Preview of Life Insurance Cos Q1 2007 Earnings

Scotia Capital, 23 April 2007

Event

• Canadian insurers start reporting Q1/F07 results on May 1. We've released our detailed Insurance Q1/F07 Earnings Preview on April 23.

What It Means

• Get ready for EPS volatility. This will be the first quarter the companies report under the New Accounting Standards. The most significant change to impact the bottom line is that the net realized gains on assets backing surplus and capital will no longer be amortized or "smoothed" into income, but rather taken into income when they are realized. Manulife is the most susceptible to inherent income volatility of the new standards.

• For the lifecos we expect 12% EPS growth, and look for 12% EPS CAGR through 2008.

• The P&C insurance market remains rational, and above industry norm profitability is expected to continue. However, pricing is expected to continue to decline (at a slower pace than 2006 for the auto insurers, and at a slightly faster pace than 2006 for the commercial lines players) and operating earnings growth is expected to be flat to slightly down YOY. That said, some valuations, particularly KFS and IIC, are starting to look attractive.

Q1/F07 Earnings Preview

The following is an excerpt from our Insurance Q1/F07 Earnings Preview report released April 23, 2007. Canadian Lifecos - new accounting standards start Q1/F07 - watch for an increase in earnings volatility

• We expect an increase in the volatility of Canadian lifeco earnings in 2007, starting with Q1/F07, especially for Manulife. The most significant net income impact of the new accounting standards (specifically Section 3855 of the Canadian Institute of Chartered Accountants), which become effective in 2007, is the loss of amortization of gains and losses on assets backing capital and surplus. Prior to Q1/F07, realized gains and losses on bonds and mortgages backing capital and surplus were deferred and amortized into income over the remaining term of the asset, and realized and unrealized gains and losses on stocks were deferred and amortized at a rate of 5% per quarter. Starting with Q1/F07, gains and losses on assets backing capital and surplus will be taken into income as they are realized. That means the steady amortization of these items, which in the past accounted for about $0.04 to $0.05 in quarterly EPS for Manulife, $0.04 in quarterly EPS for Sun Life, $0.02-$0.03 in quarterly EPS for Industrial-Alliance, and $0.02 in quarterly EPS for Great-West Lifeco (see Exhibit 1), will now be replaced by whatever the after-tax realized net gain (or loss) on these assets is in the quarter. With the most excess capital, and, as well, the company with a larger percentage of capital and surplus assets in stocks, Manulife is the most susceptible to the inherent net income volatility of the new standards.

• Over the long run, EPS estimates shouldn’t change due to the new standards; in our opinion, they’ll just be more volatile. That’s because we believe that over the long run the average realized net gain on the assets supporting capital and surplus is probably close to the average impact of the amortization of gains and losses we’ve seen on these assets in the past. It’s just that now, the quarterly income is going to more volatile.

• The amount of realized net gains on surplus assets needed to replace the 'loss in amortization' is certainly plausible and definitely not insurmountable. We estimate that, in order to replace the annual earnings associated with amortization of net gains on surplus assets, the annual net realized gain yield on surplus assets needs to be 1.5% for Manulife, 1.3% for Sun Life, 0.7% for Great-West Lifeco, and 0.5% for Industrial-Alliance (which serve as our estimates for Q1/F07). Given that these yields are far less than the 1.5%-2.0% yields we see for the P&C insurers, we believe that over the long run EPS estimates should not change due to the new standards.

• There is a possibility, due to the buoyant equity markets in Q1/F07, that the companies could beat our estimates and consensus. With U.S. and Canadian equity markets up 11% and 10% year over year (on average) and 3% and 5% quarter over quarter (on average), well in excess of the 7% annualized rate we assume (see Exhibit 2), we could possibly see companies surpass our estimates on better-than-expected fee income from wealth management business, better-than-expected net realized gains on assets supporting surplus, and some favourable movement in reserves associated with guarantees on segregated fund/variable annuity business.

• The macro environment continues to look good for our insurers. Long-term interest rates appear to have stabilized, and with Scotia Economics forecasting both U.S. 10-year treasuries and government of Canada 10-year yields to modestly increase by the middle of 2008, we see little in the way of headwinds due to declining long-term yields. U.S. equity markets, where the Canadian lifecos have the majority of their equity market risk, appear to be co-operating, which after increasing 14% last year appear to be on track (as per our strategist) to increase 7% this year. Credit conditions continue to track at very favourable levels. Given this backdrop, along with an expected S&P/TSX increase in the mid-single digit range for the next 12 months, we recently increased our recommendation for the Canadian lifecos from market weight to overweight. Finally, we have conservatively assumed that the recent bid the C$ has caught relative to the USD and the £ will continue through 2008. Should currency markets remain at current levels through 2008 we would expect to increase our 2008 EPS estimate for GWO by 1%, decrease our 2008 EPS estimate for MFC by 1%, with no change for SLF.

• The amount of share buybacks for MFC and SLF has declined over the last 2 quarters. These companies have gone from spending 30%-40% of EPS on buybacks to half those levels over the last six months (see Exhibit 3). We believe that shoring up cash for the $720 million Genworth acquisition (expected to close in Q2/07) accounts for some of SLF's recent slowdown, and we expect the company’s buyback pace to pick up after the close, consistent with the company’s targeted $500 million annual buyback spend (or 25% of 2007E EPS). For MFC, which has no share buyback target, we’re not quite sure why there is a slowdown (building an acquisition war chest? If so, coveted properties are quite expensive - see our Excess Capital Update report of April 2, 2006). We do not expect the company to significantly increase its dividend, as its payout ratio currently sits at the midpoint of its 25%-35% targeted range. If Manulife’s share buyback pace continues at this pace we would reduce our EPS estimates by $0.02 in 2007 and $0.04 in 2008, as well as freeze projected ROE at the current 16% level.

Great-West Lifeco Inc.

1-Sector Outperform : $40 one-year target, based on 3.0x 3/31/08E BV and 14.1x 2008E EPS

• We are looking for $0.56 per share for Q1/F07, $0.01 per share below consensus. Our 2007 EPS estimate is $2.46, $0.05 ahead of consensus.
• Likely no update on Putnam financing - we have to believe the longer we wait the more likely the deal could be financed without issuing common equity.
• YOY strength of the Pound and the Euro versus the C$ could push EPS above consensus.
• Recently completed tuck-in acquisitions in the United States should start to bear fruit.

Industrial-Alliance Insurance and Financial Services Inc.

3-Sector Underperform : $38 one-year target, based on 1.7x 3/31/08E BV and 12.5x 2008E EPS

• We are looking for $0.70 per share in Q1/F07, $0.01 below consensus. We peg organic growth excluding tax gains at about 9% for the quarter. Our 2007 EPS estimate of $2.91 is $0.04 below consensus.
• The Clarington acquisition will continue to propel individual wealth management earnings as should what we believe to be traditionally strong RRSP results - but increasing leverage to Canadian equity markets may cause some concern going forward.

Manulife Financial Corporation

2-Sector Perform : $43 one-year target, based on 2.5x 3/31/08E BV and 13.9x 2008E EPS

• We are looking for $0.67 per share for Q1/F07, $0.01 per share below consensus. Our 2007 EPS estimate of $2.82 is $0.01 below consensus.
• We expect EPS growth to return to a 12% clip, after growing by 22% in Q4/F06 and 20% in 2006 due to the benefit of 54% earnings growth in U.S. Fixed Products (exceptional investment and credit results) and tax gains in Canada.
• After several quarters of deceleration in sales growth in the United States and Japan, will we get a significant lift in the top line? We remain cautious.
• So what are you going to do with your excess capital? Always a conference call question.

Sun Life Financial Inc.

1-Sector Outperform : $58 one-year target, based on 1.9x 3/31/08E BV and 13.0x 2008E EPS

• We are looking for $0.94 per share for Q1/F07, $0.02 below consensus. Our 2007 EPS estimate of $4.05 is in line with consensus.
• We look for 12% EPS growth, similar to the 13% we saw in the last two quarters.
• U.S. variable annuity - we expect top-line growth momentum to continue.
• We expect the company is taking steps to alleviate the AXXX individual insurance strain issue in the United States. A new funding arrangement appears to have started in Q1/F07.

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TD Securities Leads in Q1 2007 Stock Offerings

The Globe and Mail, Boyd Erman, 23 April 2007

Buoyed by key roles in the two biggest Canadian stock sales of the quarter, TD Securities Inc. finished the first three months of 2007 atop the rankings for underwriting new share offerings.

