitive, and, despite being on the verge of an oligopoly, the market is not behaving as such. While profitability is good (ROE is 15%) and the division is a key contributor to the company's excess capital (which currently stands at $1.5 to $2 billion), the Canadian division for Sun Life, in fact for all the large Canadian lifecos, is not the driver of EPS growth. We expect 7% growth in 2007 and 2008. Group businesses continue to be the bright spot, with exceptional sales growth and increasing profitability. Individual insurance sales, up 16%, continue to pace ahead of the market, but pricing remains very competitive.

• U.S. (23% of bottom line) - excellent top-line growth (likely sustainable) but weaker than expected bottom line due to significantly higher new business strain and reserve increases (mostly non-recurring by 2008). The individual insurance segment suffered to the tune of about $0.03 per share due to excessive new business strain that in the past had been offset by favourable funding of the U.S. AXXX reserves. In an effort to diversify the funding arrangement structure, the company chose to not utilize it for a large chunk of Q3/06 business written, and thus consequently suffered from the effect of sizeable new business strain on the large volume of business written in the quarter. We expect the company to have a new arrangement in place within the next six months, which will offset the strain issue. All in, most of the strain issue we saw in the quarter should be beyond us by 2008, and with a larger inforce block by then we expect renewed earnings momentum. The individual annuity segment was about $0.04 below our expectations, with about one-half that due to reserve strengthening and credit reversals (largely non-recurring). We expect the increasing new business volume (domestic VA sales up 52%) and significantly improving net sales to help this segment going forward. The Genworth group acquisition ($0.05 EPS accretion, largely in 2008) should add to the earnings momentum for this segment.

• We expect the company to continue to increase its dividend in the 7%-9% range every six months and buy back at least $500 million of stock annually. With a payout ratio at 32% of 2007E EPS, at the low end of the 30%-40% target, we expect the company to grow earnings faster than its EPS growth (which we forecast to be 12% CAGR through 2008, 13% ex f/x). We see further potential for tuck-in acquisitions from the $1.5 billion in excess capital and lots of buy-back support.

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Bloomberg, Sean B. Pasternak, 8 February 2007

Sun Life Financial Inc., Canada's second-largest insurer, said profit rose for the fifth straight quarter, led by its Massachusetts Financial Services Co. mutual fund unit.

Fourth-quarter net income increased 14 percent to a record C$545 million ($460 million), or 94 cents a share, from C$478 million, or 83 cents, a year earlier, the Toronto-based company said today in a statement. Revenue rose 15 percent to C$6.14 billion.

Earnings from MFS, the Boston-based fund unit, surged 58 percent to C$71 million as higher stock prices boosted assets under management. The Standard & Poor's 500 Index climbed 6.2 percent in the quarter, leading to net sales of $1 billion at MFS, following three quarters of redemptions.

``We're very positive about the outlook for MFS,'' Chief Executive Officer Donald Stewart said today in a telephone interview. ``MFS is very well-placed on the international front.''

The shares rose to a record after profit topped analysts' estimates. Sun Life was expected to earn 91 cents a share, according to the average estimate of eight analysts polled by Bloomberg.

Shares of Sun Life rose 46 cents to C$51.92 at the 4:10 p.m. close of trading on the Toronto Stock Exchange. They've risen 5.3 percent this year, compared with a 2.2 percent gain for the Standard & Poor's/TSX Financials Index.

Sun Life said in October it won't sell part of MFS after earlier hiring investment bankers to find a partner. The insurer had considered an alliance with another firm after it had net redemptions from its mutual funds for nine straight quarters.

Stewart said MFS plans to add ``two to three dozen'' employees, such as research analysts, in foreign countries where it plans to boost distribution for its funds. MFS has about 2,000 employees worldwide.

``We want to expand our footprint in Australia, Asia and Europe,'' Stewart said today.

