Modest Writedowns, Market Overshoot, P/E Divergence

Scotia Capital, 19 November 2007

• Canadian Banks pre announced write-downs for the fourth quarter of $2.2 billion (including NA estimate) or $1.3 billion after-tax representing 1.5% of common equity. These writedowns are modest and pale by comparison to global players. The banks also announced credit card gains of $1.1 billion after-tax offsetting the write-downs caused by the liquidity and credit crunch.

• Canadian Banks have the lowest relative exposure in history versus global players to high risk assets. Canadian Banks had more than their share of LDC loans in the early 1980s, excessive exposure to Commercial Real Estate (O&Y- Canary Wharf) in early 1990s and Telco/Cable/Power in 2002. The banks have incredibly low exposure to U.S. Sub Prime, CDOs and LBOs. The market has not differentiated much between Canadian Bank balance sheets and U.S. and other global players. It seems the Australian Banks represent the few to escape the contagion.

• The market's reaction has been severe (no differentiation) peeling off $35 billion in bank market capitalization or an excessive 27x the amount of the write-downs. Bank valuation is extremely compelling. Individual bank relative P/E multiples have started to diverge following the debt markets.

• Conclusion: Major market overshoot on discounting balance sheet risk. Best Buying Opportunity in five Years. Reiterate Overweight. P/E Divergence favours RY and TD - 1 Sector Outperforms.

Bank Write-Downs Estimated at $1.3 Billion

• Pre-released bank write-downs (exhibit 2) for Q4/07 totalling $2.2 billion (excluding NA estimate) or $1.3 billion after-tax representing 1.5% of common equity. This amount is not a significant haircut to earnings or equity and pales in comparison to some of the global players. Pre-released VISA/MasterCard gains offset write-downs this quarter.

• BMO and CM have the largest write-downs of $530 million or $0.69 per share and $463 million or $0.90 per share, respectively.

• Total write-downs of $1.3 billion after-tax represent 5% of the banks' $20 billion earnings base which we estimate is two weeks worth of bank earnings.

• The market has peeled off approximately $35 billion in market capitalization from the banks' 52-week highs. The loss in market capitalization represents 27x the amount of write-downs expected in the fourth quarter.

NA - $500M Write-Down Expected

• BMO, BNS, RY, CM and TD (VISA gains only) have pre-released write-downs with NA the only bank of the major six to not have press released. We continue to expect NA to announce a $500 million (or $2.00 per share) write-down on its $1.85 billion exposure to non-bank ABCP.

Visa/Master Card Gain Recap

• Banks announced gains from the restructuring of VISA International (Exhibit 3).

• CM and TD announced VISA gains of $456 million ($381 million after-tax and $1.14 per share) and $163 million ($135 million after-tax and $0.19 per share), respectively. RY announced a $325 million gain ($270 million after-tax or $0.21 per share) and BNS a $200 million gain ($160 million after-tax or $0.16 per share), slightly higher than expected due to prior ownership of VISA International in addition to VISA Canada.

• BMO will also record a gain of $110 million ($85 million after-tax or $0.17 per share) aftertax from the sale of MasterCard shares.

Bank Relative P/E Multiples Taking Cue from Debt Markets

• Bank P/E multiples have started to diverge after a period of abnormal P/E convergence (Exhibit 4). This trend is following the same pattern that has happened with the debt markets and corporate spreads. Just as the debt market was not differentiating for risk, bank P/E multiples were not reflecting differences in profitability, quality of earnings, business mix (retail versus wealth management versus wholesale) or growth prospects (including degree of reinvestment).

• The debt market is now discounting for risk as corporate spreads have blown out and we are now seeing Bank P/E multiple divergence. Individual Bank P/E differentials generally tend to mirror bond spreads over time and this cycle seems to be no different (Exhibit 5). We continue to believe bank relative P/E multiples will trend towards levels highlighted in Exhibit 1. We expect divergence in P/E multiples will favour Royal Bank and Toronto Dominion based on the quality and size of their retail and wealth management (especially RY) platforms, relatively low earnings exposure to wholesale, high profitability and growth prospects.

Valuation - Extremely Compelling

• Bank valuation is extremely compelling. Bank dividend yield relative to bonds is 95% (Exhibit 8) or 4.4 standard deviations above the mean and with dividend growth projected at double digit over the next five years this valuation is extraordinary.

• Bank dividend yield relative to the TSX (Exhibit 9) is also at a record high except for the 1999/2000 peak caused by the major appreciation in Nortel's share price. Bank dividend yield is 2.2x that of the TSX.

• On a price earnings basis we believe we bottomed Nov 9 at 11.9x and look for major P/E expansion post the credit and liquidity crisis. Bank earnings need to be stressed tested in order to garner higher P/E multiples from the market.

Recommendation

• Reiterate overweight bank recommendation based on extraordinary valuation and exceptionally strong absolute and relative balance sheets. Reiterate 1-Sector Outperforms on RY and TD.

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National Bank Takes $575 Million Charge

Financial Post, Jonathan Ratner, 19 November 2007

National Bank’s announcement that it will take a pre-tax charge of $575-million related to its asset backed commercial paper (ABCP) holdings comes on the heels of similar announcements recently by other members of Canada’s Big Six banks. All of them have now made pre-announcements, but National leads the way with the largest gross charge to date.

National also said it bought $2.1-billion of ABCP in the fourth quarter of 2007, primarily from its own funds, but also ABCP held by its retail clients. This is in addition to roughly $150-million of ABCP already on its balance sheet.

The bank’s provision represents more than 25% of its exposure, according to Dundee Securities analyst John Aiken, who noted that this is one of the highest levels seen so far. He said the provision is in line with expectations and actually below some of the more conservative estimates on the Street.

National did not have an offset like many other banks did with Visa gains, or the Bank of Montreal had with the sale of its Mastercard exposure.

“However... this is well within the level that is manageable for National from a capital perspective,” Mr. Aiken told clients in a note.

“We view NA’s announcement similarly to BMO’s: although charges are never a positive, the amount was not as negative as some had speculated and with an actual amount now in the public domain, it should relieve some valuation pressure,” he said.

The analyst also said the fact that National’s charge was well above the 15% level most other banks have taken is a good sign since it signals its reasonably conservative stance with regards to this exposure.

Mr. Aiken rates National shares at "market outperform" with a $61 price target.

With this announcement behind them, National should report a fourth quarter loss of 88¢ per share, according to Blackmont Capital analyst Brad Smith.

He said the bank’s ABCP holdings are 10% to 20% higher than previously estimated, while it will carry its ABCP investments at roughly $1.7-billion, or 39% of its estimated year-end book equity.

This continued exposure compels Mr. Smith to maintain his “hold” rating on National shares, he told clients in a note, adding that it could face additional write-downs as well as competitive strains and client losses if institutional customers are not offered a buyout at par value. His price target is $67.50.

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The Globe and Mail, John Partridge, 19 November 2007

The smallest of Canada's Big Six banks is taking the biggest hit any of them has yet disclosed on its holdings of non-bank asset-backed commercial paper – and bigger than many Bay Street financial services analysts, including its own, were expecting.

National Bank of Canada said Monday that it will take a pre-tax charge of $575-million against profit in the recently ended fourth quarter related to its holdings of about $2.25-billion of this once obscure form of corporate debt.

This amounts to more than 25 per cent of the value of the holdings and compares with hits of about 15 per cent announced by other much larger banks, including $135-million by Bank of Montreal and $190-million for Bank of Nova Scotia.

National Bank said the hit will translate to about $365-million after tax and compensation adjustments.

That is $122-million more than the record profit of $243-million the bank reported for the third quarter.

What is more, unlike other banks that have already revealed the hits they have taken in the fourth quarter, which ended Oct. 31, National Bank did not announce any unusual gains with which to offset the ABCP charge.

The market for ABCP has been under a microscope since mid-August when it was frozen after the collapse of the U.S. subprime mortgage market.

“National Bank's ABCP charge is based upon its valuation estimate of its ABCP holdings, which considers the current market conditions affecting the underlying assets of the trusts and National Bank's expectation that it may be a long-term owner of this ABCP or the instruments which could replace these notes following the proposed restructuring contemplated by the Montreal Accord,” the bank said in a news release.

It also said that it expects its tier-one capital ratio to be above its target of 8.5 per cent at the end of the quarter, Oct. 31.

Analyst Brad Smith at Blackmont Capital estimated in a note to clients that this ratio will drop to 8.8 per cent from 9.4 per cent in the third quarter.

At the start of trading, investors appeared to have been expecting worse news than National Bank reported: its shares climbed as far as $52 on the Toronto Stock Exchange, up 97 cents from Friday's close, while all the other bank stocks were down, except Bank of Montreal.

“Maybe ... people [are] saying they're putting this behind them,” analyst Michael Goldberg at Desjardins Securities — who thinks there may in fact be more trouble in store — said in a telephone interview.

However, by mid-day, National Bank shares had been in and out of the red, falling as low as $50.48 before bouncing back to $51.36, up 33 cents or 0.65 per cent. The only other Canadian bank stock showing gains was BMO, which was up 15 cents or 0.26 per cent to $56.81.

The bank, which was the most active seller of third-party ABCP, bought $2.1-billion of the stuff back from its own sponsored mutual and pooled funds and from its retail clients during the fourth quarter. This was on top of about $150-million of the paper it already held on its own balance sheet.

Several analysts said the charge the Montreal-based bank is taking is higher than they expected.

Mr. Smith, for instance, said the hit exceeded his estimate by $75-million to $100-million and said he now figures the bank will report a fourth quarter loss of 88 cents when it reveals its year-end results, set for Nov. 29.

He said he is “compelled” to maintain the “hold” rating he has on the bank's shares because of its continuing exposure to ABCP. This exposure, he said in the note, could lead to additional writedowns and “competitive strains and loss of clients due to institutional customers not being offered a buyout at par value.”

Mr. Goldberg at Desjardins also cited uncertainty about the impact the entire ABCP episode will have on National Bank's reputation, adding in a note to clients that the charge the bank announced “contains no litigation provision.”

He estimated the bank will report a fourth quarter loss of $1 a share as a result of the charge.

The size of the hit was also much higher than the $330-million forecast by RBC Capital Markets analyst André-Philippe Hardy. However, Mr. Hardy, who has an “underperform” rating on the stock, told clients in a note that he had estimated the amount of ABCP the bank already had on its books at $200-million, $50-million more than it reported Monday.

Robert Sedran, bank analyst at National Bank Financial, who does not rate the parent's stock because of his affiliation, said in a note to clients that he had expected the charge to be in the $300-million to $350-million range.

He also said it is “an open question” as to whether the size of the hit is “conservative or realistic,” because there is still very little information available about the assets underlying the ABCP.