TD led or co-led 16 offerings worth $2-billion in the January-March period, beating out CIBC World Markets Inc.'s total of 17 deals worth $1.66-billion, according to figures compiled by Thomson Financial.

With the income trust market disappearing, the quarter was dominated by big common-share deals for utilities that were buying new assets. TransCanada Corp. raised $1.7-billion to fund the purchase of a pipeline from El Paso Corp., and Fortis Inc. sold $1.1-billion of stock to pay for the acquisition of a gas system in British Columbia.

TD, which has been working to beef up its investment banking division in recent years, is starting to see that effort pay off with roles on such large transactions.

"We've had some big wins early in the year as the result of a lot of hard work over the past few years," said Sante Corona, of the equity capital markets department at TD Securities.

Canaccord Capital Inc. vaulted into third place, jumping ahead of big-name banks such as fourth-ranked RBC Capital Markets, on the strength of 31 deals worth $1.52-billion, according to Thomson. Canaccord's biggest deal was raising $326-million for GPJ Ventures Ltd., now called Peak Gold.

"We're pretty pleased this quarter that our success was across all our key sectors," said Mark Maybank, Canaccord's chief operating officer and the deputy head of its CanaccordAdams securities and investment banking operations.

With income trust activity cooling in the wake of the federal government's decision to tax trusts more heavily, the outlook for the stock-sale business is uncertain. Investment bankers said that the "pipeline" of new deals is not bulging as it has in past years.

Still, with mergers and acquisitions activity still hot, stock sales to raise money for purchases may keep bankers busy.

TD finds a pipeline to deal making in the frst quarter, with its role in major common share offerings for TransCanada and Fortis.

Rank	Bank	Proceeds	Market share	Issues
1	TD Securities Inc.	2,009.7	14.4	16
2	CIBC World Markets Inc.	1,658.6	11.9	17
3	Canaccord Capital Inc.	1,516.9	10.9	31
4	RBC Capital Markets	1,332.7	9.6	9
5	BMO Capital Markets	1,248.2	9.0	11

Source: Thomson Financial

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UBS Raises Scotiabank's Price Target to $61

Financial Post, Jonathan Ratner, 20 April 2007

Bank of Nova Scotia’s international push has been marked by nearly a dozen deals in the past year, with the most recent investments coming in China and Thailand.

The bank’s move to put its excess capital to work at attractive returns, could lead to a healthy boost for earnings in 2007 and 2008, according to UBS analyst Jason Bilodeau.

He has a “buy” rating on Scotiabank shares and raised his price target to $61 from $58, representing upside of roughly 13%.

Mr. Bilodeau expects the bank will continue to make acquisitions and/or use some of its excess capital to hike its dividend or repurchase shares.

While he doesn’t think Scotiabank will be the strongest among its peers, the company’s first quarter results seemed to demonstrate that its domestic operations were in good shape.

“However, good flows on the wealth management front and the recent addition of a strong senior portfolio team (from RBC) in its mutual fund operations suggest the business is gaining some momentum,” Mr. Bilodeau added in a note to clients.

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Back Off on ABM Legislation, Banks Warns MPs

The Globe and Mail, 20 April 2007

Even as a standoff between big banks and federal Finance Minister Jim Flaherty over cash machine fees subsided yesterday, bankers made sure to leave a parliamentary committee with a warning: Regulate our machines at your peril.

Canadian bankers cautioned MPs probing their user fees against any future notions about legislating what automated banking machine levies they charge, saying they'd pull the plug on some ABMs if that happened.

"It is unlikely that we would be able to continue to maintain a network of 4,000-plus [ABMs]," Jim Westlake, head of Royal Bank of Canada's Canadian banking division, told parliamentary hearings set up to probe bank fees.

"Access would suffer, and costs to consumers would rise," Mr. Westlake said. "Increase regulation and you will be reducing choices -- for students, seniors, people with disabilities and all Canadians."

The parliamentary hearings were set up after Mr. Flaherty made fees a national issue by questioning banks' rationale for charging a special levy when other institutions' customers use their ABMs.

However, bank worries about possible interference abated yesterday afternoon when Mr. Flaherty made it clear he won't support legislation meddling with bank fees.

Mr. Flaherty rejected a new NDP bill tabled yesterday by New Democrat finance critic Judy Wasylycia-Leis that would ban bank fees, saying it's not Ottawa's role to dictate such things to firms.

"Am I going to direct the banks about what they should be charging for a particular item? That's not the role of the Minister of Finance," Mr. Flaherty told reporters.

Liberal MPs from Canada's Official Opposition said their party is unlikely to back the NDP bill either.

The lack of Liberal support likely means the bill will not be able to garner enough votes to pass the Commons and make it into law.

At hearings yesterday, banks repeatedly refused MPs' requests that they divulge how much money they reap from ABM transactions, saying such disclosures would be giving any commercial secrets to rivals.

Separately, Mr. Flaherty signalled his public goading of the banks over fees appears to be drawing to an end, saying he's happy with measures five have taken in recent weeks to boost access to cash machines. "I'm pleased with the direction it's going," he told reporters.

Toronto-Dominion Bank has said it will add 50 ABMs to college and university campuses, Royal Bank has rejigged one of its banking service packages to decrease ABM fees and Bank of Montreal has extended the fee waiver on its free banking plans for seniors and students for three years.

While Mr. Flaherty has cheered this news, none of the banks has agreed to any straightforward reduction or scrapping of fees.

Ever vigilant against criticism of their banking machines, financial institutions defended the levies before MPs yesterday, saying they were needed to defray the costs of their ABM networks.

They said it would make no sense to allow customers of other banks free access to their own machines.

"It would be like being a member of a gym and having non-members of the gym using it for free. It goes against common business practices," said Tim Hockey, co-chairman of TD Canada Trust.

Banks suggested they weren't really the appropriate target of political ire, citing statistics that only 30 per cent of the ABMs in Canada are actually owned and operated by them, while the rest are "white-label" cash machines run by non-bank businesses.

Yesterday, one Big Six bank lobbyist complained privately that organizations such as universities are restricting access to ABMs based on which company, including white-label operators, will pay them the most fees.

"Some universities are making money on the backs of their own tuition-paying students," he said.

"While some of this only involves campus pub locations, on some campuses you can only withdraw funds from a white-label machine."

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Financial Post, Paul Vieira, 20 April 2007

The chartered banks warned MPs yesterday of higher lending rates on personal loans, fewer ATMs and steeper charges on basic services should Ottawa move to regulate fees on ATM transactions.

Senior executives from the Big Six banks made their case before the House of Commons finance committee, as the all-party group of MPs probes fees charged by banks at automated teller machines. The testimony may have marked an end to the ATM fee debate, as Jim Flaherty, the Minister of Finance, said yesterday he was "pleased" with the direction banks are heading on ATM fees.

Just prior to the bankers' appearance, the NDP had announced its finance critic, Judy Wasylycia-Leis, was set to table a private member's bill that would ban ATM fees. Mr. Flaherty -- as well as the Liberals -- suggested he has no interest in regulating the day-to-day fees banks charge.

"That's not our role, quite frankly," he said. "Am I going to direct the banks about what they should be charging for a particular item? That's not the role of the Minister of Finance."

Bank executives were unapologetic about the fees they charged their clients for withdrawing cash from ATMs that they don't own. For the most part, they got a sympathetic audience from Conservative and Liberal MPs, who make up threequarters of the committee.

"We run our ATM network for the benefit of our clients. We put the machines out there for all of our clients -- and 80% of them pay zero for that access," Jim Westlake, head of the Canadian banking group at Royal Bank of Canada, told reporters. "This is not about us putting machines out in the marketplace to make money on fees. It is about providing a service to our clients."

"Our customers, if they are not satisfied, can move somewhere else. They can vote with their feet," added Christopher Hodgson, Bank of Nova Scotia's executive vice-president of personal banking.

Bank customers use ATMs for more than a billion transactions each year, and the bank executives said roughly 75% to 90% of those transactions don't face levies. Customers are charged for some of those transactions -- typically $1 to $2 -- for withdrawing cash from a machine owned by a bank at which the customer does not have an account.

Asked by Liberal MP John Mc- Kay what would unfold should the government back the NDP proposal and ban ATM fees, the executives chimed in with tales of steeper charges on banking service such as cancelled cheques; fewer investments in expanding and improving the ATM network; and higher interest rates on personal loans and lines of credit.

Moreover, the number of nonbank- owned ATMs, or white machines, would likely shrink if fees were banned because that is the sole source of revenue for the machines' owners.