Canadian earnings rose 1.2 percent to C$257 million because of gains in its individual insurance business. U.S. insurance profit fell 35 percent to C$97 million because of lower annuities and individual life insurance earnings.

Profit from Asia more than quadrupled to C$33 million, bolstered by the company's year-earlier acquisition of CMG Asia Ltd. For the full year, profit climbed 7.5 percent to C$2.09 billion, or C$3.58 a share.

Stewart said he expects this year to meet Sun Life's ``medium-term'' goal of annual earnings per share growth of 10 percent. The company had 15 percent growth on a ``constant currency'' basis last year, according to an investor presentation.

Sun Life is the first of Canada's three biggest insurers to report results, with Manulife Financial Corp. scheduled for Feb. 13 and Great-West Lifeco Inc. on Feb. 15.

Sun Life increased its quarterly dividend by 6.7 percent to 32 cents a share. The insurer reiterated it plans to pay out 30 percent to 40 percent of earnings in dividends.

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BMO CM on Mean Reversion of Canadian Banks

BMO Capital Markets, 6 February 2007

Introduction

For the period 1970 to 2006, we examined the total returns (dividend income and price appreciation) of the Big Six Canadian banks relative to the S&P/TSX Bank Index, to determine if mean reversion was a significant phenomenon when it came to bank performance. Broadly speaking, we conclude that mean reversion did produce incremental returns, although the incidence of success was no better than average.

Our research was centred on the performance of the two extremes: the best-performing bank and worst-performing bank for each year. Performance was deemed to be the total return of the bank in question relative to the S&P/TSX Bank Index in the year immediately following its best or worst title year. To ensure that outliers didn’t skew our analysis, we excluded the two years with the highest and lowest relative returns.

Even the Worst Bank Stock Produced Strong Returns

While the Big Six Canadian banks might look similar on the surface, in reality, there are differences in how the individual banks have performed over the years, with Scotiabank and TD leading the pack and CIBC, BMO and National trailing (Table 1). Having said that, even the weakest bank stock has beaten the S&P/TSX over the past 36 years.

Table 2 shows the marked differences in the returns of the best and worst performing banks over the years. The gap between the two extremes has averaged 33% over the past nine years. In four of these years, the worst-performing bank has become the best-performing bank in the following year. On the surface, this is a compelling argument for reviewing the tendency of bank stocks to mean revert.

Mean Reversion for the Big Five Banks

In examining the returns of the worst-performing bank one year after its poor performance, we found the incidence of outperformance relative to the Bank Index inconclusive. In the 36 years we considered, the worst-performing bank outperformed the bank index in the following year exactly 50% of the time (Chart 1). This meant that, on an historical basis, an investor who bought the worst-performing bank in one year had only a 50% chance of outperforming the group the following year. However, in examining the scale of outperformance for the same data set, we found the results far more conclusive. The average performance for the worst-performing bank one year later was 3% higher than the bank index. This indicated that when banks did recover from their poor performances, they tended to show meaningfully above-average returns.

The other side of the coin was the performance of the best performers. Over 36 years, the best-performing banks underperformed the group, the year after, on 16 occasions (Chart 2). This indicated that banks which performed the best in one year were likely to outperform the index in the following year. However, when the scale of performance was considered, the best performers tended to falter; the average annual performance of the best-performing bank one year later was 0.5% lower than the bank index.

Mean Reversion Inclusive of National Bank

National Bank was excluded from the bank group in our previous analysis. Our logic has historically been that mean reversion works for homogenous groups. National, with its regional focus and smaller market capitalization, tends to be impacted by different variables. For perspective, the average market cap of the Big Five banks is roughly $48 billion. National has a market cap of only $10 billion.

However, it is important to note that when National Bank was included in the results, it negatively skewed the average incremental returns - particularly for those of the worst-performing mean reversion strategy (Chart 3).