Despite investors' “initial positive reaction,” Mr. Sedran said he thinks the fact the charge was higher than the market was expecting “carries negative ramifications not just to NA's balance sheet but to other holders of the [ABCP] that have taken less conservative views (including those that may have purchased the paper from National Bank).”

By contrast, analyst John Aiken at Dundee Securities Corp. told clients in a note Monday that the National Bank hit is in line with his expectations, even though the “gross charge” is the largest disclosed by any Canadian bank so far.

As well, at 25 per cent of the bank's total exposure to ABCP, the level of provisioning is “one of the highest that we have seen to date,” he said, “well above the 15 per cent” taken by most other lenders.

However, Mr. Aiken, who rates National Bank shares as “market outperform,” also said that this should be “viewed as a positive and demonstrates a reasonably conservative stance that the bank is taking with its exposure.” As well, he argued that exposure is “well within the level that is manageable for National from a capital perspective.”

National Bank spokesman Denis Dubé confirmed that the $575-million charge does not include any provision for potential litigation costs but would not comment on the analysts' forecasts for a fourth-quarter loss.

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Bloomberg, Doug Alexander, 19 November 2007

National Bank of Canada, the country's sixth-largest bank, plans to take a C$365 million ($374 million) writedown in the fourth quarter for its investments in Canadian asset-backed commercial paper.

The charge is about C$575 million pretax and before compensation adjustments, the Montreal-based lender said today in a statement. National Bank bought back C$2.1 billion of commercial paper in the quarter ended Oct. 31, mainly from its mutual fund clients.

National Bank's writedown is the largest for any Canadian bank, and is higher than the lender's net income last quarter. The other banks, including Royal Bank of Canada, had combined writedowns of C$807 million on commercial paper, and debt tied to the U.S. subprime mortgage market.

``It seems on the high side,'' said CIBC World Markets analyst Darko Mihelic, who expected a pretax charge of about C$300 million from National Bank. ``It either implies they're being conservative or they have a lot of really junky stuff, or a combo of the two.''

The bank's shares rose 77 cents, or 1.5 percent, to C$51.80 at 4:10 p.m. trading on the Toronto Stock Exchange. The stock is down 21 percent this year, the worst performer among Canadian banks.

The C$34 billion market for commercial paper sold by non- bank dealers in Canada ground to a halt in August after Coventree Inc. and other trusts failed to renew most of their maturing debt because investors were concerned about ties to U.S. subprime lending.

National Bank, which had C$150 million in commercial paper before the buyback, first became involved with non-bank asset- backed commercial paper in 2000.

Unlike other Canadian banks, which steered most of their clients to in-house funds, National advised customers to buy commercial paper offered by dealers including Toronto-based Coventree. The bank turned to outside firms because it didn't have a lot of asset-backed products of its own.

Canada's banks have said they'll have combined securities writedowns in the quarter of about C$1.17 billion. By comparison, the world's biggest banks and securities firms in the U.S. and Europe have recorded more than $45 billion of writedowns this year on asset-backed securities.

National Bank is scheduled to report fourth-quarter results on Nov. 29. The bank will probably post a net loss of about C$1 a share with the writedown, said Michael Goldberg, an analyst at Desjardins Securities. The bank had profit of C$220 million, or C$1.31 a share, a year earlier.

National Bank is among a group of investors led by the pension fund Caisse de Depot et Placement du Quebec that signed the so-called ``Montreal proposal'' on Aug. 16. The group agreed to restructure the commercial paper into floating-rate notes with longer maturities, and aims to finish the plan by Dec. 14.

National Bank's writedown is equal to more than 25 percent of its commercial paper holdings, one of the highest writedowns recorded by Canadian companies. DundeeWealth Inc., the Toronto- based owner of Dynamic Mutual Funds, wrote down the value of its asset-backed commercial paper by about 15 percent. Desjardins Group, the largest credit union in Canada, took an 8 percent writedown last week.

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BMO Takes $320 Million Charge

RBC Capital Markets, 16 November 2007

First Impression

BMO pre-released $345 million pre-tax ($225 million post-tax) in write-downs and losses in its wholesale division related to:

• Trading and structured credit-related positions (approximately $170 million pre-tax);

• Canadian Asset-Backed Commercial Paper (approximately $135 million pre-tax).

• Capital notes in the Links and Parkland structured investment vehicles or SIVs (approximately $15 million pre-tax).

• Losses from its strategy to reduce its commodities trading portfolio (approximately $25 million pre-tax or $15 million after-tax).

The bank also announced a charge related to its credit card loyalty rewards program liability ($185 million pre-tax or $120 million after-tax), which is partially offset by a gain from the sale of its MasterCard shares of $110 million pre-tax ($85 million after-tax). These two items will be booked in its Personal & Commercial Banking Canada's results.

Positives

• With this many potentially negative exposures, the positives are that the write-downs of $345 million pre-tax are less than what we expected ($422 million) because of lower charges from structured investment vehicles and the commodities portfolio wind down.

Negatives

• The negative is that BMO will invest up to $1.6 billion in the senior debt of its two structured investment vehicles. Senior tranches should have less risk than subordinate positions and we would like to think that the debt was issued at prices that reflect the widening of spreads that has occurred in the last 4 months (since it appears the debt is being issued now) but we cannot know for sure.

• We do not think that markets will be at ease over the bank's exposure to SIVs given the added capital commitment.

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The Globe and Mail, Tara Perkins, 16 November 2007

Bank of Montreal on Friday became the latest big Canadian bank to disclose that it's taking a hit as a result of the recent credit crunch, saying it will take a one-time charge of about $320-million in the fourth quarter as a direct result of the financial turmoil.

Bank of Montreal on Friday became the latest big Canadian bank to disclose that it's taking a hit as a result of the recent credit crunch, saying it will record one-time charges of about $320-million in the fourth quarter.

That amount includes a $170-million writedown as a result of trading, structured credit-related positions and preferred shares; a $135-million writedown as a result of Canadian asset-backed commercial paper; and a $15-million hit as a result of its exposure to structured investment vehicles.

Those charges will amount to $210-million after tax. As a result of them, and a number of other one-time issues, the bank said its fourth-quarter financial results will be about 50 cents lower per share.

BMO also said Friday that it will participate in the senior debt issued by its two SIVs, Links Finance Corp. and Parkland Finance Corp., up to a maximum of about $1.6-billion.

Meanwhile, its continuing effort to shrink its commodities trading portfolio continues, and will cause a loss of about $25-million this quarter.

The bank's commodities trading portfolio has been a headache since it first revealed earlier this year that it would be recording hundreds of millions of dollars in losses, largely as a result of its natural gas trading operations. Last quarter the bank took a $149-million hit on the portfolio, bringing the total commodities trading charges this year to $829-million. After the fourth-quarter, that will stand at $854-million.

Bank of Montreal's fourth-quarter results this year will also include a charge of about $185-million because it believes more customers will be redeeming loyalty rewards they earn on their MasterCards.

Royal Bank of Canada similarly said on Tuesday that it will take a $120-million charge because it believes more customers are cashing in credit card points.

On the bright side for BMO, it expects to see a gain of about $110-million from the sale of shares of MasterCard International Inc.

The bank said that its Tier 1 Capital Ratio “remains strong.”

It has much company among its peers when it comes to taking fourth-quarter writedowns as a result of the turmoil that's rocked financial markets in recent months.

Earlier this week, Canada's biggest bank, Royal Bank of Canada, said it will record a $360-million charge as a result of its exposure to subprime mortgage-related securities. Bank of Nova Scotia said it will take a $190-million hit as a result of its investments in ABCP and structured credit instruments. Canadian Imperial Bank of Commerce pre-announced a $463-million charge on its exposure to the U.S. mortgage market.

But even that figure pales in comparison to the multi-billion dollar writedowns that the major U.S. banks are taking.

RBC Capital Markets analyst Andre-Philippe Hardy noted that the writedowns were less than the $422-million he had expected BMO to announce.

However, on the negative side, he doubts the markets will be at ease with BMO's exposure to SIVs, given the bank's decision to invest up to $1.6-billion.

“We would like to think that the debt was issued at prices that reflect the widening of spreads that has occurred in the last four months (since it appears the debt is being issued now) but we cannot know for sure,” he wrote in a note to clients, adding that he hopes to find out more when the bank releases its full results on Nov. 27.

Dundee Capital Markets analyst John Aiken said that he thinks the announcement will be a positive for BMO.

“Although multi-layered, the charges were not as large as had been speculated by some camps.”

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Financial Post, Grant Surridge, 16 November 2007

BMO's morning revelations that it will take a $320-million charge in its fourth quarter could provide an opportunity for investors, says Blackmont Capital analyst Brad Smith.

BMO's stock has been hammered since August, due at least partly to concerns over the bank's exposure to mortgage-backed securities and investments of similar ilk.

Analysts had predicted BMO's writedowns on such investments could have been even higher than those announced today.

"This morning's confirmation that net losses to be recorded in Q4/07 are expected to reduce EPS by only $0.50, confirms that the negative market sentiment has surpassed real loss potential," writes Mr. Smith.

He upgrades from "hold" to "buy" and maintains his $72 per share target.

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Financial Post, David Pett, 16 November 2007

Impressive decision making by Toronto-Dominion Bank's top brass over the past few months is garnering rave reviews from two analysts Friday.

To start, Desjardins Securities analyst Michael Goldberg said in a note to clients that all the bad news about structured credit writedowns at the other banks, can be seen as good news for TD.

"TD is the only one of the major banks not to pre-announce any charge related to structured credit," Mr. Goldberg said "Why? Because it has no meaningful issues related to structured credit in the US or Canada."

He added that TD exited this business months ago because it did not like the lack of transparency and took a not-insignificant charge at the time.

The analyst also applauded the company's decision to acquire Commerce Bancorp, "a great retail banking franchise in the US" and avoid activist pressure to purchase discount brokerage E*Trade, whose shares tumbled earlier this week amid fears of a possible bankruptcy.

Mr. Goldberg said he expects TD to continue delivering stellar performance going forward and maintained his "top pick" rating on the bank and left unchanged his $84 price target.

Citigroup analyst Shannon Cowherd echoed Mr. Goldberg's sentiments on all points and raised her fiscal 2009 earnings per share estimate from $6.43 to $6.60 based on the company's strong domestic retail franchise and leverage of the new sizable U.S. platform.

She maintained her "hold" rating and $75 price target however, telling clients she remains cautious regarding the the current credit crisis, also noting the integration costs associated with the Commerce Bancorp deal.