"I guess we are in the category of, 'Be careful of what you wish for,' " Mr. McKay said, in reference to Ms. Wasylycia-Leis's proposed bill.

Outside of Ms. Wasylycia-Leis, none of the other MPs on the committee indicated support for the NDP proposal.

Nevertheless, the NDP was successful in getting ATM fees in the headlines. Mr. Flaherty agreed to take up the cause, at the behest of the party. And most of the banks have responded. Royal Bank, for instance, launched a new line of account that it says will lower ATM fees, while other banks have pledged to place more of their ATMs near university campuses, which generally are home to white-label machines.

The NDP and Bloc Quebecois, though, pressed the banks to disclose the cost of ATM transactions to justify the fees charged. The bank executives refused, citing corporate confidentiality.

"You say you are transparent, but you won't provide the cost structure. That is very strange," said Thierry St-Cyr, a Bloc MP.

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The Toronto Star, Richard Brennan, 20 April 2007

Canada's major banks were accused of being arrogant yesterday for refusing to tell Canadians the cost of providing automated teller machines or their profit margins on controversial ATM fees.

"It is a very disappointing response," Judy Wasylyela-Leis, the New Democratic MP for Winnipeg North, said in an interview. "The arrogance of the banks just boggles the mind. With all their (bank) charter responsibility, you would think they would be a little more willing to be accountable to Canadians."

Almost every time the Commons finance committee members, who are probing ATM fees, tried to peer inside the world of banking yesterday, they were met with blank expressions."We won't comment on that," said Jim Westlake, the Royal Bank of Canada's group head of Canadian banking, when he was asked about profit margins for the ATM fees.

Canada has more ATMs per capita than any other country in the world and Canadians are among the heaviest users of these automated machines.

Representatives for RBC, the Canadian Imperial Bank of Commerce, the Toronto Dominion Bank, the Bank of Nova Scotia, the Bank of Montreal and even the central agency for credit unions objected strongly to suggestions the government should regulate bank charges that hit poor people particularly hard.

"We do not want to change ATM fees," Westlake said, emphasizing that it is a user-pay system that doesn't have to be regulated.

Wasylyela-Leis has introduced a private member's bill amending the Bank Act to prohibit banks from charging for the electronic transfer of funds or account information through automated banking machines.

Finance Minister Jim Flaherty has made it clear he expects some or all of the major banks will reduce or scrap automated teller machine fees for lower-income Canadians.

Flaherty told reporters after the Commons question period yesterday that when he first raised his concern over ATM fees, he got a "dismissive" letter back from the Canadian Bankers Association.

Since then, five of the banks "have been responsive with various issues that I raised with them including access for persons with disabilities to the machines, making sure that students on our campuses, both colleges and universities, have good access to the machines as well, and also seniors.

"But am I going to direct the banks about what they should be charging for a particular item? That's not the role of the minister of finance," he said. "We believe in competition and choice."

At the centre of the controversy are the sometimes hefty fees charged when a consumer uses an ATM not owned by the bank they normally deal with.

In many cases, that means paying a $1.50 fee to the company that owns the machine plus another $1.50 to their own bank, ostensibly for the convenience of using the ATM.

With so-called white labels, some of which are owned by banks, the charge for withdrawing money can be as high as $6.

But the banks told the committee that most of their clients – anywhere from 75 to 90 per cent – pay no fees.

Any attempt to reduce or eliminate these charges would result in a lower level of service and probably fees added elsewhere.

At least one said no one is forcing consumers to pay fees and that they always have the option of "voting with their feet."

All the bank representatives talked about their particular institutions spending tens of millions of dollars on improving the ATM service by adding more machines across the country, among other things.

Other countries, including Britain, the Netherlands and Ireland, allow free withdrawals of clients' money from their own banks, but the Canadian bankers told the committee that banks there don't provide the same level of service and tack on the charges in other areas.

Record bank profits in Canada have only exacerbated public criticism of the bank machine fees. The Royal Bank, for example, reported a sharp climb in quarterly earnings in February, which exceeded analysts' expectations as net income leaped to a record $1.5 billion.

Richard Taylor, a deputy commissioner with the federal competition bureau, said high prices, whether it be the banks or another business, do not violate the Competition Act, unless it is the result of anti-competitive conduct.

Bloc Québécois Leader Gilles Duceppe said later the banks are rich enough they should be able to absorb the cost of getting rid of ATM charges.

"I think they're too high. I think we have to limit that. Having said that, I think the banks have enough money to face that reality," Duceppe said.

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Alabama Bank's Anti-Canadian Ad

Financial Post, Duncan Mavin, 20 April 2007

Royal Bank of Canada's retail banking strategy in the United States is under attack at the corner of Alabama Highway 67 and Cedar Street.

A couple of weeks ago, local bank Superior Bancorp put up a billboard at the intersection on the edge of Decatur, Ala. -- population 53,929 -- where the giant Canadian intruder has just opened a branch.

"Sweet Home Canada," the billboard reads. But the word "Canada" is crossed out, replaced by "Alabama." And then the kicker: "It didn't sound right to us either."

Scott Custer, chief of RBC Centura, the bank's U.S. franchise, is not amused.

"What they are obviously trying to play on there is the Canadian connection," Mr. Custer said. "I have my own personal opinion on the tastefulness of that sign. I didn't really find it very funny or amusing, but maybe somebody did."

The billboard has been "very well received" by local people who have a strong affiliation to their state, said Tom Jung, an executive with Superior Bancorp, which has 26 branches Alabama and parts of Florida

"Whenever you have a new entrant to the market, you always think of how to combat it," Mr. Jung said. In the case of RBC, you tell potential customers the new bank is Canadian-owned, he said.

There are more than 9,000 banks in the United States and more than 90% of those are significantly smaller than the big Canadian banks.

The smallest U.S. banks operate out of only a handful of branches restricted to individual states or even specific counties.

"A lot of times, people don't really appreciate bigger banks coming in," said Jim Schutz, a bank analyst at Sterne Agee & Leach Inc. in Birmingham, Ala.

Many people in Alabama probably do not know RBC is Canadian, said Mr. Schutz, so Superior Bancorp's billboard strategy is smart because it points that out and plays to local sentiments that are opposed to big businesses from out of state.

RBC's Decatur branch is one of 39 bought from AmSouth Bank in March, a purchase which marked RBC's entry into Alabama. RBC Centura's Mr. Custer said the Alabama branches are on target to meet their business plan so far. "And that's far more important than what's on a billboard," he said.

RBC has its own advertising campaign to introduce the brand to Alabama "in what I would say is a much more positive way," said the Centura chief. He also said the bank's workforce in the state "is virtually 100% Alabama folks."

The bank's two Canadian rivals that have a retail presence in the United States have also recognized the importance of playing to local affiliations.

Bank of Montreal 's 202 branches in and around Chicago and Northwest Indiana, operate under the banner of subsidiary Harris Bank, retaining a link to a brand with 125 years of history.

Toronto-Dominion Bank's franchise in the northeastern United States is Portland, Me.- based TD Banknorth has been supported by a US$25-million marketing package.

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TD Banknorth Approves TD Bank's Bid for Stake

Bloomberg, Sean B. Pasternak and Doug Alexander, 18 April 2007

TD Banknorth Inc. shareholders approved a $3.2 billion bid from Toronto-Dominion Bank for the 40.2 percent stake that Canada's second-largest bank doesn't already own.

About 94 percent of TD Banknorth shareholders, excluding Toronto-Dominion, voted in favor of the $32.33-a-share cash offer at a meeting today in Portland, Maine.

Toronto-Dominion Chief Executive Officer Edmund Clark has vowed to turn around TD Banknorth, whose profits have declined in five of the past seven quarters. The bank plans to cut 400 jobs and close as many as 24 branches in New Jersey, New York and other states.

The Toronto-based bank bought about 51 percent of TD Banknorth for $3.5 billion in March 2005, its first acquisition in the U.S. consumer-lending market. The bank agreed in November to buy the remaining shares, bringing its total investment in Maine's biggest bank to at least $6.7 billion.

``We're paying top dollar and I think if you take a look at the banking environment in the United States today, it's a fairly courageous move for us to put another $3 billion on the table in the banking sector today,'' Clark said today. ``We wouldn't have paid more.''

TD Banknorth shares will be delisted from the New York Stock Exchange on April 20, Toronto-Dominion said today in a statement.