With National included, the average long-term returns of buying the worst-performing bank drop to 1.2% from 3.0%, owing to several years of consecutive underperformance relative to the other banks in the early 1980s and early 90s. Having said that, National has closed the performance gap over the past five years as it has moved its ROE higher to match its bank peer group. We would not be surprised if it begins to ‘mean revert’ like the Big Five Banks.

The Investor Perspective

Mean reversion, therefore, appears to be a valid investment strategy and can produce positive returns if adhered to over the long term. Both strategies - buying the worst-performing stock or short-selling the best performing stock - would have produced positive returns since 1970 (Chart 4). Ignoring transaction costs and taxes, simply buying the worst-performing bank each year since 1970 would have produced a CAGR of roughly 2.8% above the bank index. (Note that this is different from the average shown in Chart 1 due to compounding effects).

Chart 4 highlights two interesting trends. First, the incremental returns earned from buying the worst-performing bank are higher than those earned by selling the best-performing bank. We believe this is a case study in behavioural finance, which contends that investors are more enthusiastic of strategies that have them buying weak stocks than strategies that have them selling strong ones. Put another way, banks tend to be 'oversold' in negative times, rather than 'overbought' in good times.

We also find it interesting to see that the trend in both incidence and scale of mean-reversion actually seems to be picking up, particularly for the worst-performing bank. In the 1970s, 80s and 90s, the average incidence of outperformance for the worst performing bank one year later was roughly 45%. That number has increased to 71% since 2000. Similarly, the average performance of the worst-performing stock one year later relative to the bank index between 1970 and 1999 was 1.7%. Since 2000, that number has increased to 11%. The reasons for this are less clear to us. It is difficult to tell whether investors have become more aware (and more proactive) of the mean reversion strategy, or whether bank executives are becoming more effective at correcting their mistakes. If indeed it is bank executives who are taking action more quickly to repair damaged stock prices, one dares question whether corporate time horizons have shrunk over time, making bank managers less willing to pursue long-term strategies that hurt short-term stock prices.

The Timing of Incremental Returns from Mean Reversion

We also thought it interesting to examine the speed with which the revaluation occured. In the 36 years we examined, the worst-performing bank outperformed the market in the first half of the following year roughly 53% of the time (Table 3). Furthermore, the average relative returns experienced by the worst performers in the fi rst half were 2.2% (interesting, given the average relative returns for the full years were roughly 3.0%). Similarly, the best performers underperformed the market one year later roughly 56% of the time, with an average relative underperformance of 1.8%.

This indicated to us that there is a seasonality component to mean reversion, with the majority of the re-balancing occurring in the first half of the calendar year. In other words, if you are going to employ the strategy, it pays to get in early, before other investors catch on or bank managers pull up their socks.

Conclusion

From the analysis above, we could speculate that a reasonable investment strategy today would be to buy BMO and short CIBC. BMO, the worst-performing bank stock of 2006 (Table 4), has held this title seven other times in the past 36 years. In the years after each of these times, BMO has outperformed the bank index by an average of 3.8%. CIBC, the best-performing bank stock of 2006, has been the best of the pack on six different occasions within the past 36 years. The bank’s one-year return following these incidents has averaged 4.4% lower than the bank index.

However, as analysts we believe that fundamental research does have value and that there are complexities to future bank performance that are not captured in the simple analysis of historical relative returns. While we do not deny that the Canadian banks tend, over time, to move as a group, we believe that their platforms, risks, opportunities and management teams can lead to meaningfully different total return performance in the short term.

We continue to prefer CIBC and TD Bank over other bank stocks. Both banks have significant exposure to the domestic retail environment, which we believe will remain healthy in 2007. CIBC will continue to reap the benefits of its loan portfolio restructuring as well as its cost control. TD Bank has an outstanding domestic footprint as well as a solid platform in the U.S., providing it both diversification benefits and the potential for growth.