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Dow Jones Newswires, 16 November 2007

11:54 There's a notable absence in list of Canadian banks taking 4Q credit-related charges - Toronto-Dominion. Desjardins Securities says there's three positives to consider. TD "has no meaningful issues related to structured credit in the US or Canada" because it exited the business some time ago, and took a charge then. TD acquiring "great retail franchise" in Commerce Bancorp, and also "stands to benefit" from troubles at E*Trade, as TD Ameritrade could pick up skittish clients. Still, investors may be tarring TD with same brush: its shares have fallen in line with peers.

10:41 Given trading and structured credit-related losses at Bank of Nova Scotia and Bank of Montreal, it's "plausible" Royal Bank of Canada and CIBC will report "meaningful" trading losses in Q4, Genuity Capital Markets says. Chances are less likely for Toronto-Dominion. Absence of disclosure from CM, RY and TD could reflect different market positioning, analyst says, but more likely relates "to the banks' different perspective on what is considered unusual versus operating."

9:39 When the market is expecting charges of up to C$500M, then it's good news when the sum is only C$260M, Dundee Securities says. Investors should receive Bank of Montreal's news with sigh of relief, analyst says, although niggling concerns remain. Like its peers, BMO offsets charges on structured credit and trading with gains from shares in credit card holdings, in this case MasterCard. However, the potential for further charges related to structured investment vehicles remains. Dundee backs outperform rating given recent 10% decline.

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Courts Allow Lawsuits Over Fees

Financial Post, Peter Brieger, 16 November 2007

Two of the country's highest courts paved the way yesterday for a handful of lawsuits to proceed against financial institutions over fees they charge on everything from credit-card cash advances to "buy now, pay later" deals.

The Supreme Court declined to hear arguments that fee-based lawsuits against three companies should be quashed -- giving the claims a green light to go ahead -- while the Ontario Court of Appeal certified a $150-million class-action against Toronto-Dominion Bank over charges it slaps on credit-card purchases in foreign currencies.

While the top court's decision suggests it didn't find the cases were of sufficient national importance to hear them, there is a strong message behind allowing such lawsuits to stay alive, said prominent class-action lawyer Harvey Strosberg, who argued the foreign currency case against TD Bank.

Individual claims in credit-card lawsuits may be small, but they can add up to hundreds of millions of dollars in fees, he noted.

"The courts are being sensitive to the fact that big business can't make millions a few bucks at a time if it's in breach of a contract," Mr. Strosberg said.

In a curious footnote, Ontario's highest court threw cold water on TD's argument that calculating foreign currency fees stretching back to 1968 -- the date picked as a starting point in the lawsuit -- would take 1,500 people working for one year at a cost of $48.5-million.

"It would hardly be sound policy to permit a defendant to retain a gain made from a breach of contract because the defendant estimates its costs of calculating the amount of the gain to be substantial," the appeal court wrote.

The claim was launched by TD Visa cardholder Dr. Paul Cassano over charges from a New York City hotel bill. His claim, launched in 1997, argued that TD Bank breached its credit-card agreement with clients by slapping two "undisclosed" and "unauthorized" sets of fees on customer purchases in foreign currency.

Two lower courts had dismissed the claim, a ruling overturned by the appeal court yesterday.

The appeal court judges ruled that a previous court erred by agreeing with TD Bank's position that calculating any loss would require polling hundreds of thousands of cardholders individually to see if the unauthorized fees would have stopped them from making a foreign currency purchase on their cards.

"It is clear that this error informed [the judge's] ultimate conclusion that this action was not appropriate for certification as a class proceeding," the appeal court wrote.

The ruling comes less than a month after a Quebec Superior Court judge gave the go-ahead to three credit-card lawsuits against dozens of financial institutions, including Bank of Montreal, CIBC, and Royal Bank.

Meanwhile, the Supreme Court refused to hear British Columbia's Coast Capital Savings Credit Union argue against a lawsuit involving a member who sued on behalf of all customers who were charged overdraft fees above $5.

The rulings by the country's top court also cleared the way for a class action to proceed against MBNA Canada Bank over fees and compound interest on its credit-card cash advances.

The court's decision not to hear Merchant Retail Services Ltd.'s appeal means the finance company must pay damages ordered by a lower court over the way it charged late fees under a "buy now, pay later" agreement.

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The Toronto Star, Tony Wong, 16 November 2007

As record numbers of Canadians head south for cross-border shopping, a court has ruled that a class-action suit against the Toronto Dominion Bank over foreign currency transactions on its Visa credit cards will be allowed to proceed.

The decision by the Court of Appeal for Ontario, released this week, overturns a lower court ruling that dismissed the certification of a class-action suit by a Toronto doctor who complained about service charges on his TD Visa card.

Dr. Paul Cassano used his credit card to pay for a hotel in New York in 1994. The bill came to $563.36 (U.S.), or $766.62 (Canadian). The hotel mistakenly charged his credit card twice, so Cassano was given a credit.

However, instead of a refund of $766.62, his credit card statement showed he was given $745.44. The difference was in the additional fees charged by the bank for foreign currency transactions.

In July 1997, Cassano and another doctor started a class-action suit against the bank, alleging the "undisclosed practice" of incorporating a conversion fee and an additional issuer fee was "unauthorized" under the terms of the cardholder agreement.

According to the suit, the bank typically has three components to its foreign exchange rate; a basic conversion rate set by Visa International, an additional 1 per cent conversion fee, and an issuer fee ranging from 0.4 per cent to 1 per cent.

Cassano argued that cardholders were blindsided by charges that were far more than a simple conversion rate. The bank claimed the terms of the cardholder agreement provided "broad discretion" to determine the exchange rate applied to foreign currency transactions, and that there was no need for additional disclosure. TD's agreements were eventually amended to include disclosure of the conversion and issuer fees.

"A class proceeding is clearly the preferable procedure," said Ontario Chief Justice Warren Winkler.

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UK Regulator Fines TD Bank Over Rogue Trader

Reuters, 16 November 2007

Toronto-Dominion Bank has been fined 490,000 pounds (C$998,000) after one of its traders attempted to hide losses on his trading book, Britain's financial regulator said on Friday.

The Financial Services Authority (FSA) said former TD Bank employee Simon Brignall, who was a senior fixed income trader, resigned in March and revealed to TD he had been attributing false values to his trading positions for almost two years.

Brignall did this to hide significant losses on his trading book and he also entered a number of fictitious trades during the two weeks leading up to his resignation, the FSA said.

The FSA fined TD Bank for not identifying, through its own systems and controls, either the extent of the mispricing of the trades or the fictitious trades.

The loss caused by Brignall was $8.8-million, which was borne by TD Bank, the FSA said. No client or third party suffered a loss and Brignall made no personal gain.

The FSA said it had banned Brignall from carrying out regulated activities.

TD Bank informed the FSA as soon as practicable of the problems, had cooperated fully and has taken steps to address the systems and controls failings, the regulator said.

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Canadian Press, 16 November 2007

Britain's Financial Services Authority has fined the London office of Toronto-Dominion Bank 490,000 pounds for failing to control a rogue bond trader who cost the bank C$8.8 million.

The bank's fine is worth about C$980,000 at current exchange rates, and the trader, Simon Richard Brignall, was banned from the capital markets "on the grounds that he is not a fit and proper person" after his activities between the start of 2005 and last March.

The $8.8-million loss caused by Brignall was borne by TD with no pain to clients or outside parties, and the FSA said Brignall made no personal gain.

Brignall, a senior fixed-income trader, resigned March 9 and revealed to TD that he had been booking false values on his trading positions for almost two years to hide losses. Just before his resignation, he had also entered a number of fictitious trades.

"TD Bank did not identify, through its own systems and controls, either the extent of the mispricing of the trades or the fictitious trades," the FSA stated Friday.

It found an absence of independent price verification, ineffective trading supervision and a failure of procedures to resolve mismatches between trading data in its system and information received from counterparties.

The bank informed the FSA quickly of the misconduct and co-operated fully and "has also taken a number of steps to address the systems and controls failings," the authority said.

By settling quickly, TD qualified for a 30 per cent discount on the penalty under the FSA's procedures, which reduced the fine from 700,000 pounds.

The FSA commented that "at the time of the misconduct, Mr. Brignall was under significant pressure in his personal life."

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Only TD Bank Was Willing to Pay a Premium for Commerce Bancorp

The Globe and Mail, Tara Perkins, 14 November 2007

Toronto-Dominion Bank says it remains comfortable with the $8.5-billion (U.S.) price tag on its blockbuster bid for New Jersey's Commerce Bancorp Inc., despite documents that show Commerce's investment bankers approached 17 potential bidders but only TD was willing to make an offer at a premium to the stock price.

"We made our bid proposal on numbers we were comfortable with, and for economic reasons we were comfortable with," TD spokesman Neil Parmenter said Wednesday.

The deal for Commerce's nearly 460 locations, which will make TD the seventh-biggest bank in North America, became possible after Commerce fell into trouble this year.

Commerce's board of directors began considering a sale after the bank revealed it was being investigated by regulators and its chief executive officer resigned, according to documents filed this week with the U.S. Securities and Exchange Commission.

Not only had regulators hampered its ability to open branches quickly, the bank's board was also contending with numerous business challenges, ranging from a relatively low return on assets to increased competition from bigger banks to a slowdown in deposit growth on a branch-by-branch basis, the documents state.

"Although Commerce's board of directors believed that each of the business challenges, as well as the regulatory issues, could have been resolved, such resolutions would have required substantial investments of money and personnel and would have diverted management's attention from day-to-day operation of the business for a lengthy period of time," the proxy circular filed in connection with deal states.

In July, the board gave Commerce's investment bankers at Goldman Sachs a mandate to find potential strategic partners. They had initial conversations with 17 banks and identified four, including TD, that Goldman Sachs considered most likely to make a bid at a premium to Commerce's stock price. (A number of the 13 banks that were whittled out had either said they didn't think their business models were compatible with Commerce or that they would not be willing to pay a premium).

Between Aug. 6 and Aug. 10, Goldman Sachs met with each of the four contenders, and gave them a chance to ask questions after asking them to sign confidentiality agreements. On Aug. 7, Bharat Masrani, the chief executive of TD Banknorth — TD's U.S. bank — and some of his colleagues met with the investment bankers, and suggested that Commerce's customer-service philosophy meshed with TD's and that Commerce could become a key part of TD's U.S. strategy.

With the Commerce acquisition, roughly half of TD's 2,100 branches will be in the U.S.

Following that round of meetings, one potential bidder told Goldman Sachs it had concluded Commerce was not a good fit with its current strategy. Another said it had decided not to expand its operations in the mid-Atlantic region.

TD and the other remaining contender submitted preliminary written expressions of interest. TD's said it would be willing to make a cash and share offer at a premium to Commerce's stock price, subject to due diligence. The other bank said it would be willing to make an offer roughly equivalent to the stock price.