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TD Ameritrade Q2 2007 Earnings

Financial Post, Duncan Mavin, 18 April 2007

TD Ameritrade Holding Corp. chief Joe Moglia said market volatility and lower activity rates are behind the company’s decision to slash its full year earnings guidance by 11%.

But that explanation is “less than straightforward,” according to Robert Ellis, an analyst with Boston-based research and consulting firm Celent LLC.

“In fact, greater volatility increases trading volume and revenue for online brokerage firms,” Mr. Ellis said.

A bigger factor affecting TD Ameritrade’s earning potential is lower commission rates from competitors, including Just2Trade, SogoInvest and Zecco, he said.

“If these firms catch on, TD Ameritrade may find itself in a perpetual spiral of lowering commission rates, even though it offers superior trading tools,” said the Celent analyst.

Earlier, TD Ameritrdade, a unit of Toronto-Dominion Bank, announced an 18% drop in quarterly earnings compared to the same period last year.

Earnings of US$141.1-million for the quarter ended March 31 were down from $172.8-million in 2006.

Mr. Moglia said the firm will lower its full-year 2007 guidance range to US92¢ to US$1.08 from US$1.01 to US$1.19.

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Bloomberg, Bradley Keoun, 17 April 2007

TD Ameritrade Holding Corp., the third-largest online brokerage, reported an 18 percent decline in fiscal second-quarter profit and cut its forecast for earnings this year amid falling trading revenue.

Net income fell to $141.1 million, or 23 cents a share, from January through March, from $172.8 million, or 30 cents, a year earlier, Omaha, Nebraska-based TD Ameritrade said today in a statement. The company was expected to earn 28 cents, the average of 14 analyst estimates compiled by Bloomberg.

Chief Executive Officer Joseph Moglia said in the statement that ``recent market volatility and lower activity rates'' had prompted the company to cut the upper end of its forecast for this year's earnings per share by 11 percent. Competition has forced the company to lower trading fees, and the stock market's tumble in February made investors wary of placing new bets.

``Trading volumes were lackluster for the quarter,'' said Peter Kovalski, a financial-services analyst at Alpine Woods Investments in Purchase, New York, who helps manage $3.5 billion. ``It started off strong at the beginning of the quarter and got a little slow'' after the market's retreat in February.

The company's new forecast for fiscal 2007 earnings per share is 92 cents to $1.08, compared with an October prediction of 98 cents to $1.22.

TD Ameritrade shares fell $1.56, or 9.3 percent, to $15.31 at 4 p.m. in Nasdaq Stock Market trading. It was the biggest drop since last October. Shares of Charles Schwab Corp., the biggest online broker, fell 46 cents to $19.05 after the company said its earnings increased 12 percent, in line with analysts' estimates. Rising money management fees helped Schwab offset the decline in trading commission revenue.

TD Ameritrade plans to increase investments in new products and services by about $100 million a year ``to position us for more growth in 2008,'' Moglia said in the statement. Some of the investments may cater to clients who have recently retired or are approaching retirement, he said on a conference call today with analysts and investors.

``We haven't been able to provide them with a comprehensive solution to their retirement needs,'' Moglia said.

Results in the year-earlier period were bolstered by $78.8 million of gains on the sale of investments, TD Ameritrade said.

Revenue grew 5.5 percent to $524.8 million, aided by the company's purchase of rival brokerage TD Waterhouse USA in January 2006.

TD Waterhouse, which was bought from Toronto-Dominion Bank in exchange for a stake in TD Ameritrade, more than tripled TD Ameritrade's client assets and gave it a network of about 140 branches.

Moglia had said he wanted to boost earnings per share by about 16 percent in the current fiscal year, in part by closing offices, eliminating jobs and combining the merged companies' trade-processing systems. The midpoint of the new guidance range, $1, would be about 5.3 percent higher than last year's earnings.

The company twice has delayed its plan to convert TD Waterhouse's trade-processing, currently handled through a contract with Automatic Data Processing Inc., onto its internal system. The conversion was supposed to happen by December 2006, then in March, and now in May.

``They need to finally get that done so they can devote their energy to growing the client base,'' Kovalski said. ``It's been a little bit of a distraction for them, and also a bit of a black eye.''

Last month, Moglia announced the retirement of Chief Operating Officer Randy MacDonald, who was overseeing the conversion. Asiff Hirji, who oversaw the company's client businesses, left at the beginning of this month to join the private-equity firm Texas Pacific Group.

TD Ameritrade's customers placed an average 253,631 trades per day, flat compared with the prior year's period, while average fees per trade declined 11 percent to $12.49.

On the conference call, Moglia said individuals are ``less enthusiastic'' about the stock market than they were last year.

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Financial Post, 17 April 2007

An earnings miss on falling trading revenue at TD Ameritrade Holding Corp. may have only caused a minor downward blip for Toronto-Dominion Bank on Tuesday, but AMTD shares were down more than 7% in New York at around 1 p.m. ET.

TD Bank expected AMTD’s March quarter would contribute $63-million to its second quarter financials, according to Desjardins Securities analyst Michael Goldberg.

He continues to rate TD Bank a “top pick” and has a $78.50 price target on the stock, representing upside of almost $10.

AMTD also lowered its full-year 2007 guidance range to US92¢ to US$1.08 from US$1.01 to US$1.19.

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RBC in 'Royal Fidelity Merchant Bank & Trust Ltd' Joint Venture

The Globe and Mail, Tara Perkins, 18 April 2007

Royal Bank of Canada is forecasting growth in the Caribbean markets and is positioning itself to grab a piece of the action.

"The Caribbean capital markets are certainly small and it's relatively early in their development," Ross McDonald, RBC's head of Caribbean banking, said in an interview yesterday from Nassau. "We see the growth of the capital markets accelerating, and we really want to be a part of that."

Yesterday, Canada's biggest bank announced that it will buy a 50-per-cent stake in Fidelity Merchant Bank & Trust Ltd., the Bahamas-based merchant banking business of Fidelity Bank & Trust International Ltd.

"The merchant bank will provide a bunch of services that we don't currently have to offer, such as corporate advisory, investment management, transfer and registrar agents for corporates and governments," Mr. McDonald said. "It's the kind of capability that we are able to offer in Canada."

In one recent transaction involving a large Bahamian supermarket company, Fidelity provided the corporate advisory service and RBC partnered to provide some debt.

"There've been a number of mergers and acquisitions and large corporate financings in the Bahamas, Trinidad, Jamaica and Barbados," Mr. McDonald said. "Those are the four markets, I think, that we're targeting."

The movement within Caribbean markets toward economic integration means that "clients are going to be doing more cross-country business, and you've got to be offering the full range of services for those folks."

RBC already has about 1,350 employees and 42 branches in Antigua, the Bahamas, Barbados, Cayman Islands, Dominica, Montserrat, St. Kitts and St. Lucia.

The new joint venture with Fidelity will be called Royal Fidelity Merchant Bank & Trust Limited, and will provide corporate finance and advisory, investment management, stock brokerage, share registrar and transfer agency, pension and mutual fund administration services. Financial terms of the deal were not disclosed.

Royal Fidelity aims to be a one-stop shop for medium and large corporate finance transactions. Its president will be Michael Anderson, who is the current president of Fidelity Merchant.

Mr. McDonald, 54, was RBC's vice-president, personal and commercial banking, in Canada before being sent to Nassau six years ago.

"The Caribbean is not unlike Canada," Mr. McDonald said, citing small groups of the population separated by vast geographical distances. "And so, to have a critical mass in any kind of business is difficult in any one market, and it's hard to consolidate because none of the individual markets are big enough to get you the mass economies of scale. So, for people outside of the area looking in, it just doesn't have the attractiveness of some of the high-growth markets around the world."

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Desjardins' Positive on Sun Life's New Product

Financial Post, Jonathan Ratner, 16 April 2007

Sun Life Financial Inc.’s move to launch a guaranteed minimum withdrawal benefit (GMWB) product in Canada – a retirement income product that is similar to Manulife Financial Corp.’s IncomePlus product launched last fall, is a positive development for Sun Life, according to Michael Goldberg.

Manulife had $1-billion in sales for its product in the first 19 weeks, the Desjardins Securities analyst said in a note to clients, adding that both companies are using their experience in the U.S. “in pricing and hedging a GMWB product as a foundation in Canada.”

“While there are some differences between the Sun and Manulife products, we believe that they expand the market for this product overall, much more than competing with one another,” Mr. Goldberg said.

Mr. Goldberg has a “buy” rating on Sun Life shares and $56 price targets, which represents upside of roughly 6%.