Our other recommendation is National Bank, which fits squarely into our mean reversion argument. The second-worst performer of calendar 2006, National’s shares have meaningfully underperformed the bank group over the past 12 months (-0.5% vs. the bank group of almost 12%) due to BMO’s recent outperformance. The somewhat more attractive competitive environment in Quebec, combined with National’s solid retail and wholesale franchises, indicates that NA shares should be due for a catch-up.

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RBC Capital Markets Appoints Co-Presidents

The Globe and Mail, Boyd Erman & Sinclair Stewart, 8 February 2007

RBC Capital Markets, the country's biggest securities firm, is drawing up a road map for succession at the top by naming co-presidents who will oversee everyday operations.

Doug McGregor and Mark Standish will share the president's job and become the co-chairmen of the firm's key operating committee, enabling CEO Chuck Winograd to spend more time planning strategy and working on deals.

The two men come from different sides of the firm, with 45-year-old Mr. Standish in New York focusing on bonds, derivatives, foreign exchange and services for hedge funds, while Mr. McGregor, 50, works in Toronto overseeing corporate finance, mergers and acquisitions, and stock sales and trading.

The firm, owned by Royal Bank of Canada, is not the first to try the two-heads approach. When David Wilson left Scotia Capital Inc. to become head of the Ontario Securities Commission, John Schumacher and Steve McDonald were made co-chairmen and co-CEOs. The idea is not to set up a competition for the CEO's chair, said Mr. Winograd, but to split up responsibility to reflect the fact that RBC has grown and worked its way into such varied niches outside Canada.

"I think the co-head structure is probably more appropriate for the business as it's evolving," Mr. Winograd said. "It's definitely not a succession contest."

RBC's operations have grown quickly outside Canada, and now more than half the securities firm's employees are located abroad and about 60 per cent of its revenue comes from outside the borders of its home country. The firm has an investment banking arm in New York, and a foreign-exchange hub in London, as well as smaller outposts around the world.

RBC Capital Markets is coming off a big year, with a $1.4-billion profit in the 12 months that ended Oct. 31, but there are challenges. At home, the firm must protect its position as a dominant player against incursions by giant "bulge bracket" rivals from abroad that offer a wide suite of services to Canadian firms.

Already, aside from RBC and CIBC World Markets Inc., the ranks of the busiest merger advisers in Canada are largely made up of foreign firms. "You have to have a spectacular product platform to compete, with a large-cap Canadian issuer, because if you don't, the bulge bracket dealers will eat your lunch," Mr. McGregor said.

In the U.S., where the firm has been growing by acquisition, it's still a relatively small player in a hypercompetitive market. "In Canada we're all things to all people," Mr. Standish said. "Outside of Canada we tend to be more specialized."

Stepping back from the day-to-day operations will be difficult for a "very hands-on guy," Mr. Winograd acknowledged. "It's going to be gradual, but this is the catalyst.

"For me, it will involve a change in style, because that's what has to happen for succession to be effective," he added. Still, he doesn't expect to be too hands-off.

"I can't imagine that I'm going to stop reading my numbers and if I'm having a thought before bed, [Mr. Standish and Mr. McGregor] are going to hear about it."

Mr. Winograd expects to now spend more time trying to drum up business. "I like clients and doing deals," he said. "I'd like a chance to do more of them."

RBC, in another promotion, named George Lewis head of a new global wealth management unit as part of a plan for international growth in the bank's three main businesses: capital markets, wealth management and banking.

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• Mark Standish
Age: 45
Birthplace: London, England
Resides: New York
Oversees: Global debt, structured product, foreign exchange, prime brokerage.
Little-known fact: Got his first banking job at 16 as a "teaboy," making tea, sweeping out the vault, and stamping cheques.

• Doug McGregor
Age: 50
Birthplace: Etobicoke, Ont.
Resides: Toronto
Oversees: Global corporate finance, M&A, equity sales and trading.
Little-known fact: Was part of the national wrestling team as a student at University of Western Ontario.