Commerce's board "noted that the price range in TD's preliminary indication of interest was materially greater than that indicated by the other institution," the documents state. Goldman Sachs said the other contender was not willing to raise its offer.

"The board of directors also discussed with Goldman Sachs the fact that, notwithstanding the widespread speculation that Commerce would be sold, no other potential purchasers had approached Commerce about a potential business combination," the documents said.

From that point forward, Commerce focused its efforts on its one remaining suitor, and TD spent Aug. 29 to Sept. 20 on due diligence, pouring through business, legal, tax, and regulatory issues.

The banks had multiple discussions about the potential losses in Commerce's portfolio as a result of sharp declines that had been occurring in bond markets. By Sept. 26, TD told Commerce it would be willing to make an offer for $42US per share, subject to it being satisfied that Commerce would take acceptable actions to reduce the potential interest rate risk in its investment securities portfolio.

The following days saw negotiations on subjects ranging from a break fee ($332-million U.S.) to new contracts for some Commerce executives.

TD's final offer — roughly one-quarter cash, three-quarters stock — was announced on Oct. 2, at which point it was valued at $42.34 based on the bank's share price. That was a premium of about 25 per cent above Commerce's stock price on June 28, the day before its CEO resigned. Commerce shares closed at $39.47 on Oct. 2, down 27 cents.

The deal's price tag is what TD was willing to pay for a new expansion avenue outside of Canada's limited banking borders, as well as for bragging rights. "We are the first North American bank," chief executive officer Ed Clark declared.

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The Associated Press, Geoff Mulvihill, 13 November 2007

Some Commerce Bancorp executives will get big paydays — some more than $7.5-million (U.S.) — if the company's sale to TD Bank Financial Group goes through and they stick around.

That's in addition to what they would make as shareholders in the company.

Cherry Hill-based Commerce, which decided to sell after founder Vernon W. Hill II was forced out earlier this year as part of a settlement with regulators, disclosed the payment schedule in a filing Tuesday with the federal Securities and Exchange Commission.

Seven executives would get four annual payments as a result of a change in control. They would have to remain with TD Bank for three years after the sale to get the full amounts, which range between $1.75-million and $7.63-million.

The executives in line to get the most are Dennis DiFlorio, the chairman of Commerce Bank, who would get $7.63-million; Robert Falese, president and CEO of Commerce Bank, would get $7.33-million; and George E. Norcross III, the chairman and CEO of Commerce Banc Insurance Services, would get $7.59-million.

Each man's stocks and outstanding options are worth millions more.

Tuesday's filings also explained how Mr. Norcross, who is best known in New Jersey as a major player in Democratic politics, can buy the insurance division, which is a successor of a company that he founded.

He can negotiate until Dec. 1 to buy the company. If he doesn't reach a deal, he can leave the company at any time and get a payment for involuntarily termination without cause. The company has not disclosed how much that would be now, but as of Dec. 31, 2006, the amount would have been about $2.2-million, according to previous filings. He would also get a similar payment if he bought the insurance subsidiary.

Also, if he does not buy the company but leaves Commerce and starts a new insurance firm, there's a provision that would relax noncompete restrictions for former employees who went to work for him.

In June, Commerce announced that Mr. Hill would leave the company as part of a settlement with the Office of the Comptroller of the Currency over self-dealing. The bank has a long history of giving contracts to firms controlled by Mr. Hill and his relatives.

The company quickly went up for sale. Only Toronto-based TD Bank Financial Group was willing to pay a premium over Commerce's stock value at the time, according to Tuesday's filing. The deal is expected to close in April.

Since the sale was announced, the company has had some more woes.

It lost money in the third fiscal quarter and announced that the SEC was investigating the same type of issues that the OCC found troublesome.

And Monday, there were reports that the company was warning some customers that an employee had released their personal information to a third party, causing the potential for identity theft. Commerce has offered those customers 12 free months of credit monitoring.

The bank has not explained which customers, or how many, are at risk.

In trading on the NYSE on Tuesday, Commerce shares were selling at $37.46, up 64 cents.

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Scotiabank & TD Bank Share Of Small Business Market Rises

Dow Jones Newswires, Monica Gutschi, 14 November 2007

Royal Bank of Canada still has the biggest share of Canada's small-business market, but is rapidly losing ground to Bank of Nova Scotia as the latter strives to expand its services to that group.

A survey by the Canadian Federation of Independent Business, or CFIB, shows that Royal Bank's share of the market has eroded by 3.7 percentage points in the years 2000 to 2006. Scotiabank's share grew by 3.3 percentage points.

"We feel we've been making excellent strides in our small-business banking offering," Scotiabank spokesman Frank Switzer said in an interview. "We feel that's certainly reflected in business growth as shown by the CFIB study."

Earlier this year, Scotiabank launched a "Running Start for business" package, to help entrepreneurs establish new small businesses and "Scotia Plan Writer for business", an online tool to help small business owners through the process of writing a business plan. It also offers "Scotia Blueprint for business," which provides advice on how to improve cash flow, and it has invested in its sales force and training program.

The bank's share of the small-business market climbed to 14.5% in 2006 from 11.2% in 2000.

Kyle McNamara, head of small business for Scotiabank, said in an interview that the bank has decided to increase its focus on that market segment and has made a "really, really significant investment in tools and training" in recent years. Those initiatives have already sparked a major increase in volume of business, he said, and the bank is planning a "double-digit" increase in the number of small-business banking specialists on staff.

"Those tools in combination with the expertise and the focus that our teams have, (is) really powerful," McNamara said.

Small business is "a very good market for the bank to concentrate on," he said, as owners typically have "deeper banking needs" since their business holdings are closely intertwined with their personal holdings.

Among the Big Five banks, only Toronto-Dominion Bank's market share also grew in the six-year period, to 13.6% from 12.1%.

Royal Bank's share dropped to 17.5% from 21.2%, with the biggest decline seen in the past three years. The CFIB survey is conducted once every three years.

Canadian Imperial Bank of Commerce saw its share drop to 11% from 13.3% and Bank of Montreal fell to 10.8% from 12.6%.

National Bank of Canada and HSBC Bank Canada, a unit of HSBC Holdings PLC, saw their shares hold steady, while the country's credit unions enjoyed a big surge in business. Their collective share rose to 11% from 8.7%. Quebec-based Desjardins Group also saw market-share gains, to 11% from 8.4%.

Doug Bruce, who authored the study for the CFIB, said that despite the shift in market share, the majority of small-business owners see little difference among the big banks.

"When they do shop around for a new bank, they don't find much of a change," he said. "And we find that if you look at the bank scores, all are smack dab in the middle. The score is very, very close."

In fact, Royal Bank's satisfaction rating was higher than that of Scotiabank's in the 2006 ranking. The results aren't exactly comparable, as factors such as branch hours were no longer measured, while business succession planning was added.

Overall, Bruce said, the relationship between the account manager and the small business owner was the paramount factor in the level of satisfaction with a bank's services.

"That will affect everything right across the board," he said.

The report is based on survey results from 9,347 owners of small- and mid-sized businesses. The CFIB represents more than 105,000 business owners

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CIBC, RBC, Scotiabank Writedown Parade

Scotia Capital, 14 November 2007

RY Announces VISA Gains and Benign Write-Downs

• The write-downs announced by RY are extremely benign and pale by comparison to writedowns taken by a number of global players. The very modest write-downs reflect the Canadian banks high asset quality and extremely low exposure to the high risk areas being impacted by the credit and liquidity crunch. We believe the market was discounting substantially higher write-downs for RY.

VISA Gains - RY $325M - Inline

• RY announced that it will book a $325 million gain ($270 million after-tax or $0.21 per share) from the completion of VISA's restructuring, in line with expectations.

• RY announcements follow similar announcements from CM and TD with VISA gains of $456 million gain ($381 million after-tax and $1.14 per share) and $163 million gain ($135 million after-tax and $0.19 per share), respectively.

RY - Benign CDO Write-Down of $0.13 Per Share

• RY announced a relatively benign write-down of $360 million pre-tax ($160 million after tax and compensation adjustments or $0.13 per share) on its CDOs and RMBSs. This pre-release implies to us that there will be no other major write-downs. We believe the market was discounting a much higher write-down.

RY - Additional $120M Charge Relating to Credit Card Liabilities

• RY also announced a $120 million pre-tax ($80 million after-tax or $0.06 per share) charge relating to an increase in credit card customer reward program liability.

RY - Net Impact of Unusual Items Minimal

• The RY VISA gain of $0.21 per share is offset by $0.13 per share CDO/RMBS write-down and $0.06 per share charge for credit card reward program liability for a net gain of $0.02 per share.

• We consider the VISA gain as one-time and other charges as operating.

Write-Downs Expected From BMO and NA

• We continue to expect NA to announce a $500 million (or $2.00 per share) write-down on its $1.85 billion exposure to non-bank ABCP.

• There is a lot of uncertainty surrounding BMO in terms of the bank's potential write-downs from non-bank ABCP liquidity facilities and perhaps recent holdings in non-bank ABCP, as well as its Structured Investment Vehicles (SIVs). The potential magnitude of the writedown is difficult to ascertain but could be as high as $500 million.

Recommendation

• We are trimming our Q4/07 earnings estimates on RY to $0.85 per share from $1.00 per share to reflect the announcements. Our 2008 earnings estimates are unchanged.

• We believe that Friday, November 9 was the bottom for Canadian banks at 11.9x trailing earnings. Reiterate our overweight recommendation on the banks with 1-Sector Outperform ratings on RY and TD.

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Financial Post, Sean Silcoff, 14 November 2007

At charm school for Canadian bankers, one of the first lessons is that if you have something bad to say, it's best to have something nice to say as well.

The Big Five are notorious for coupling good news with bad when they can, despite tighter disclosure rules in recent years that were supposed to stop stage-managed earnings reports.

It's easy to be cynical about the latest bad-news/but-waitthere's-good-news! story from the banks.

On Friday, Canadian Imperial Bank of Commerce reported a $463-million writedown, pre-tax related to the U.S. subprime mortgage crisis.

But wait! CIBC also booked a $456-million gain from swapping its shares in Visa Canada for shares in Visa Inc. as the credit card giant prepares to go public.

Different day, different banks, same story.

Royal Bank of Canada yesterday said it too would book a gain, of $270-million after tax, from its Visa shares.

Oh, and, it will also write down $240-million, mostly U.S. subprime-related.

Then, Bank of Nova Scotia said it would book a $200-million pre-tax Visa gain and write down the value of its subprime-related paper by $190-million. Hmm. Coincidence?

To be fair, we knew the banks were going to book Visa-related gains. And U.S. subprime writedowns by banks aren't exactly a shocker these days.