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Financial Post, Jonathan Chevreau, 17 April 2007

Sun Life Financial and C.I. Investments Inc. yesterday unveiled a new variable annuity retirement offering dubbed SunWise Elite Plus. Like Manulife's earlier Income Plus, SunWise offers an optional insurance rider of a GMWB, or Guaranteed Minimum Withdrawal Benefit. It provides predictable guaranteed income while still exposing up to 90% of the portfolio to growth through various C.I. equity mutual funds. If stock markets do well, gains can be locked in through automatic resets every three years. Investors receive a 5% bonus for every year they do not make withdrawals in the first 10 years after the initial deposit to the GMWB rider. There is also an optional 4% Annual Automatic Death Benefit Reset rider.

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RBC CM to Expand Its US Fixed Income Business

Bloomberg, Doug Alexander and Sean B. Pasternak, 13 April 2007

RBC Capital Markets, Canada's biggest investment bank, plans to expand its U.S. fixed-income business and is willing to spend as much as $1 billion on acquisitions to do it, said Chief Executive Officer Charles Winograd.

``When you look at what we spend most of our time on, it's figuring out how to grow the businesses outside of Canada,'' Winograd said in an interview. ``We will unquestionably do expansion and, as time goes on, acquisitions.''

The investment banking unit of Royal Bank of Canada, which led all Canadian lenders in stock and bond sales last year, lags behind its bigger rivals in the U.S. and Europe. The Toronto- based bank ranked 19th in U.S. bond sales in 2006, according to data compiled by Bloomberg.

``The global competitors have a nuclear arsenal that is larger than ours by a long shot and so we're fighting for that business,'' Winograd said yesterday from his third-floor office overlooking the bank's trading floor on Bay Street.

Winograd, chief executive since 2001, said the investment bank plans to hire staff, add teams of bankers and make acquisitions to expand its bond sales and trading business in the U.S. He cited that unit as one of his priorities, along with expanding in Europe to provide more lending for infrastructure projects such as roads and hospitals.

``I think that in five years we would have more employees in the U.S. than we would have in Canada,'' said Winograd, Canada's highest-paid investment banker last year, with C$10.4 million ($9.2 million) in salary, bonus and stock options. ``The U.K. and Europe and Asia will probably grow just as fast.''

Canada's biggest bank is targeting international expansion after investment banking profit doubled last year on record trading. RBC Capital's profit rose 27 percent to C$420 million in the fiscal first quarter, led by stock sales and merger advice.

``Given their domestic dominance, the only avenue for growth is outside of Canada,'' said Robert Wessel, an analyst at National Bank Financial in Toronto, who rates Royal Bank shares ``sector perform.''

Winograd, 59, said the bank probably won't make a ``transformational'' acquisition in the U.S., which he defines as more than $1 billion. The bank paid $1.46 billion for Minneapolis-based brokerage Dain Rauscher Corp. in 2001, allowing it to enter the U.S. equities market.

Since then, the bank has made smaller acquisitions, including the brokerage business of New York-based Carlin Financial and Denver-based Daniels & Associates. It also agreed on March 13 to acquire Parsippany, New Jersey-based J.B. Hanauer & Co., which offers fixed-income and wealth-management services.

``Integrating large investments can be very hard and the results are mixed,'' said Winograd. ``We would be very discriminating in looking at any large capital markets deals where the execution risk would put the overall progress of the business at harm.''

A $1 billion spending target rules out most U.S. brokerages and investment banks. Firms worth less than that include Stifel Financial Corp. in St. Louis, and Penson Worldwide Inc. in Dallas.

Royal Bank's investment bankers will also focus more on Canada's ``mid-market'' companies, those smaller than the top 50 to 75 firms, he said.

``This business in Canada is a great business. We love it and we're going to make sure we don't ignore it,'' Winograd said. ``You cannot succeed globally unless you lead domestically.''

Winograd doesn't plan to repeat mistakes in 2003 of letting the investment bank's share of the Canadian market slip by focusing outside the country.

``Frankly, we did it by saying we're going to make it more of a continental business and took our eye off the Canadian aspect of it, and it hurt us,'' Winograd said.

Winograd said he expects equity sales in Canada to slow this year because the market for income trust public offerings has slumped. He expects mergers to remain strong, following a record 2006.

He also expects higher loan defaults as interest rates rise, ending a credit cycle that's allowed Canadian banks to set aside less money for bad loans in recent years. Royal Bank set aside C$429 million last year, compared with C$1.07 billion in 2002.

``It's been an amazing cycle and it's gone on longer than I ever thought it would,'' he said. ``Am I more worried than a year ago? Yeah.''

Winograd, who joined Royal Bank when it bought his former employer Richardson Greenshields of Canada Ltd. in 1996, plans to advance his expansion plans for the U.S., Europe and Asia before he retires. The bank in February promoted Doug McGregor, 50, and Mark Standish, 46, to co-presidents of RBC Capital as part of a ``succession plan.''

``We have a tradition around here that the CEO doesn't stay on and the young blood gets a shot,'' Winograd said, adding he has no set retirement date. ``You don't want to have a succession plan in place for too long and you don't want it to be too short.''

The CEOs at RBC Capital Markets have traditionally stepped down at age 60. Winograd turns 60 in January. RBC Capital Chairman Anthony Fell stepped down as CEO in 1999 when he was 60.

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BMO Interested in LaSalle Bank, UBS Analyst Says

Bloomberg, Doug Alexander, 13 April 2007

Bank of Montreal, Canada's fourth- largest bank, may offer to buy the Chicago branches of LaSalle Bank if they become available following a possible merger of two European banks, said Jason Bilodeau, an analyst at UBS Securities Canada.

``Management indicated that it would be interested in the Chicago-based assets of LaSalle, which it knows well,'' Bilodeau said today in a research note, after meeting with bank executives including Chief Financial Officer Karen Maidment.

Bank of Montreal wants to expand its Chicago-based Harris Bank by opening branches and buying assets. ABN Amro Holding NV's LaSalle Bank could provide an opportunity if it's sold, Bilodeau said. ABN Amro, the biggest Dutch bank, is in talks to be bought by Barclays Plc, a move that may result in the sale of some U.S. assets.

UBS says ``several banks'' would be interested in LaSalle Bank, most likely Citigroup Inc., Bank of America Corp., Fifth Third Bancorp and National City Corp. LaSalle is the largest Chicago-based bank with more than 135 branches in Chicago and its suburbs, according to its Web site.

``We have said in the past that we do take a look at everything that comes on the market; LaSalle would be no different,'' Bank of Montreal spokesman Ralph Marranca said today in an e-mail. He declined to comment further.

Bank of Montreal probably wouldn't want to buy all of LaSalle Bank, which has about 265 branches in Michigan and Indiana, and operations in about 18 other states. LaSalle Bank has about $124 billion in assets, compared with C$355 billion ($307 billion) for Bank of Montreal.

``Management was clear in expressing their interest in the Chicago-based retail business, which would be an attractive asset to combine with Harris,'' Bilodeau said.

Such an acquisition could be worth about $10 billion to $12 billion, and a partnership ``could be workable,'' Bilodeau said. That would make it the largest purchase by the bank in at least 23 years, according to Bank of Montreal's Web site.

``Management remains committed to growth via aquisitions in the U.S. and continues to target assets up to C$2 billion in size,'' wrote Bilodeau, who was unavailable for comment. ``We believe they would be willing to consider larger deals under the right circumstances."

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Bankers to Testify Next Week on ABM Fees

Bloomberg, Sean B. Pasternak, 13 April 2007

Executives from Royal Bank of Canada, Toronto-Dominion Bank and other Canadian lenders will testify before a parliamentary committee next week to discuss bank-machine fees and electronic payments.

Royal Bank's James Westlake, Toronto-Dominion's Tim Hockey, Canadian Imperial Bank of Commerce's Sonia Baxendale and others are scheduled to appear before the House of Commons Finance Committee in Ottawa on April 19, according to a government Web site. The executives head the banks' consumer lending units.

Finance Minister Jim Flaherty has urged banks to lower automated-teller fees, particularly for students and seniors. Lenders usually charge transaction fees when non-clients use their machines.

Flaherty said on April 11 that he expects to hear further announcements from the banks on their fees ``within days,'' according to the National Post and other newspapers.

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The Globe and Mail, Tara Perkins, 13 April 2007

Royal Bank of Canada insists its decision to rejig one of its banking packages to decrease bank machine fees is not a concession to Finance Minister Jim Flaherty.