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Citigroup Initiates Coverage of Canadian Banks

The Globe and Mail, Angela Barnes, 7 February 2007

Citigroup Global Markets Inc. has initiated coverage of the big six Canadian banks, rating three as “holds” and three as “buys.”

The three holds are Toronto-Dominion Bank, National Bank of Canada and Royal Bank of Canada and the three buys are Canadian Imperial Bank of Commerce, Bank of Nova Scotia and Bank of Montreal. The ratings vary significantly from consensus in some cases.

Citigroup analyst Shannon Cowherd gave CIBC a “buy-high risk” rating and a 12-month price target of $121. Ms. Cowherd said her rating reflects a view of the upside profit potential at CIBC, primarily driven by its cost-cutting initiative and the loan-loss coverage ratio. “We recognize the stock is up 38 per cent in seven months but feel the story is not over yet,” she said. The shares are currently trading at $101.78 on the Toronto Stock Exchange.

With Scotiabank (buy-medium risk), she noted that the shares are trading at a premium to the group, based on the forward price/earnings multiple. “We think this premium is warranted given the bank's exposure to high-growth, albeit risky, markets and our estimated three-year CAGR [compound annual growth rate] of 6.6 per cent exceeds the group average,” Ms. Cowherd said. She expects Scotia shares, which are currently stand at $51.68, will rise over the next 12 months to $64.

Ms. Cowherd noted that Bank of Montreal (buy-medium risk) shares are trading at a discount to the peer group, again based on the forward P/E. She thinks they should trade at a premium to the group. “Our recommendation is driven by our view of the upside potential for growth in both Canada and U.S. as the bank increases its risk appetite in order to generate earnings,” she said. She has a 12-month target of $85 on the shares. They are currently trading at $71.28.

In rating Toronto-Dominion a “hold” -- instead of a “buy” as most analysts have done - Ms. Cowherd argued that its shares don't deserve the premium they have because its share profit is estimated to grow by 6 per cent a year, which is in line with its peer group. “In our view, the stock will trade sideways until there is some clear indication of what shape the bank will take,” she said. That view is reflected in her 12-month price target of $73 on the shares. They stand at $70.17.

Ms. Cowherd said she doesn't see any near-term catalysts for significant share price appreciation with the Royal Bank and she thinks the premium on the shares is not warranted, given that profit is expected to grow basically in line with the group. “We believe other Canadian banks are better positioned considering our view of the operating environment over the next 12 months,” she said. “Aside from valuation, we rate the stock ‘hold' because our view is that most of the bank's strategy and earnings potential are already priced in,” she added. She expects the shares, now trading at $54.60, will rise to $59 over the next 12 months.

Ms. Cowherd describes National Bank as a niche player. Its business is being primarily driven by lending to small and medium sized enterprises and growth in the mutual fund area -- and is “firing on all cylinders,” she said. But “as the only regional player of the six and the smallest in loan, asset and market capitalization we think the opportunities for growth are somewhat limited,” she said. She has a price target of $67 on the shares that are trading at $64.70.

Ms. Cowherd's recommendations on the six banks are in some cases noticeably different from the consensus. For example, TD has been a perennial favourite in recent years and continues to be, as indicated by the eight buy ratings on it and four holds, according to Bloomberg. The consensus opinion on CIBC and Bank of Montreal is generally less favourable. There are four buys on CIBC against eight holds, and one buy on BMO against 10 holds and one sell.

She said of BMO, that the “street likely underestimates the importance of credit risk management and increased risk.”

She also said that Canadian bank valuations over all are now in line with those of U.S. banks.

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RBC Creates Wealth Management Segment

Reuters, 7 February 2007

Royal Bank of Canada is shifting some existing businesses into a new wealth-management segment and plans aggressive growth in those products and services, the bank said on Wednesday.

The realignment will see the bank's RBC Asset Management unit move into the new segment from its current spot within Canadian personal and business banking.

RBC's Canadian and U.S. full-service brokerages, the Canadian trust and discretionary investment management business, and the bank's global private banking business will also move into wealth management.