But two things smell: the coincidental timing of the release of information on two unrelated events -- the restructuring of stakes in Visa and losses from poor risk management -- and coincidentally offsetting values of gains and losses. Three times out of three.

The banks received their Visa shares on Oct. 3, but it wasn't until early last week that an independent evaluator provided them each with the estimated value.

The banks then asked their auditors to check the valuations, disclosing the values when they heard back.

But are we to believe that on the same day, each of the banks also happened to learn the value of their subprime losses in the fourth quarter (ended Oct. 31), and that they all closely matched up?

A spokeswoman for Royal said the bank followed normal disclosure procedures "as they relate to events that may be considered material."

But she added that the bank, upon reviewing the results, decided that the two losses and one gain, though independent of one another, should be rolled into one release.

"Providing disclosure on each development in isolation would not have been responsible," she said.

Releasing material information one piece at a time is irresponsible?

That beggars belief. Here's a more plausible explanation: the banks were not going to get credit from investors for one-time Visa gains.

But they could use them to tidy up the balance sheet by matching them against expected losses.

That way, the size of their all-important capital bases would be unaffected. Investors would have nothing to worry about.

There is nothing wrong with this, but it smacks of cynicism on the part of banks.

It also suggests the banks face further writedowns. Why? Those gains they've booked on Visa presumably assume an IPO price.

Since Mastercard's IPO in May, 2006, its shares have risen almost five-fold.

If Visa follows suit, Canadian banks holding its shares could have a bigger windfall on their hands -- so much the greater to offset subprime writedowns yet to come, leaving their balance sheets unscathed. How polite, investors may agree.

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Financial Post, Grant Surridge, 14 November 2007

The ongoing subprime mortgage disaster in the United States clipped two of Canada's big banks yesterday, although market and analyst reaction indicated the writedowns were largely expected.

Royal Bank of Canada said it would take a $360-million charge (about $160-million after tax) to reflect lower valuations on its stable of collateralized debt obligations and residential mortgage-backed securities. RBC also said it would book gains related to its stake in Visa Inc., with its bottom line "only modestly affected" as a result. Investors responded by pushing up RBC shares more than 3% at the close on the Toronto Stock Exchange.

"It basically confirms there has been valuation loss in these portfolios, which I think everybody knew," Blackmont Capital analyst Brad Smith said yesterday. "These are very small amounts for all the banks."

Later in the afternoon, Bank of Nova Scotia said it would take a $190-million ($135-million after-tax) hit on assets tied up in the non-bank assetbacked commercial paper market. Scotia also cushioned the blow with a $200-million pretax gain related to Visa.

The two join CIBC, which last Friday simultaneously announced a pre-tax $463-million subprime writedown in the fourth quarter and a $456-million gain related to Visa.

Mr. Smith said he was surprised to learn Scotia had exposure to ABCP, but the writedown was a small event.

Observers said yesterday that Canadian banks are using expected gains from Visa's upcoming IPO, which could raise US$10-billion, to tidy up their balance sheets.

While damage to Canadian banks has been relatively limited, the U.S. subprime mortgage disease has infected credit markets the world over.

South of the border, Wall Street banks have announced billions in writedowns and turfed senior executives in a mad scramble to clean up balance sheets. In Europe, financial institutions in the U.K., Germany and Switzerland are expected to announce writedowns on a similar scale.

Dundee Securities analyst John Aiken estimated yesterday's writedown at RBC would cover off a third of the bank's total subprime exposure of $1.2-billion.

RBC also said on Tuesday it would take a $120-million ($80-million after-tax) charge related to increased liabilities in its credit card customer loyalty program, alongside a $325-million gain related to its stake in Visa Inc., following that company's global restructuring.

"Royal Bank is taking advantage of the Visa gain in order to shore up some areas on its balance sheet that may have some cracks," wrote Mr. Aiken in a note.

Analysts now see National Bank and Bank of Montreal, neither of which will book Visa-related gains, as the two banks to watch in the subprime writedown game.

While investors appear satisfied that CIBC's and RBC's subprime exposure is not worse than expected, Mr. Smith cautioned that global credit markets have a ways to go before sorting themselves out, and that more writedowns are a possibility.

"It does not guarantee there won't be further losses if credit market conditions continue to deteriorate," said Mr. Smith.

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Financial Post, Jonathan Ratner, 14 November 2007

After two more Canadian banks said they would take subprime-related writedowns on Tuesday, RBC Capital Markets has reduced its rating on CIBC and lowered its price target on four of the five banks it covers.

Many global banks have produced disappointing results recently and their shares have been pummeled as a result. However, RBC thinks Canadians names will see a smaller scale impact.

Nonetheless, it cut CIBC to “sector perform” from “outperform,” while $3 was shaved off its price target now at $105 per share.

The target for Bank of Montreal shares was also cut by $3 to $66. It continues to be rated at “underperform.” Bank of Nova Scotia’s target was reduced by a dollar to $54, as was National Bank to $59.

“We remain cautious on the banks and continue to prefer lifecos in the near term,” RBC analyst Andre-Philippe Hardy said in a note to clients. “If the economy remains healthy in 2008 and the U.S. financial services system does not go into a crisis, we would expect the bank stocks to provide attractive upside, but we do not expect the share appreciation to occur in the near term given the capital markets and credit overhang in U.S. financial markets.”

The Big Six banks, which also includes Royal Bank and Toronto-Dominion – RBC’s favourite name in the group – will report fourth quarter results between Nov. 27 and Dec. 6.

Mr. Hardy anticipates that TD’s earnings per share will grow at the highest rate in the group due to its lower exposure to wholesale markets and industry-leading retail growth. The analyst also thinks TD, along with Scotiabank, are less exposed to possible markdowns in their capital markets business.

But its not over when fiscal 2007 ends. Greater risk to investor sentiment will come when the banks report results for the first half of 2008, said Mr. Hardy. At that point, he expects both the broader U.S. outlook and sustainability of recent growth in capital markets will be clearer..

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Dow Jones Newswires, Monica Gutschi, 13 November 2007

Three of Canada's biggest banks are using expected gains from the VISA Inc. restructuring to offset the pain from their exposure to the eroding U.S. subprime mortgage market.

Royal Bank of Canada Tuesday joined Canadian Imperial Bank of Commerce in announcing it would take a writedown in the fourth quarter related to its holding in collaterized debt obligations and residential-mortgage backed securities linked to subprime mortgages.

Also on Tuesday, Bank of Nova Scotia said it would take a charge on its holdings in non-bank asset-backed commercial paper. Canada's ABCP market was launched into turmoil this summer on concerns about possible contagion from the U.S. subprime market.

All three, however, have been able to offset the bottom-line impact with gains expected from VISA's planned initial public offering.

"Certainly the timing worked out pretty well," said Craig Fehr, Canadian bank analyst at Edward Jones.

While the charges and gains aren't core to the banks' earnings, he said they do "speak a bit to the risk of the capital-markets segments at all of these banks."

Nevertheless, analysts said the overall exposure remains minimal and unlikely to crimp the strong growth at Canadian banks.

"If this is the extent of the pain from the collapse of structured products in the U.S., this is good news," BMO Capital Markets said in a note following Royal Bank's announcement. And Sumit Malhotra at Merrill Lynch said the charges at Royal and Canadian Imperial show "the well-publicized problem areas in the marketplace are both relatively and absolutely small."

Royal Bank, Canada's biggest lender, said Tuesday it expects to record an after-tax gain of about C$270 million (US$286 million) in the fiscal fourth quarter, based on an independent valuation of its shares in Visa Inc.

At the same time, it expects to record a charge of about C$160 million after-tax on the reduced value of its holdings in subprime collateralized debt obligations and subprime residential mortgage-backed securities. In addition, Royal Bank expects to record an after-tax charge of about C$80 million on rising redemptions on its loyalty reward program.

Later in the day, Scotiabank said its VISA-related gain would be about C$160 million after-tax, while it would take a C$135 million charge on its non-bank ABCP and structured credit instruments.

The announcements come hard on the heels of similar news from Canadian Imperial Bank, which said last week it expects a VISA-related gain of C$381 million in the fourth quarter, largely offset by mark-to-market writedowns, net of gains on related hedges, of C$302 million on collateralized debt obligations and residential mortgage-backed securities related to the U.S. residential mortgage market.

Analysts noted that Royal Bank's writedown represents 33% of its total exposure of C$1.1 billion, which Malhotra characterized as "sizable" and indicative of the rapid deterioration of the subprime market.

Still, the charge is only 3-6% of Royal Bank's total assets, said John Aiken at Dundee Securities. While that does raise the risk of further charges if the market continues to deteriorate, he noted the bank "could sustain additional charges of over C$1.4 billion without materially impairing its future growth potential."

The charges had been widely expected after all of Canada's banks revealed in the third quarter their exposure to the U.S. subprime mortgage market. Although the exposure was seen as minimal, uncertainty over the final impact - given the huge writedowns at U.S. financial institutions - has been weighing on the banks' shares.

The removal of that uncertainty spurred a bit of a relief rally in bank shares Tuesday.

In Toronto, Royal Bank is up C$1.38 to to C$51.92 on 2.9 million shares, while Bank of Nova Scotia is up C$1.01 to C$51.42 on 1.4 million shares.

"While taking writedowns is never a positive, we believe the scale of the charges (at Royal Bank) is quite manageable," BMO said.

Toronto-Dominion Bank, which earlier quantified its expected gain from VISA's IPO, is seen as unlikely to take a charge on subprime exposure, as it doesn't participate in U.S. structured credit markets.

Bank of Montreal is a MasterCard issuer. Aiken at Dundee Securities said it and National Bank of Canada are the next most-likely banks to take writedowns. Both have large exposure to Canada's asset-backed commercial-paper market.

But Mario Mendonca at Genuity Capital Markets said the absence of an ABCP-related charge at Royal Bank - which is the country's largest liquidity provider to U.S.-based conduits - could bode well for Bank of Montreal.

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The Globe and Mail, Tara Perkins, 13 November 2007

Bank of Nova Scotia announced Tuesday that it's taking a fourth-quarter writedown of $190-million as a result of its investments in asset-backed commercial paper and structured credit instruments.

Earlier in the day, Royal Bank of Canada, this country's biggest bank, announced that it will record a $360-million pre-tax writedown in the fourth-quarter as a result of its exposure to subprime-mortgage related securities.

Analysts had not been expecting a significant writedown from Scotiabank, which said it will take a hit of $190-million, pre-tax, for the quarter ended Oct. 31. That charge results from structured credit instruments and third-party asset-backed commercial paper, the bank said. It amounts to about $135-million after tax.

The bank simultaneously announced that it will record a $200-million pre-tax gain from its stake in Visa Inc.