“It's a fairly massive overhaul for us that we've done in the last year in this space and it's interesting the way the timing worked, but we've been working on this for over a year,” said Jim Westlake, the head of RBC's Canadian banking division.

Mr. Flaherty has been pushing the banks to justify the fees they charge when customers from other banks use their automatic teller machines. In a meeting with chief executive officers of the big banks, the minister focused on the cost to groups such as students and seniors.

On Wednesday, he said he was encouraged by what the banks were saying and believed “some announcements will be coming quite soon, so we're talking days, not months.”

“I have no idea what he was referring to,” Mr. Westlake said in an interview Friday. “This is business as usual for us.”

Canada's biggest bank announced Friday morning that it has “enhanced” the RBC Signature No Limit Banking account, removing the cap of 65 transactions a month. The account will now refund the RBC fee for three non-RBC machine withdrawals per month, instead of one.

The bank is also tweaking some of its other packages. The headline on its news release was, “Accounts offer enhanced access to ATMs, free banking for students & seniors.”

RBC CEO Gordon Nixon told reporters at the bank's annual meeting this year that the ATM fee issue had become regrettably politicized, and some bank executives have bristled at the suggestion they might cave in to Ottawa's demands.

Mr. Westlake said the most important element of the new fee lineup for the bank is the move toward a loyalty pricing model.

That's similar to the bundling model used by companies such as Rogers Communications Inc.

“We're now going to reward customers very directly who have more than one relationship with us,” Mr. Westlake said. He added, for example, if customers have a mortgage, an investment with RBC and a credit card, they could get free banking.

Canada's banks are restricted from what is called coercive tied selling, but Mr. Westlake said bundling is allowed. “What we're not allowed to do is say ‘the only way we will give you a mortgage is if you take a credit card.' That would be tied selling.”

Mr. Westlake said the moves are expected to have a positive impact on the bottom line in the near term.

“We certainly expect to do more business,” he said. “Obviously, we'll be rebating some fees to existing customers to recognize their loyalty, [but] we think we'll more than make up for that in new business that we'll do.”

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The Globe and Mail, Patricia Best, 10 April 2007

Who says there's no such thing as real rivalry among Canada's big banks? Not long after Ed Clark took the pulpit at Toronto-Dominion Bank's annual shareholder meeting recently, where he preached the virtues of TD's affordable student packages (cheaper than a latte!), Bank of Montreal hastily assembled a retaliatory press release. "Some banks boast that their student banking plan costs $3.45 -- less than the cost of a latte -- for 25 transactions a month," BMO sniped. "Bank of Montreal offers a better plan -- 30 transactions per month absolutely free!!" Note the double exclamation marks --which we assume denotes extreme emotion.

This is a rarity in the clubby world of Canadian banking, where executives typically take pains not to have any sort of disagreement -- no matter how minor -- in the public eye. But one official at BMO couldn't resist taking another poke at Mr. Clark's speech, especially in light of the controversy generated recently over the fees banks charge on transactions made at automated banking machines. "Sounds like old Ed Clark might be getting too comfortable in that overstuffed green chair of his," the BMO insider told a Globe and Mail reporter, pointing out that students on the TD plan are spending more on fees in a year than it would cost to buy two dozen beer. "Forget the designer lattes. Over a year, that'll buy you and your friends a two-four with enough change left over for [Tim Hortons] the next day."

(By comparison, Bank of Nova Scotia charges students $1.25 a month for a package that offers 12 free transactions. Royal Bank of Canada offers 25 transactions as part of a $3.50 monthly package, while at Canadian Imperial Bank of Commerce, students can pay $1.95 for 10 transactions.)

Readers will recall that Finance Minister Jim Flaherty wrote the banks a letter in December, asking them to justify their fee structure, and then met with industry executives in Toronto early last month to express his concern about cheap access to banking services for seniors, students, low-income Canadians and people with disabilities. The banks didn't make any concessions. Mr. Clark, however, acknowledged in his speech that Mr. Flaherty raised a "legitimate concern" with respect to easy ABM access. Mr. Clark noted many students have only one ABM on campus -- often of the privately owned, "white-label" variety. As a remedy, he pledged to install ABMs on or near all of Canada's major universities, which would mean adding about 50 machines to the bank's network. Mr. Clark honoured the industry's gentleman's rules, choosing not to mention BMO operates ABMs on just 17 campuses.

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Moody's Downgrades CIBC's Credit Rating

Investment Executive, 11 April 2007

Moody’s Investors Service has altered a number of its ratings on banks, including all of the big Canadian banks, following changes to its bank rating methodology, which incorporates joint default analysis.

It lowered the debt and deposit ratings of 44 banks, the ratings of two banks were confirmed. Of the 44 downgrades, 29 were one notch, 12 were two notches and 3 were three notches. It also upgraded the junior securities of 13 banks as the result of the refinement of its JDA methodology.

The refined methodology, released on March 30, reduces the level of external support incorporated into bank deposit and debt ratings in order to give greater weight to intrinsic financial strength. A number of bank ratings that were upgraded prior to the refinement were identified as being inconsistent with the refined methodology.

The ratings lowered by one notch include: CIBC, ING Bank and ABN Amro.

As for the banks that are seeing the ratings on their capital securities upgraded, the list includes: Bank of Montreal; Bank of Nova Scotia; Caisse Centrale Desjardins du Quebéc; Royal Bank of Canada; and TD Bank.

In the United States, the Bank of New York, JPMorgan Chase Bank, State Street Bank and Trust Co. and Wachovia Bank are also affected, along with several European banks.

CIBC and National Bank also had their subordinated securities upgraded, and their senior debt and deposit ratings lowered. As with the other 11 banks whose subordinated securities were upgraded, the upgrades for CIBC and National Bank result from the refinement of the notching methodology, whereby subordinated securities typically are notched one level below senior debt and deposits and preferred securities and certain deeply subordinated debt securities typically are notched two rating levels below senior debt and deposits.

Additionally, Moody’s raised the senior and subordinated debt and preferred stock ratings for The Bank of New York Company Inc., the holding company of the Bank of New York.

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AP, 11 April 2007

Moody's Investors Service has lowered the credit ratings of 44 banks worldwide, including Canada's CIBC, as part of an examination into how it ranks debt held by financial institutions.

ABN Amro Bank, CIBC and ING Bank were among those Moody's cut late Tuesday in an effort to address complaints about a new ranking system it put in place six weeks ago. Moody's had upgraded 150 banks, saying they could rely on a government-sponsored bailout if there were concerns of a financial collapse.

The rating methodology was panned by Merrill Lynch & Co. and others for skewing the entire ratings system. For example, it gave several small Icelandic banks the same triple-A rating as major global corporations like Exxon Mobil Corp.

After considering the complaints, Moody's refined its methodology on March 30 to stress the banks' financial strength instead of any outside help they might get. Of the 44 downgrades, 29 were down one notch, 12 fell two notches, and three were fell three notches.

No U.S.-based banks were among the financial institutions that were downgraded. Moody's left intact upgrades to U.S. banks like Bank of America Corp., JPMorgan Chase & Co., and Washington Mutual Inc.

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UBS Expects 'Decent, but Not Great' Life Insurance Cos Results

Financial Post, Duncan Mavin, 11 April 2007

UBS Investment Research is forecasting "decent, but not great" results from the big life insurance companies, due to report first quarter 2007 earnings starting in the first week of May.

Profits across the industry could be hurt by weak equity markets, a challenging rate environment, and strong competition, said UBS analyst Jason Bilodeau in a note.

"North American equity markets were fairly choppy through the first quarter," Mr. Bilodeau said, noting that the S&P/TSX index was up just 2% in the first quarter, while the S&P500 was down nearly 3% over the same period.

At the same time, the life companies have been faced with inverted yield curves in Canada and the U.S., which "likely kept a lid on investment spreads and continued to dampen fixed annuity sales trends," said the UBS analyst.

From a competitive bunch, Mr. Bilodeau rates Manulife Financial Corp. as his top pick, with continued healthy sales and a possible 10% dividend hike on the cards.

Sun Life Financial Inc., Industrial Alliance Inc. and Great-West LifeCo Inc. are all rated "neutral" by Mr. Bilodeau. Only Manulife gets a "buy" rating from UBS.

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FBR Upgrades TD Ameritrade to Outperform

Down Jones Newswires, 10 April 2007

Friedman Billings Ramsey ups TD Ameritrade to outperform from market perform, citing "compelling risk/reward tradeoff" for patient investors. "Despite the choppy markets and our concerns regarding the company's sluggish account growth, TD Ameritrade is still generating significant amounts of free cash that can be used to reinvest in the business, de-lever the balance sheet, or buy back stock," firm says. Also, at current valuation FBR sees AMTD as "increasingly attractive as a takeout candidate either by TD Bank or another competitor."