"The old structure just lumped in a lot of disparate businesses together, so this is a step in the right direction to report the business by type rather than by geography," said Ohad Lederer, a financial services analyst with Veritas Investment Research in Toronto.

As of Oct. 31, 2006, RBC's wealth management segment had about C$475 billion ($402.5 billion) of client assets under administration in Canada, the United States and outside North America, the Toronto-based bank said. It also had C$140 billion of assets under management, and 3,000 financial advisers in Canada and the U.S.

George Lewis, head of the new wealth management operations, said RBC is one of the few Canadian financial institutions with a global platform to expand in asset management and international trust functions.

"We intend to continue to grow aggressively the businesses that we have, centered around affluent and high net-worth clients, by attracting and retaining advisers and client-facing professionals," Lewis said in an interview.

Global economic growth and aging populations are expected to keep pushing up demand for asset management, brokerage and trust services, making these attractive lines for financial institutions.

"It's a business where, if your clients do well, your business does well -- it grows along with clients -- and it doesn't require a significant capital outlay to grow organically the way some other segments of financial services do," Lewis said.

RBC's other three business segments are Canadian Banking, Capital Markets, and U.S. and International Banking.

The bank will report second-quarter results under the new structure on May 25. First quarter results are due March 2.

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Enron's Banks Lose Bid to Combine Lawsuits for Trial

Bloomberg, Thom Weidlich, 7 February 2007

Merrill Lynch & Co., Credit Suisse Group and Barclays Plc, three former lenders to Enron Corp., lost a bid to consolidate in one trial three lawsuits brought by the defunct energy trader's investors.

U.S. District Judge Melinda Harmon in Houston today denied the request, as well as a motion by the lead plaintiff, the Regents of the University of California, to consolidate two cases for trial in the massive class action, known as Newby v. Enron, set to begin April 9 in Houston federal court.

``The procedural tracks of the cases are too disparate for consolidation with Newby at this late date,'' Harmon wrote. Enron's investors are seeking $40 billion in the Newby case.

Enron's investors accused the company's banks of helping former Chairman Kenneth Lay and ex-Chief Executive Officer Jeffrey Skilling manipulate company finances by disguising debt as loans, financing sham energy trades and using off-the-books partnerships to hide losses and inflate revenue.

New York-based Merrill, Zurich-based Credit Suisse and London-based Barclays wanted to consolidate the Newby trial with those of two other cases because they have similar facts, claims and legal theories, according to Harmon's decision. One of the two lawsuits is against Edinburgh-based Royal Bank of Scotland Group Plc and Toronto-based Toronto-Dominion Bank, the other against the Royal Bank of Canada, also based in Toronto.

The banks in the two cases, which haven't yet been certified as class actions, or group lawsuits, objected to the combination, Harmon wrote.

The Regents wanted the Newby trial consolidated with one against Goldman Sachs Group Inc. because it involved the same public offering of $255 million in convertible Enron notes as a claim in Newby, according to today's ruling. New York-based Goldman Sachs objected to the consolidation, Harmon wrote. Peter Rose, a spokesman for Goldman, declined to comment.

A federal appeals court in New Orleans heard arguments Feb. 5 on whether Enron investors can continue pressing their claims in Newby as a group. Harmon last year ruled they can and certified the case as a class-action suit. Plaintiffs in class actions can pool their resources and claims, gaining more leverage to achieve bigger settlements, or a favorable verdict at trial.

Merrill and Credit Suisse said shareholders shouldn't be able to pursue their suit as a group because they can't prove the firms directly participated in the accounting fraud that sparked a federal investigation and Enron's 2001 bankruptcy. The appeals court has yet to rule.

Investors have recovered $7.3 billion from other Enron defendants, including New York-based Citigroup Inc., New York- based JPMorgan Chase & Co. and Toronto-based Canadian Imperial Bank of Commerce.