Royal Bank's charge, which amounts to $160-million when you factor in the tax adjustment and lower bonus payments for employees, stems from the value of subprime collateralized debt obligations (CDOs) and residential mortgage-backed securities, the two types of complex financial instruments that have caused headaches for numerous banks around the world.

When RBC reported its third-quarter results in August, chief executive Gordon Nixon said it had “minimal” exposure to U.S. subprime CDOs and RMBS. Its exposure at July 31 was about $1.1-billion, which was less than 0.2 per cent of its total assets of $604.6-billion.

A dramatic rise in defaults in the U.S. subprime mortgage sector — the sector that caters to borrowers with less-than-stellar credit histories — has caused the value of these types of securities to plunge.

RBC said Tuesday that a number of other one-time charges will occur in its fourth-quarter, which ends Oct. 31, and the net result should be that they largely offset one another.

As analysts had expected, the bank will book a $325-million pre-tax gain as a result of its shares in Visa Inc. It will also take a $120-million charge because more of its customers are cashing in their points on its credit cards.

RBC's subprime writedown, which amounts to about one-third of the bank's exposure, is slightly smaller — on a percentage basis — than the charge that Canadian Imperial Bank of Commerce has taken, Genuity Capital Markets analyst Mario Mendonca said in a note to clients.

“For the most part, we believe [Royal's] subprime charge was largely expected,” he added.

Last week, Canadian Imperial Bank of Commerce announced that it will take a $463-million pre-tax hit on its exposure to subprime-related securities. That brought CIBC's total writedowns to $753-million for the last six months as a result of these investments, an issue that prompted the bank to parcel off much of its U.S. investment banking operations, which were sold to Oppenheimer Holdings Inc. for a minimal sum.

Mr. Mendonca estimates that incentive compensation, or bonuses, will be between $100-million to $120-million lower this quarter. The bank's full-year incentive compensation is about $3-billion, suggesting it will be 3 to 4 per cent lower this year, he added.

Meanwhile, analysts are watching the remaining Canadian banks for signs of trouble. Some have estimated that National Bank of Canada could face a writedown of up to $400-million in connection with its $2-billion exposure to asset-backed commercial paper. And Bank of Montreal has hundreds of millions of dollars exposed to structured investment vehicles.

National and Bank of Montreal are the “most next likely banks to incur write-downs,” Dundee Capital Markets analyst John Aiken wrote in a note to clients Tuesday.

Meanwhile, Joe Price, chief financial officer of Bank of America Corp., said Tuesday that the bank expects to take a writedown of about $3-billion (U.S.), prior to taxes, as a result of its CDO exposure.

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The Globe and Mail, Tara Perkins & Roma Luciw, 13 November 2007

Royal Bank of Canada, this country's biggest bank, has joined the parade of financial institutions that have taken a hit as a result of their exposure to the U.S. subprime mortgage market, announcing Tuesday that it will record a $360-million pre-tax writedown in the fourth-quarter.

The bank said the charge, which amounts to $160-million when you factor in the tax adjustment and lower bonus payments for employees, stems from the value of subprime collateralized debt obligations (CDOs) and residential mortgage-backed securities, the two types of complex financial instruments that have caused headaches for numerous banks around the world.

When RBC reported its third-quarter results in August, chief executive Gordon Nixon said it had “minimal” exposure to U.S. subprime CDOs and RMBS. Its exposure at July 31 was about $1.1-billion, which was less than 0.2 per cent of its total assets of $604.6-billion.

A dramatic rise in defaults in the U.S. subprime mortgage sector — the sector that caters to borrowers with less-than-stellar credit histories — has caused the value of these types of securities to plunge.

RBC said Tuesday that a number of other one-time charges will occur in its fourth-quarter, which ends Oct. 31, and the net result should be that they largely offset one another.

As analysts had expected, the bank will book a $325-million pre-tax gain as a result of its shares in Visa Inc. It will also take a $120-million charge because more of its customers are cashing in their points on its credit cards.

Shares of RBC rose were up 1.46 per cent, or 74 cents, to $51.28 in morning trading Tuesday on the Toronto Stock Exchange.

The subprime writedown, which amounts to about one-third of the bank's exposure, is slightly smaller — on a percentage basis — than the charge that Canadian Imperial Bank of Commerce has taken, Genuity Capital Markets analyst Mario Mendonca said in a note to clients.

“For the most part, we believe [Royal's] subprime charge was largely expected,” he added.

Last week, Canadian Imperial Bank of Commerce announced that it will take a $463-million pre-tax hit on its exposure to subprime-related securities. That brought CIBC's total writedowns to $753-million for the last six months as a result of these investments, an issue that prompted the bank to parcel off much of its U.S. investment banking operations, which were sold to Oppenheimer Holdings Inc. for a minimal sum.

Mr. Mendonca estimates that incentive compensation, or bonuses, will be between $100-million to $120-million lower this quarter. The bank's full-year incentive compensation is about $3-billion, suggesting it will be 3 to 4 per cent lower this year, he added.

Meanwhile, analysts are watching the remaining Canadian banks for signs of trouble. Some have estimated that National Bank of Canada could face a writedown of up to $400-million in connection with its $2-billion exposure to asset-backed commercial paper. And Bank of Montreal has hundreds of millions of dollars exposed to structured investment vehicles.

National and Bank of Montreal are the “most next likely banks to incur write-downs,” Dundee Capital Markets analyst John Aiken wrote in a note to clients Tuesday.

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Bloomberg, Doug Alexander, 13 November 2007

Royal Bank of Canada and Bank of Nova Scotia, Canada's two biggest banks, will take combined writedowns of C$295 million ($307.3 million) in the fourth quarter for their investments in asset-backed securities.

Royal Bank will take a C$160 million writedown on U.S. mortgage-backed debt, while Bank of Nova Scotia will write down the value of its commercial paper holdings and other debt in Canada by C$135 million.

The banks' writedowns will be offset by gains from the restructuring of Visa Inc., underscoring how the Canadian lenders haven't been as hard hit as their U.S. rivals from the meltdown in the subprime mortgage market. Shares of both banks rose.

``The reason why we haven't seen major-league charges out of our Canadian banks is that the issues of the day are just underrepresented,'' said Genuity Capital Markets analyst Mario Mendonca, who rates Royal Bank a ``hold'' and doesn't own the stock. ``We don't have a lot of subprime exposure, we don't have a lot of leveraged buyout type of exposure.''

Royal Bank's costs will be offset by a C$270 million Visa gain, the Toronto-based bank said today in a statement. Scotiabank, the second-biggest bank, said separately it will have a C$160 million gain from Visa.

``The Visa equity issue is good timing,'' said Pierre Bernard, vice president of equities at Montreal-based Industrial Alliance Fund Management Inc., which manages about $13.6 billion. ``We may see announcements from other banks as they clean up the place.''

Scotiabank and Royal follow Canadian Imperial Bank of Commerce in announcing writedowns to revalue debt securities. Canadian Imperial said Nov. 9 it would take a C$302 million writedown in the quarter ended Oct. 31 for investments tied to the U.S. mortgage market. Scotiabank's writedown relates to investments in non-bank asset-backed commercial paper that hasn't traded in Canada since the market seized up in mid- August.

Royal Bank shares rose C$1.58, or 3.1 percent, to C$52.12 at 4:10 p.m. on the Toronto Stock Exchange, the biggest gain in 20 months. Scotiabank rose 68 cents, or 1.4 percent, to C$51.09.

Gordon Nixon, Royal Bank's chief executive officer, said Aug. 24 that the bank had C$1.1 billion linked to the U.S. subprime market, with most of its holdings in collateralized debt obligations and residential mortgage-backed securities. Collateralized debt obligations package mortgage bonds and other debt into new securities.

Other Canadian banks may record writedowns in the quarter for asset-backed securities, including Bank of Montreal and National Bank of Canada, said John Aiken, an analyst at Dundee Securities Corp.

Canadian banks have fared better than their U.S. and European counterparts, which have recorded billions of dollars in writedowns linked to the collapse of the subprime mortgage market. Merrill Lynch & Co., Citigroup Inc. and UBS AG accounted for about 60 percent of the $45 billion of writedowns reported by the world's biggest banks and securities firms this year.

Four of Canada's six biggest banks will benefit from their stakes in Visa when they report fourth-quarter results. Canadian Imperial will have a C$381 million gain and Toronto-Dominion Bank, Canada's third-biggest lender, will have a C$135 million gain, the companies said Nov. 9. The banks' recorded gains based on an increase in value for the credit-card company ahead of a planned initial public offering.

Royal Bank said it will also record a C$80 million cost to reflect higher redemptions at its credit-card customer loyalty program. Royal Bank reports Nov. 30, with Scotiabank reporting Dec. 6.

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Scotia Capital, 12 November 2007

Event

• CM announced that it will book a $456 million gain ($1.14 per share) from the VISA restructuring, as expected. TD will book a $163 million gain ($0.19 per share). We expect RY to follow suit by making a similar announcement.

• CM also announced that it expects to write-down $463 million or $0.90 per share on its CDOs and RMBSs.

What It Means

• We view the CDO write-down as operating and the VISA gain as onetime. However, the two items would net to a positive $0.24 per share contribution in the fourth quarter.

• The pre-announced write-down is approximately $175 million higher than our previous speculation level.

• We are reducing our 2007 earnings estimate to $7.67 per share from $8.37 per share based on higher-than-expected CDO write-downs. Our 2008 earnings remain unchanged at $9.00 per share. CM - 2-Sector Perform.

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Loan Losses Spike at BMO's & RBC's US Units

Dow Jones Newswires, 7 November 2007

The weak US banking environment is starting to gnaw away at Royal Bank of Canada's and Bank of Montreal's US units, BMO Capital Markets notes after reviewing regulatory statements. Analyst says 3Q income statements show a "relatively material spike in loan losses." BMO's Harris Bank losses 20% up QOQ, RY's Centura sees them double. While not a surprise, added to "choppy" spread, earnings likely down 15-25% from preceding quarter, analyst says. And that's before converting the total into Canadian dollars. News at Toronto-Dominion's Banknorth is "less worrying," analyst says. Loan loss provisions increased some time ago. Dollar headwind still a factor, though.

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Dow Jones Newswires, 6 November 2007

Canadian banks likely to chalk up C$1.1B in 4Q from one-time gains on Visa restructuring, Scotia Capital estimates. Biggest winner is Canadian Imperial Bank of Commerce, estimated to snag C$430M, followed by Royal Bank of Canada at C$330M, Toronto-Dominion Bank at C$175M and Bank of Nova Scotia at C$125M. For CM at least, amount will be enough to offset expected write-downs from U.S. subprime mortgage exposure, officials say. In any case, Scotia Capital sees operating earnings before gains from Visa IPO up 3% YOY but 10% down QoQ.