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DBRS Confirms Scotiabank Rating

Investment Executive, James Langton, 9 April 2007

Scotiabank’s ratings are supported by its diversified earnings profile, with balanced contributions from domestic banking, international banking and Scotia Capital, a strong cost-control culture and a favourable financial-risk profile, the rating agency says.

“Over the past 18 months, Scotiabank has continued to execute on its acquisition strategy. Strategic international purchases include Corporación Interfin (parent of Banco Interfin) in Costa Rica, the remaining interest in Banco Sudamericano and Banco Wiese Sudameris in Peru, Citibank’s retail banking business in the Dominican Republic and 24.99% of Thanachart Bank in Thailand,” DBRS says, adding that Scotiabank’s objective is to have a minimum 10% market share in countries in which it desires to operate.

International operations contributed 30% of earnings in fiscal year 2006, which is balanced relative to the rest of Scotiabank’s operations. DBRS suggests that the relative importance of international operations is expected to increase, as they hold more positive growth prospects than domestic banking.

It believes the risk profile of the bank will increase in the medium term due to additional economic, currency and operational risks. However, DBRS considers diversification by country and the bank’s experience in lesser-developed markets will help to somewhat temper this risk.

Domestically, the bank has also been expanding its distribution footprint through organic branch-building and the purchases of the mortgage business of Maple Financial Group, including Maple Trust, and the Canadian operations of the National Bank of Greece, it says. DBRS expects the bank to continue to make market-share gains in select areas. “Scotiabank’s domestic-banking franchise remains the key to earnings stability as Scotia Capital can have potentially volatile returns,” it adds.

Scotiabank has one of the strongest financial-risk profiles among its peer group, which provides the bank with the flexibility to manage its growth strategy (organically and/or through acquisitions) and the ability to absorb unforeseen shocks, DBRS notes. The bank also has a competitive advantage as the cost leader among its Canadian banking competitors. DBRS does not anticipate any significant changes in the Bank’s financial-risk profile or cost management.

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Scotiabank Setting Framework for Asian Expansion

The Globe and Mail, Tara Perkins, 6 April 2007

Bank of Nova Scotia is setting the framework for its eastern expansion and bracing for a rockier trip than its one down south.

Canada's third-biggest bank has been in aggressive acquisition mode for a few years now, but most of its muscle was put to use closer to home in Mexico, Central America and the Caribbean, said Rob Pitfield, executive vice-president of international banking.

“We had small franchises in many of those locations that needed to be built out,” he said in an interview in his office, where he was organizing himself after a recent trip to Thailand. “Our first and foremost strategy was to become a strong hemispheric bank.”

Having achieved an impressive size on this side of the world, the bank is turning its sights eastward, where it will proceed with bite-sized investments.

“Buying in Asia is harder,” Mr. Pitfield said. “We don't have the established presence that we do in the Caribbean and the Western Hemisphere.”

In addition to that, it's hard to find good personal and commercial banking “deals that are of any size, because the competition is so huge right now, and there's not a whole lot for sale.”

The bank's strategy is to make acquisitions that are “very chewable,” or of a size the bank can handle from both a management perspective and a financial perspective. “So, if anything were to go wrong with one of them, in and of itself, it wouldn't be too punitive if the whole thing were to collapse.”

Scotiabank is currently negotiating to buy a minority stake in China's Bank of Dalian Co. Ltd. And, in the past two weeks, it has signed a deal to buy a chunk of the eighth-biggest bank in Thailand, opened four new branches in Malaysia and launched a representative office in Turkey, which it sees as a gateway to Europe, Asia, the Middle East and Africa. “What we're trying to do is put more than little seeds in the ground, literally stakes in the ground, which can grow to be meaningful entities.”

Opportunities must be seized. “You know that these banks are not going to sit there,” he said of the targets in Thailand and China.

“These are serious banks that are going to grow two, three, four, five years out. Are they going to do deals with other banks? Probably,” Mr. Pitfield said.

The Thailand purchase is an example of how Scotiabank is looking to invest in banks that it believes are poised to grow domestically through merger and acquisition deals, as the banking sectors in many Asian countries consolidate.

Scotiabank is paying $240-million for a 24.99-per-cent stake in Thanachart Bank, which is already the leading automobile lender in Thailand and is building a presence in other traditional bank product areas. Scotiabank is seeking permission from local authorities to bring its stake to up to 49 per cent.

“If the opportunity ever came along where the regulators permitted foreign banks to acquire more than 50 per cent, that's definitely something we would look at,” Mr. Pitfield said.

“If that bank, in the meantime, were to look at another bank in Thailand and possibly do a merger or acquisition, hopefully we would have the right to go up to 25 per cent in that merged entity. That kind of amalgamation partnership, with whatever entity the bank chose to consolidate with in Thailand, would be a real strength. It would be a very dominant financial institution in Thailand.”

And Scotiabank's investment in that mega-bank would help to boost its profile in the region, making future acquisitions easier. The more Scotiabank gets to know a market and its politicians, regulators and economics, the better, Mr. Pitfield said.

Scotiabank is learning about the Thai market, where the process for car loans is more “manual” and relationship-oriented than in Canada.

A recent analyst note by Tisco Research said: “A slowing economy and the uncertain political outlook are likely to make 2007 another tough year for the Thai auto industry,” but the long-term outlook is positive and domestic car sales are on the rise as concern over the security situation in Bangkok has decreased.

Mr. Pitfield brushes off worries about Thailand's political stability. The bank is salivating over the upwardly mobile young people in a population roughly double the size of Canada's.

Ditto for Malaysia. “Malaysia, for us, is exactly the same kind of market as Thailand — good potential, good population, good economics, good future for the country,” Mr. Pitfield said.

“And we're hoping as they act out their master plan for financial services companies that foreigners will be allowed increasingly to bank in Malaysia.”

Scotiabank has reached its current allowable limits for growth in Malaysia, where it was able to open four branches recently as long as one was in an urban area, two suburban, and the fourth rural, Scotiabank spokeswoman Krista Pawley said.

Mr. Pitfield doesn't know how long it will be before Scotiabank has a hefty presence in Asia.

“Realistically, it will probably be longer, because they are bigger countries, they are very established in their own right, very worthy competitors, and we're very new from a retail perspective in these markets,” he said.

“Having said that, one of the things I've found about having a network like this is it's impossible to know. You don't know what partner is out there that you could identify who could completely transform your presence in that market.”

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Reuters, 5 April 2007

Bank of Nova Scotia is open to talks to buy a stake in Malaysia's fourth-largest lender, RHB Bank, if such a move suits its strategy, a Scotiabank executive said yesterday. "We are always interested in opportunities to expand our presence, especially in a market like Malaysia. If it aligns with our bank's strategy, we are open to discussion," said Michele Kwok, senior vice-president for Asia Pacific, when asked if Scotiabank would be interested in a stake in RHB. A stake in RHB Bank will be soon be up for grabs after the state pension fund made a successful US$3.68-billion bid for parent companies RHB Capital and Rashid Hussain last month. The fund has said it wants to find a strategic equity partner for RHB and that it will sell down to about 35%. Ms. Kwok spoke to reporters after opening a new Scotiabank branch outside Kuala Lumpur, one of four new outlets recently approved by Malaysia's central bank. The government keeps a tight rein on foreign banks, allowing them only a few new branches each year. Scotiabank, Canada's third-biggest bank by assets, now has just five branches in Malaysia after 14 years there.

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Enron Investors Ask Supreme Court to Review Class-Action Ruling

AP, 5 April 2007

Enron shareholders and investors on Thursday asked the U.S. Supreme Court for help in their effort to recoup billions they lost in the once-mighty energy company's collapse.

Shareholders and investors filed a motion asking the court to review an appeals court's ruling that halted their class-action lawsuit against investment banks and firms.

There is no timetable for the Supreme Court to decide whether to consider the motion.

The $40 billion suit alleges that Merrill Lynch & Co., Credit Suisse First Boston and Barclays PLC played roles in the accounting fraud that led to Enron's collapse.

Last month, the 5th U.S. Circuit Court of Appeals reversed a ruling by U.S. District Judge Melinda Harmon in Houston, who had said shareholders could sue as a class.

The decision by the appeals court meant that shareholders and investors could not pool their resources to sue as a group. Attorneys general from 30 states have sided with Enron shareholders in their bid for a class action.