``We look forward to trial in April against Merrill, CSFB, Barclays and the five former Enron officers,'' Regents spokesman Trey Davis said in an e-mailed statement. ``The denial of consolidation at this time allows us the opportunity to focus on that effort.''

Also named as defendants in the Newby lawsuit are Skilling, former Enron Chief Accounting Officer Richard Causey, ex-Chief Risk Officer Richard Buy, former Treasurer Jeff McMahon and former Executive Vice President for Investor Relations Mark Koenig, Davis said.

Merrill spokesman Mark Herr and Barclays spokesman Peter Truell declined to comment. Credit Suisse spokeswoman Victoria Harmon didn't immediately return a call for comment.

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Credit Suisse, Merrill Lynch Ask Court to Throw Out Enron Fraud Suit

Reuters, Russell McCulley, 5 Feburary 2007

Lawyers for Merrill Lynch and Co. Inc. and Credit Suisse Group on Monday told a U.S. appeals court a $40 billion lawsuit alleging the banks helped hide financial misdeeds that led to Enron's collapse should not proceed as a class-action complaint.

If the three-judge panel from the 5th Circuit Court of Appeals overturns the class certification ruling from U.S. District Judge Melinda Harmon in Houston, it would be a major blow to the investors' case, which is set for trial in April.

The banks argue that Judge Harmon has wrongly allowed investors to allege Merrill Lynch and Credit Suisse were primary participants in the fraud.

But in court papers Merrill Lynch has said there is no evidence to prove the investment bank was a "substantial or significant factor" in the losses that caused Enron's collapse.

And that was an issue the appeals judges focused on, quizzing both sides about whether or not the banks were only secondary actors in the alleged fraud.

"What is the test we use to determine whether a party is an aider and abettor rather than a secondary party?" Judge Jerry Smith, asked Richard Clary, a lawyer for Credit Suisse.

Patrick Coughlin, a attorney representing the plaintiffs, told the court the banks had a fiduciary duty to Enron's investors.

In a class-action lawsuit, investors consolidate their complaints, allowing more clout than if claims were pursued on an individual basis. And if the class-certification were overturned in this case, it would be a massive setback for the plaintiffs.

"It would be much more difficult for the plaintiffs to recover if the appeals court rules in the banks' favor," Lowell Peterson, a lawyer with Meyer Suozzi English & Klein in New York. "A lot of times, it's only realistic for these plaintiffs to pursue claims as a class."

So far, the lawsuit has netted more than $7 billion for investors, including $2 billion or more each from Canadian Imperial Bank of Commerce, J.P. Morgan, and Citigroup.

Other banks named in the complaint include Toronto Dominion Bank, Royal Bank of Canada and Royal Bank of Scotland Group Plc.

Enron filed for bankruptcy on December 2, 2001. The company's collapse erased thousands of Enron employees' pensions and billion of dollars in investors' money.

Coughlin expects the appeals judges to issue an opinion on matter within a couple of weeks.

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Bloomberg, Bob Van Voris and Jef Feeley, 5 February 2007

Merrill Lynch & Co. and Credit Suisse Group asked a federal appeals court to end a class action lawsuit by Enron investors seeking $40 billion they lost when the now- bankrupt energy trader collapsed in 2001.

The firms argued that a Houston judge was wrong to allow investors to sue as a group. Merrill and Credit Suisse claimed they can't be sued because they didn't participate directly in the fraud that led to Enron's bankruptcy. The investors argued the court can only address whether the plaintiffs can sue as a group. Trial is scheduled for April in Houston federal court.

``This class certification is putting enormous coercive impact on my client, facing a possible $40 billion exposure,'' Merrill lawyer Stuart Baskin said today in New Orleans federal appeals court.

A ruling throwing out class status may reduce any liability the banks would face for Enron losses. In June, U.S. District Judge Melinda Harmon said investors who bought Enron securities between October 1998 and November 2001 may combine their claims. The decision gave investors, who would otherwise be forced to sue individually, the possibility of a much higher recovery at trial and more leverage in negotiating any settlement.