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Oppenheimer to Buy Some of CIBC's US Businesses

The Globe and Mail, Derek DeCloet, 6 November 2007

So here's what makes Gerry McCaughey a good boss for CIBC: He does not give a damn about the optics.

Wall Street brokers are waist-deep in red ink and bad mortgages, their values are getting crushed, and even mighty Citigroup is staggering. Two of the biggest names in finance, Citi's Chuck Prince and Merrill Lynch's Stan O'Neal, have been pitched out of the glass towers, and that's just in the past week. Every major investment bank in the United States is worth less than it was six months ago, in some cases a lot less.

Who in his right mind would sell an investment bank now, near the height of the panic? Gerry McCaughey would. Not only that, he's not even selling it all for cash; CIBC is accepting warrants. And it's giving the buyer a loan, too. Man, if David Kassie were around to see this ... .

But that's the point. For Mr. Kassie and John Hunkin, architects of CIBC's next-we'll-take-Manhattan strategy in the 1990s, it was about ambition and ego and public displays of how powerful you are. They made a grand foray into the Wall Street equities business not because of sound strategy, but hubris. Mr. McCaughey got out of it because of, well, sound strategy, and because hubris is not his style.

The deal itself - selling the guts of CIBC World Markets' U.S. arm to Oppenheimer Holdings - is financially insignificant to a $33-billion financial institution. But it signals the end of an era and presents a timely lesson for other bankers with wanderlust. CIBC's venture failed, ultimately, because it sought to take a Canadian model of banking and transplant it.

Investment banking in Canada, as practised by the Big Five, is based on the banks' considerable negotiating power. Loans are used as bargaining chips for more lucrative business. You want a $100-million loan, do you, Mr. CEO? Very well. But we'll take the lead underwriting role on that equity deal you're planning, thanks very much. Oh, and don't forget to call us when you're ready to follow up on that merger idea our investment bankers have presented (eight times).

CIBC may not have exactly duplicated this on Wall Street, but it certainly tried to emulate the cross-selling notion. One of Mr. Kassie's big ideas, for example, was to invest lots of the bank's money in venture capital and buyout funds. If CIBC owned a little bit of 100 different funds, and each of those owned 20 different companies, he reasoned, that's 2,000 potential investment banking clients. CIBC would then have the connections, even if it lacked the brand name of Goldman Sachs or Morgan Stanley. (A taste of the hubris: Early on, the bank ran advertisements on CNBC that featured a Hummer climbing a set of stairs and blowing by a group of men in suits.)

Alas, it turned out that the best young U.S. companies still wanted to use Goldman Sachs or Morgan Stanley. ("A CFO doesn't want to go to a cocktail party and tell people his deal is led by CIBC World Markets," sniffs one investor who specializes in financial stocks.) CIBC found it couldn't use the muscle of its balance sheet on Wall Street the way it does on Bay Street. It had some modest success in the tech sector, and there was that huge, multibillion-dollar windfall on its investment in Global Crossing. But that was before events - the tech collapse, the Enron scandal, the lawsuits and Department of Justice investigation - began to turn against the bank.

So Mr. McCaughey offloaded his problem. The buyer, Oppenheimer Holdings, is a strange little company. Its head office is technically in Toronto, but it isn't listed on the TSX any more, does almost all of its business in New York and is run by a New Yorker named Albert Lowenthal. It has taken unwanted assets off CIBC's hands before, namely 600 or so retail stockbrokers.

Despite the stupendous timing of that deal, coming just weeks after the market hit bottom in 2002, it hasn't totally paid off for Oppenheimer shareholders; the stock has underperformed the Amex broker-dealer index over the past five years. The governance raises an eyebrow or two. Mr. Lowenthal owns a 22-per-cent economic stake, yet controls the company absolutely (the listed shares are non-voting). His contract entitles him to a direct share of the pretax profit, and the company is paying for his son - the highly-paid head of IT at Oppenheimer - to get an executive MBA at Columbia University.

OK, so it's not the world's greatest brokerage firm. But Mr. McCaughey can do the math. Mr. Lowenthal is in his early sixties; Oppenheimer is probably too small to make a go of it, in the long run. That makes it a takeover play. If it can raise its share price by 10 per cent annually for the next five years, then sell for a reasonable takeover premium, CIBC's warrants alone should be worth about $50-million (U.S.). Add in the cash portion and the proceeds from the 2002 sale, and maybe, just maybe, the whole thing wasn't such a costly learning experience after all.

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Financial Post, Duncan Mavin, 6 November 2007

Amid turmoil in the global banking sector, CIBC chief Gerry McCaughey says he will use capital freed up by the sale of the company's investment banking unit to shore up its balance sheet rather than growing other business lines.

"I would see capital strength taking somewhat precedence over capital deployment at this time," Mr. McCaughey said on a conference call.

The move out of a riskier business segment is consistent with Mr. McCaughey's fixation on trimming volatility from Canadian Imperial Bank of Commerce's earnings.

The bank said the sale will release $200-million of capital.

But it does not appear likely CIBC will be spending its cash on expanding other businesses and the sale of the unit will heighten concerns about whether Mr. McCaughey can expand CIBC's top line as well as cut costs.

"CIBC is nowhere near as risky a bank as it was at the end of last week," said Dundee Securities analyst John Aiken.

However, reduced earnings volatility has come at the cost of growth, Mr. Aiken said.

CIBC lags behind some of its competitors with its domestic retail offering, in a market where it is tough to gain a bigger share of deposits, mortgages and the like without hurting the bottom line by offering better rates to customers.

Overseas, CIBC has raised its ownership stake in First-Caribbean Bank to 91.5% from 49.5% for a total cost of $1.1-billion.

But last month the bank showed it may have less appetite for further growth in the Caribbean region than even domestic rivals -- Royal Bank of Canada splashed out $2.2-billion to buy Royal Bank of Trinidad and Tobago, which had been viewed by many in the industry as a likely target for CIBC.

This week's announced deal sees CIBC getting out of several U.S. business lines, including investment and corporate banking and debt capital markets.

The subprime mortgage-related turmoil in the United States was "likely the final straw [for CIBC's U.S. investment bank] and Gerry Mc-Caughey has decided that the only way to ensure that there will not be any more charges emanating from U.S. wholesale is to sell the operations," said Dundee's Mr. Aiken.

Banks in the United States and elsewhere have seen multi-billion write-downs related to capital markets in recent weeks, and several high-profile executives have lost their jobs.

Mr. McCaughey said the market is "fairly unpredictable" and has deteriorated at a surprising pace.

The deal announced Sunday sees CIBC offload a large part of its U.S. investment banking unit, worth about $400-million in annual revenue, to Oppenheimer Holdings Inc.

The bank will record $175-million in severance and other costs, and will retain some upside potential through options on Oppenheimer shares and deferred performance payments.

Since Mr. McCaughey became chief executive officer in August, 2005, he has tightened ship at the once accident-prone bank.

The CIBC chief inherited an organization with a reputation tainted by bad loans and an entanglement with Enron that cost it a $2.5-billion legal settlement.

A cost-cutting exercise slashed hundreds of millions of expenses off the bottom line, as Mr. McCaughey focused on stabilizing earnings by reducing exposure to riskier operations.

In the most recent quarterly reporting announcement in August, CIBC World Markets' said it incurred mark to market losses, net of hedges, of $290-million on structured products related to the U.S. residential mortgage market.

The bank disclosed that its exposure to the U.S. residential mortgage market was approximately US$1.7-billion.

CIBC also said yesterday it is rearranging its investment banking management team following the announced deal.

Phipps Lounsbery, head of debt capital markets, will be leaving the bank next week.

Head of investment banking David Leith becomes deputy chairman of CIBC World Markets, with an expanded mandate that includes securitization. Global equities chief Richard Phillips also becomes a deputy chairman and is now also head of fixed income and foreign exchange.

CIBC is keeping some of its U.S. business lines including real estate finance, merchant banking and oil and gas advisory.

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Financial Post, Barry Critchley, 6 November 2007

After the events of the weekend, maybe CIBC, the smallest of the Big Five chartered banks, should consider changing the name of its wholesale and corporate banking arm.

Known as CIBC World Markets, the entity will now be less worldly with activities in less markets than it was at the end of last week.

The reason: the sale by CIBC of its U.S. domestic investment banking, equities, leveraged finance and related debt capital markets businesses; its Israeli investment banking and equities business, and certain parts of other U.S. capital markets-related businesses based in the U.K. and Asia.

Those businesses have assets of about $2-billion and generate revenue of about US$400-million a year.

CIBC's main non-Canadian activities will be confined to real estate finance, equity and commodity structured products, merchant banking and oil and gas advisory, and some U.S. debt capital markets pursuits. Those groups will employ about one-third of the staff that was part of CIBC World Markets.

They will be allocated about $600-million of capital -- or 75% of CIBC's capital commitment to the U.S.

So what do all these decisions -- described as being driven by strategic considerations and not as a response to the current credit crunch environment -- mean for the firm's Canadian operations?

In a conference call yesterday, Gerry McCaughey, CIBC's chief executive, was asked about the ability of CIBC World Markets to compete in the U.S. market with the other Canadian-based dealers and the U.S. domestic firms. Naturally enough McCaughey said the firm's ability wouldn't be diminished.

"We have had a successful Canadian investment banking business and very important to us in considering this transaction was the continued success of that business," he said, adding that the "capacity" of the firm's domestic investment banking business to operate internationally "is not inhibited in any way by this transaction. We do not have a noncompete as part of this transaction," a comment that could lead to the impression that CIBC, at some future date, may re-enter the U.S investment banking business. Don't bet on it.

Brian Shaw, chief executive at CIBC World Markets, said the firm "will be undertaking a modest reorganization of some of our businesses."

Other observers don't share the optimism of the CIBC executives.

"At the margin it will definitely hurt some of their Canadian business," said one investment banker, who adds that other Canadian firms, including RBC Capital Markets and TD Securities "can at least make noises of having a U.S. platform. These guys can't do that," he said.

And clearly part of CIBC's pitch was that it could deliver the U.S. market to a Canadian issuing client. "The Canadian guys used to make noise of their U.S. capability. That [absence] will hurt them," he said. "The local business will do a lot worse next year than it did this year."

There will be other consequences for the firm: some of its analysts who covered Canadian stocks from New York will now be working for a U.S. firm--a separate public company. Accordingly the firm will have to reassign the work done by those analysts.

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Bloomberg, Doug Alexander, 5 November 2007

Canadian Imperial Bank of Commerce, whose U.S. investment bank has had $2.6 billion in writedowns since 2005, is shedding most of its U.S. businesses to lower risk, analysts say.