"The banks should be held accountable," said William Lerach, who represents the Regents of the University of California, the lead plaintiffs in the litigation. "Beyond shielding them from redress in the Enron case, the 5th Circuit's decision gives other corporations the green light to commit fraud without consequence in the future, threatens the credibility of the securities markets and leaves investors without any legal recourse."

A spokesman for Credit Suisse and an attorney for Barclays both declined to comment Thursday, and a spokesman for Merrill Lynch did not immediately return a call seeking comment.

So far plaintiffs have recouped $7.3 billion, mostly from such financial institutions as Bank of America, JPMorgan Chase & Co., Citigroup and Canadian Imperial Bank of Commerce.

The appeals court decision put the case on hold, which was set to go to trial April 16.

Besides Merrill Lynch, Credit Suisse and Barclays, the remaining defendants include several former Enron officers: Jeff Skilling, the chief executive; Richard Causey, chief accounting officer; Richard Buy, chief risk officer; Jeff McMahon, treasurer; and Mark Koenig, executive vice president of investor relations.

The cases against Royal Bank of Canada, Royal Bank of Scotland and Toronto Dominion Bank have not been set for trial and were stayed pending the appeal of the 5th Circuit's ruling.

Enron Corp., once the nation's seventh-largest company, crumbled into bankruptcy in December 2001 after years of accounting tricks could no longer hide billions in debt or make failing ventures appear profitable. The collapse wiped out thousands of jobs, more than $60 billion in market value and more than $2 billion in pension plans.

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DBRS Upgrades CIBC Ratings

Investment Executive, James Langton, 4 April 2007

DBRS has upgraded all its ratings on CIBC and removed the Under Review with Positive Implications status, which was placed on the ratings March 1.

This rating action confirms DBRS’s preliminary view that the bank continues to make progress in raising capital ratios to levels comparable to peers and better managing reputation-related risk, factors that caused rating pressure in 2005. “Sustaining capital ratios will be the result of growth in retained earnings, which also increases the amount of preferred shares allowed to be included in Tier 1 capital, but partially offset strong growth in risk-weighted assets,” it said.

“CIBC has demonstrated its ability to facilitate future expansion without significantly impeding the Tier 1 and tangible capital ratios through the acquisition of and the subsequent share purchase of FirstCaribbean International Bank,” DBRS said.

“Should CIBC resume its share buyback program, the level of capital growth is anticipated to slow in 2007,” it adds. DBRS also anticipates the bank will be able to meet its objective to maintain a Tier 1 capital ratio at or above 8.5%.

DBRS adds that it expects the bank will continue to manage reputation-related issues through ongoing improvements in business practices, corporate governance and compliance.

“The ratings are supported by CIBC’s lower-risk retail business mix and progress in improving its expense ratio, which should contribute to earnings stability and credit quality, therefore better positioning CIBC for future downturns,” it says.

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RBC's New Wealth Management Unit

Investment Executive, 4 April 2007

Royal Bank of Canada’s move to create a distinct wealth-management unit by merging its domestic, U.S. and global wealth-management businesses signals its intention to grab a greater slice of the affluent and high net-worth market.

“This is a true global wealth business that has a presence in all the major geographies in the world,” says George Lewis, group head of RBC’s new wealth-management segment. He was formerly head of Canadian wealth management for the bank.

Lewis says the change, which gives RBC four corporate segments instead of three, will allow the bank to co-ordinate its efforts in targeting affluent investors with more than $250,000 of investible assets and high net-worth investors with at least $1 million.

In Canada, the new unit includes full-service investment dealer RBC Dominion Securities Inc., RBC Asset Management Inc. — of which Lewis is chairman and CEO —and RBC’s trust services and discretionary investment-management business, which all shift over from the Canadian personal and business unit, now renamed Canadian banking. The bank’s in-branch advisory business and discount brokerage remain in the latter unit.

The wealth-management unit also includes U.S. full-service brokerage RBC Dain Rauscher and Royal Bank of Canada Global Private Banking, both of which shift over from U.S. and international personal and business unit, now renamed U.S. and international banking. The capital markets unit remains unchanged.

“RBC has a significant existing presence in wealth-management businesses [in Canada and abroad],” Lewis says. “We hope to accelerate our growth, but from an already solid position.”

Currently, earnings are almost evenly divided among the Canadian, U.S. and foreign wealth-management businesses, he says.

RBC is the dominant wealth-management company in Canada, with a 22% share of the market through DS. In the U.S., Dain Rauscher is the eighth-largest full-service brokerage. RBC also has 25 global private-banking centres around the globe.

In total, the new wealth-management unit had $561 billion in assets under administration and $158 billion in assets under management at the end of the first quarter of 2007, ended Jan. 31. The unit employs 3,500 advisors at DS and Dain Rauscher, and about 1,500 at the global private-banking centres.

“This is a concrete reflection of the importance of wealth management to RBC’s business,” says Keith Sjogren, director of strategy consulting at Toronto-based Investor Economics Inc.

Lewis says there are three main reasons for RBC’s decision to create the new wealth-management unit:

• RBC and most other financial institutions anticipate above-average growth rates for the affluent and high net-worth market in both developed and developing countries, compared with other financial services.

“As populations age and mature, we’re finding there is a demand, not only for assistance in helping clients grow their wealth but also in harvesting their wealth for cash-flow purposes, and then ultimately for transferring wealth to heirs,” Lewis says.

• Global wealth management provides strong recurring revenue streams, which only increase as clients’ portfolios build.

“It’s a business that doesn’t require significant balance-sheet capital from the bank to grow organically,” Lewis says.

• Globally, the market for affluent and high net-worth wealth-management business is still fragmented, with no one company holding more than 3% or so, Lewis says. This gives RBC the opportunity to expand in a business in which no single player dominates. He says the new unit has not set an overall target for market share.

Sjogren says that, while RBC probably won’t challenge the biggest players in the global wealth-management market — Switzerland’s UBS AG and Credit Suisse Group, Britain’s HSBC Holdings PLC and the U.S.’s Citibank Inc. are among the largest — the Canadian bank holds a strong niche position. “Its global private-banking business is well regarded,” he says.

RBC probably made the move, Sjogren says, to create a more efficient structure for its global business, pool learning and expertise from all countries, and develop new products. Lewis’s entry onto RBC’s executive committee also means wealth management will get a voice at the bank’s most senior level, Sjogren adds.

Lewis says he is focused on expanding the wealth-management business in all the countries in which RBC does business. The bank is specifically interested in “adding capability” and hiring more advisors in Britain. RBC currently has offices in London, Cheltenham and in the British Crown dependencies of Jersey and Guernsey.

Sjogren says RBC’s interest in building its British business is not surprising. “The British market has both domestic and international appeal,” he says. “It’s an attractive market itself and it’s a primary international financial centre.”

Lewis anticipates growth of the wealth-management segment will come both organically and through selected acquisitions.

In March, Dain Rauscher acquired New Jersey-based J.B. Hanauer & Co., a full-service brokerage specializing in fixed-income and wealth-management services with US$10 billion in AUA. That deal is awaiting regulatory approvals, expected in May.

On the organic side, the key strategy will be to add to RBC’s advisory force. Lewis says the wealth-management unit has specific targets for adding to DS, Dain Rauscher and RBC Global Private Banking, although he declines to give details.

“Particularly for the high net worth segment, it’s extremely important to offer world-class solutions from the perspective of products and services,” Lewis says. “The common theme across all our client-facing businesses in the wealth-management segment is the acquisition and retention of advisors, consultants and client-facing professionals.”

The move by RBC to create a global wealth-management unit is consistent with an overall strategy for the bank, as articulated recently by RBC president and CEO Gord Nixon: “We focus on operational effectiveness across all our businesses. Our integrated strategy will enable us to continue to generate very strong revenue growth and earnings.”

Lewis says the wealth-management unit’s strength, compared with its domestic competitors, is that it can leverage capabilities from RBC’s other business segments, primarily capital markets, which is a dominant player in Canada and which also has strength in selected international capital markets.

“Capital markets is providing [product] solutions that are attractive to our high net-worth clients,” he says.

RBC Asset Management, which now falls under the new wealth-management unit, continues to realize about 75% of its sales through the Canadian domestic branch network.

“We have the best of both worlds,” Lewis says. “We have a culture that supports client--facing professionals as they grow their businesses, combined with the strength not only of the RBC brand — particularly in Canada — but also the capability that comes with being part of a global financial institution.”

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