Other former Enron lenders, including Citigroup Inc. and JPMorgan Chase & Co., both based in New York, and Toronto-based Canadian Imperial Bank of Commerce, have settled with investors for more than $7 billion.

Merrill, the third-largest U.S. securities firm by market value and based in New York, and Zurich-based Credit Suisse, Switzerland's second-largest bank, argued that Harmon's ruling is based on the mistaken theory that the banks are individually responsible for investor losses because they took part in a scheme run by Enron and its former executives.

That theory, the banks argued, unfairly allows shareholders to hold individual banks liable for the entire fraud, regardless of whether they knew or participated in the entire scheme.

To be liable, a defendant must ``make a material misstatement or an omission where there's a duty to speak, or engage in manipulative securities trading,'' said Richard Clary, a lawyer for Credit Suisse.

U.S. Circuit Judge E. Grady Jolly, one of three judges hearing today's arguments, asked defense lawyers whether Merrill's agreement to buy a barge from Enron, a transaction which the judge said posed no financial risk to the securities firm, would make Merrill liable to Enron investors.

``The barge transaction is no different than countless other transactions contained in allegations in the complaint,'' said Merrill lawyer Baskin. ``Merrill Lynch could be responsible for tens of billions of dollars of liability based on that one transaction,'' if the court accepts the investors' argument.

Baskin predicted the courts under the jurisdiction of the New Orleans appeals court, which includes federal courts in Louisiana, Mississippi and Texas, would become ``a breeding ground'' for securities fraud class actions if it permitted defendants to be responsible for the entire fraud based on one or two transactions.

The Nigerian transaction raised by Jolly involved the sham sale of energy-producing barges moored off the Nigerian coast. In a related criminal prosecution, the U.S. obtained convictions of Enron finance executive Dan Boyle and former Merrill banker James Brown.

Boyle and Brown were both convicted of fraud and lying to investigators. Brown's fraud verdicts were overturned, and he is free on bond while appealing his perjury conviction. Boyle chose not to appeal.

Prosecutors won guilty verdicts against three other former Merrill bankers in the barge case. The bankers' convictions were thrown out on appeal.

The Enron investors, led by the Regents of the University of California, claim the appeals court is limited to determining whether Harmon properly combined their claims into one case, not whether the claims have merit. They argue that Merrill and Credit Suisse can be sued under federal securities laws because they both knowingly engaged in the scheme to defraud Enron investors.

``The conduct was directed at the Enron shareholders,'' Patrick Coughlin, a lawyer for the investors, argued at today's hearing. ``That's when I say you've stepped over the line. That goes beyond aiding and abetting.''

In court filings, the investors claimed that ``each bank knew that to obtain part of Enron's lucrative business it had to structure, fund, and execute bogus transactions.''

Enron, once the world's biggest energy-trading firm, had a market value of as much as $68 billion before its bankruptcy, the second-largest in U.S. history after WorldCom Inc., wiped out more than 5,000 jobs and at least $1 billion in retirement funds. The investors sued the Houston-based company in 2001.

Investors accused the banks of helping former Enron Chairman Kenneth Lay and ex-Chief Executive Officer Jeffrey Skilling to manipulate Enron finances by disguising debt as loans, financing sham energy trades and using off-the-books partnerships to hide losses and inflate revenue.

A federal jury in Houston convicted Lay and Skilling in May 2006 of fraud and conspiracy charges after a four-month trial. Lay died of a heart attack at age 64 in July. His conviction was thrown out because he didn't have an opportunity to appeal.

Skilling, 53, was sentenced to more than 24 years in prison and is now serving his term at a federal prison in Waseca, Minnesota.

The case is: Regents of the University of California v. Credit Suisse First Boston, No. 06-20856, U.S. Court of Appeals for the Fifth Circuit.

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