Canada's fifth-largest bank said late yesterday it agreed to sell part of its New York-based investment bank to Oppenheimer Holdings Inc., a boutique investment bank. The sale includes the U.S. investment banking, equities, and leveraged finance businesses. CIBC is also selling its investment bank in Israel and other units in the U.K. and Hong Kong.

``This transaction substantially reduces its exposure to the areas of the business that have historically plagued CIBC's results,'' Dundee Securities analyst John Aiken said today in a note to clients.

Chief Executive Officer Gerald McCaughey has sought to reduce risk since 2005, when Toronto-based CIBC set aside $2.4 billion to settle claims from investors of failed energy trader Enron Corp. In August this year, CIBC recorded a C$190 million ($204 million) writedown from investing in securities tied to U.S. mortgages. CIBC will have more writedowns in the fourth quarter from mortgage-backed investments, the bank has said.

CIBC shares rose 10 cents to C$98.20 at 4:10 p.m. on the Toronto Stock Exchange. Oppenheimer rose $3.99, or 9.4 percent, to $46.24 on the New York Stock Exchange, the biggest gain in almost three months.

CIBC will keep its U.S. businesses that offer real estate financing, merchant banking, oil-and-gas advisory, structured products and some debt operations. McCaughey said today in a conference call that the sale allows CIBC to ``redeploy capital'' for its Canadian, U.S. and international operations. He said an acquisition is ``improbable.''

``The environment is one that has proven to be both fairly unpredictable and has had a deteriorating element to it that has proceeded at a pace that has been somewhat surprising,'' he said on the call.

Oppenheimer will pay CIBC a combination of cash, shares and debentures, payable on the fifth anniversary of closing. As part of the agreement, CIBC will lend Oppenheimer $100 million to support trading operations and up to $1.5 billion in credit to help finance loan underwriting.

Oppenheimer will pay CIBC an amount based on the performance of the businesses between 2008 and 2012, with $25 million guaranteed, plus warrants for 1 million shares at $48.63 each at the end of five years. The sale is scheduled to close Jan. 2 subject to approvals, with a later closing date for the overseas businesses.

The CIBC World Markets investment bank ranks 17th for U.S. stock sales this year, with 15 transactions worth $828 million, according to data compiled by Bloomberg. CIBC ranks 15th this year for announced U.S. mergers, with 56 takeovers worth $66.6 billion, according to Bloomberg data.

The businesses Oppenheimer is buying have annual revenue of about $400 million and employ more than 700 people, Oppenheimer said. CIBC has approximately 1,300 employees in the U.S., which mainly support the investment-banking business.

``The fact that 30 percent of the World Markets headcount was providing just 14 percent of the revenue speaks to the negative impact on efficiency that the U.S. capital markets business has had on CIBC,'' Merrill Lynch analyst Sumit Malhotra said in a note to clients. He rates CIBC a ``buy'' and doesn't own the stock.

CIBC bankers affected by the sale may include Charles Holmes, head of U.S. equities; Andrew MacInnes, co-head of U.S. equity capital markets; and John Parks, head of U.S. equity research. Analysts include John Glass, who covers restaurants, and Meredith Whitney, whose downgrade of Citigroup Inc. last week triggered the stock's steepest retreat since September 2002.

CIBC will record one-time costs of about C$50 million, or 10 cents a share, for asset write-offs and severance packages from the sale, Chief Financial Officer Tom Woods said in the call. CIBC will also record C$100 million in the first quarter and C$25 million for the rest of fiscal 2008 for severances and other sale costs. CIBC reports fourth-quarter results on Dec. 6.

The transaction reverses most of CIBC's U.S. expansion. The bank bought Oppenheimer & Co. in 1997, and then sold the private client and asset management businesses to Fahnestock Viner Holdings Inc. in 2003. Fahnestock Viner changed its name to Oppenheimer Holdings in September that year. CIBC also closed Amicus, an online-banking business, in 2002.

CIBC will report a ``large gain'' in the fourth quarter from the restructuring of the Visa Inc. credit-card network, Woods said. That gain will exceed writedowns from mortgage- backed securities, he said.

CIBC will also have a ``modest reorganization'' of some of its investment banking operations, CIBC World Markets CEO Brian Shaw said in the call. The bank is ``constraining'' activities tied to mortgage-backed securities such as collateralized debt obligations.

``We've decided that the business prospects in that area are going to be limited,'' Shaw said. ``We intend to move forward on a narrowed, or restricted basis and the focus currently is on management of existing risks."

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Financial Post, Duncan Mavin, 5 November 2007

Canadian Imperial Bank of Commerce has shed some of its riskier business lines by selling off its U.S. investment banking operations, but at what cost?

The bank’s deal with Oppenheimer Holdings Inc. will boost CIBC’s stock valuation as the discount it is awarded for being “accident prone” should dissipate, says Dundee Securities analyst John Aiken.

But the bank’s growth plans have been unclear at least since chief executive officer Gerry McCaughey took over in 2005 and began a cost and risk-trimming exercise.

After selling off the majority of its U.S. wholesale operations, “future growth now effectively relies on domestic,” with the capital markets franchise weakened because of its minimal presence in New York, Mr. Aiken says.

“Outside of FirstCaribbean” — CIBC’s retail bank in the islands — “CIBC does not have any obvious high growth avenues for the mid to longer term. Further, CIBC’s investment banking operations will likely be at a bit of a disadvantage with its now lack of ability to provide integrated cross-border solutions,” says the Dundee analyst.

He also notes that the bank may not even have got the best deal because it sold the operations at the bottom of the cycle.

“We believe that the subprime mortgage losses experienced in the third quarter were likely the final straw and Gerry McCaughey has determined that the only way to ensure that there will not be any more charges emanating from the U.S. wholesale is to sell its operations,” Mr. Aiken says.

Despite hindering longer term growth however, the deal will likely have little near term impact on earnings. Consequently, Mr. Aiken has left his rating for CIBC at “market neutral,” with an unchanged target price of $105.

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Bloomberg, Sean B. Pasternak and Doug Alexander, 4 November 2007

Oppenheimer Holdings Inc., a boutique investment bank, will buy part of the U.S. investment banking business of Canadian Imperial Bank of Commerce to offer more services to its investment-banking clients.

The price of the transaction wasn't disclosed. The sale includes CIBC's equity research and options trading units, CIBC said today in a statement. CIBC, Canada's fifth-largest bank, will keep its U.S. businesses which offer real estate financing, merchant banking and equity and commodity structured products.

CIBC Chief Executive Officer Gerry McCaughey has said the Toronto-based bank will focus on containing costs and on the bank's main Canadian franchise, where it does most of its business.

``The sale of these assets does allow CIBC to redeploy capital over time and support our high growth core Canadian businesses as well as our ongoing U.S. businesses,'' CIBC spokesman Rob McLeod said in an interview.

Oppenheimer said in a statement the transactions helps them to offer a ``suite'' of products to clients such as merger advice, underwriting and loan syndication.

Oppenheimer will pay CIBC a combination of cash, shares and debentures, payable in the fifth anniversary of the transaction's closing. Oppenheimer spokesman Brian Maddox didn't immediately return a phone call placed after business hours seeking comment.

As part of the transaction, Oppenheimer will borrow $100 million from CIBC.

The businesses Oppenheimer is buying employ more than 700 people and have annual revenue exceeding $400 million. The transaction is expected to close in January.

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The Globe and Mail, Tara Perkins, 4 November 2007

Canadian Imperial Bank of Commerce is scaling back its U.S. capital markets business, agreeing to sell a swath of it to Oppenheimer Holdings Inc.

In a deal that will include roughly half of CIBC's 1,300 employees in the United States, Oppenheimer will pick up CIBC World Markets' U.S. investment banking, corporate syndicate, institutional sales and trading, equity research and options trading businesses, as well as a portion of the debt capital markets business. Some operations in the U.K., Israel and Hong Kong are also included.

The deal's value will depend on how the business performs in coming years as it combines with Oppenheimer's operations.

"This transaction gives CIBC the opportunity to benefit from Oppenheimer's future success," stated CIBC chief executive Gerry McCaughey.

"It will also permit CIBC to redeploy capital over time to further support the continued growth of our strong and profitable U.S. and international operations, as well as our core Canadian businesses."

The businesses being acquired by Oppenheimer employ more than 700 people in the U.S. and overseas. Annualized revenue for the businesses - based on recent results - exceeds $400-million (U.S.), Oppenheimer said in a statement.

CIBC said it does not expect the deal to have a material impact on its earnings per share or Tier 1 capital ratio, either at closing or on an ongoing basis.

"We are pleased to once again be partnering with CIBC and believe that the combination of these resources will significantly increase Oppenheimer's penetration in capital markets," said Oppenheimer CEO Albert Lowenthal. "The timing of this acquisition will permit us to gain market penetration at a time that other firms are pulling back."

The purchase price for the deal is made up of an "earn-out," or payment that will be based on the annual performance of the capital markets division in the coming four years. That payment, to be made in 2013, is guaranteed to be at least $20-million.

In addition, the purchase price includes warrants to buy 1-million Oppenheimer shares at $48.63 a piece in five years. Cash will also be paid for certain fixed assets.

As part of the deal, Oppenheimer will borrow $100-million from CIBC in a five-year subordinated loan. CIBC will also provide a $1.5-billion warehouse facility.

The transaction is expected to close on Jan. 2 for all of the U.S. businesses, with a later closing date for overseas operations.

CIBC said it will still be active in U.S. real estate finance, equity and commodity structured products, merchant banking and oil and gas advisory. The bank will also keep its corporate lending capability and its ability to distribute Canadian equities and fixed income products in the U.S. and international markets on behalf of its Canadian clients.

The deal is "in line with our strategic imperative to achieve consistent and sustainable performance over the long-term," stated Mr. McCaughey.

Many major American investment banks have been suffering in the wake of August's credit crunch and the U.S. subprime mortgage meltdown.

CIBC revealed in August that its exposure to the U.S. subprime mortgage market was about $1-billion (U.S.).

CIBC World Markets analyst Darko Mihelic wrote a note to clients last week about the big Canadian banks, titled "Expect an Ugly Q4," in which he predicted that capital markets weakness would lead to lower profits in the final quarter of the year.

He said there is a good chance that National Bank and the Bank of Montreal will pre-announce some losses, while CIBC "may elect not to pre-announce losses on sub-prime, as its VISA gain will likely offset."

CIBC bought Oppenheimer & Co. in 1997, as it sought entry into the U.S. investment banking industry.

But five years later, the bank was chopping more than 700 jobs in its U.S. investment banking and wealth management operations, and in 2003, it sold the retail brokerage CIBC Oppenheimer to New York-based Fahnestock Viner Holdings Inc. for $257-million (U.S.).

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