CIBC Q1 2011 Earnings

Scotia Capital, 25 February 2011

• CIBC (CM) cash operating EPS increased 19% YOY to $1.97, significantly above expectations due to very strong wholesale earnings, higher retail, and lower LLPs. Wholescale earnings were slightly higher than the strong Q1/10 and almost triple Q4/10. Underwriting and advisory fees were up significantly with trading revenue solid.

• Operating ROE: 24.0%, RRWA: 2.89%, Tier 1 Capital: 14.3%.

Implications

• The bank indicated that its Basel III Common Equity Tier 1 ratio would be just in excess of the 7% 2019 minimum capital requirements. CM's dividend payout ratio on our 2011E EPS is 45%, versus the target range of 40%-50%.

Recommendation

• We are increasing our 2011E and 2012E EPS to $7.70 and $8.50 from $7.00 and $7.80, respectively, due to recovery in wholesale earnings and improving retail. Our one-year share price target is unchanged at $100.

• We reiterate our 1-Sector Outperform rating due to CM's high profitability (RRWA) and strong operating leverage from the stability in the bank's wholesale and retail operating platform.

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National Bank Q1 2011 Earnings

Scotia Capital, 25 February 2011

• NA cash operating earnings increased 16% YOY to $1.80 per share above expectations.

• Operating ROE: 19.0%, RRWA: 2.37% Tier 1 Capital: 14.6%.

Implications

• Earnings were driven by strong Retail and Wealth Management earnings and higher security gains. Volume growth was strong at 7% with revenue growth of 7% and expenses increasing 4% for positive operating leverage of 3%.

• Wealth Management earnings increased 91% with Retail earnings increasing 15%, offsetting a 5% decline in Financial Markets earnings.

• The bank disclosed its Basel III Tier 1 Common ratio at 8.1%, exceeding minimum 2019 requirement of 7%, extremely positive.

• NA dividend payout ratio of 38% on our 2011 earnings estimate is below its target range of 40%-50%.

Recommendation

• We are increasing our 2011 and 2012 earnings estimates to $7.00 and $7.70 from $6.80 and $7.50 due to strong earnings from wealth and improving retail. One-year target is unchanged at $90. We maintain our 1-SO rating.

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Preview of Banks' Q1 2011 Earnings

Scotia Capital, 18 February 2011

Banks Begin Reporting February 24

• Banks begin reporting first quarter earnings with Canadian Imperial Bank of Commerce (CM) and National Bank (NA) on February 24, followed by Bank of Montreal (BMO) on March 1, Canadian Western (CWB) (after market close) on March 2, Royal Bank (RY) and Toronto-Dominion (TD) on March 3, Bank of Nova Scotia (BNS) on March 8, and Laurentian Bank (LB) closing out reporting on March 9.

• Scotia Capital’s earnings estimates are highlighted in Exhibit 1, consensus earnings estimates in Exhibit 2, and conference call information in Exhibit 5.

First Quarter Earnings – Recovery Cycle Begins – Growth 3% YOY

• We expect first quarter operating earnings to increase 3% year over year (YOY) and 8% sequentially (more normalized expense levels). We expect wholesale banking earnings to be solid on a sequential basis but well below the exceptionally strong earnings from a year earlier. This quarter, wholesale earnings are expected to be driven by strong underwriting and advisory revenue partially offsetting weak fixed income trading revenue. Retail banking earnings growth is expected to begin to slow but to remain resilient with double-digit growth. Wealth management earnings are expected to continue to show strong momentum, the strongest of any of the business lines. International for BNS and TD is expected to be strong, with continued weakness at RY and BMO.

• Earnings growth YOY is expected to be led by BMO, BNS, and NA at 15%, 13%, and 8%, respectively. TD and RY have very challenging comps with earnings declines of 3% and 5% expected, respectively. CM, LB, and CWB earnings growth is expected to be modest at 3%, 3%, and 0%, respectively.

• Bank earnings recovery/growth has been a grind this cycle thus far as earnings growth in 2010 was anaemic due to the countercyclical high wholesale earnings in 2009. In fiscal 2010, TD, and NA have had the strongest earnings recovery at plus 1% and 0% versus peak earnings, with BNS 3% below peak. CM, RY, and BMO are significantly below peak earnings at 27%, 17%, and 16%, respectively, due mainly to lower wholesale earnings and perhaps capital allocation issues.

• We believe dividend increases are again possible this quarter, following up on dividend increases by NA, LB, and CWB last quarter. TD is the most obvious candidate for a dividend increase, followed by BNS. We expect TD to increase its annual dividend 6.6% to $2.60 per share this quarter. BNS, although less likely in our view, could increase its annual dividend 6.1% to $2.08 per share. Further dividend increases by NA, LB, and CWB are also possible mid-year, if not very large ones in the fourth quarter. The banks' payout ratios and quarterly dividend trends are highlighted in Exhibit 6.

• The most significant earnings variable this quarter remains the net interest margin, particularly the retail net interest margin. Stability in the margin is critical to drive revenue growth, especially in light of the countercyclical slowdown expected in consumer and mortgage loan growth. We expect a stable to expanding margin based mainly on the expectation of higher interest rates, which we believe will fully offset competitive pressures driven by slowing volume growth. We expect the oligopoly pricing structure to hold.

• The banks’ overall net interest margin has many cross-currents with average BA rates up 11 bp sequentially; however, the yield curve actually steepened modestly sequentially, although still substantially flatter than a year earlier. The positive impact of higher short-term interest rates, we believe, is still filtering through, helping offset competitive pricing pressures. The residential mortgage GIC spread (posted) continued to decline in the quarter in both the one and five-year term. The caveat is that drawer rates have become more of a factor in the past 10 years; nevertheless, this remains a concern.

• Canadian banks' Investment Banking Division/Wholesale earnings in Q1/11 are expected to increase 10% quarter over quarter (QOQ) but decline 25% YOY based mainly on lower trading revenue. Trading revenue in Q1/11 is expected to decline 8% QOQ and decline 31% YOY to $1.9 billion due mainly to weaker fixed income trading results. Underwriting and advisory revenue is expected to increase slightly YOY and 4% sequentially.

• Credit trends remain positive, with gross impaired loan formations declining. Loan loss

provisions are expected to continue to decline with improvements moderating. We expect a modest 4% sequential decline in provisions.

• International earnings are expected to improve, aided by the lower drag from the high C$, especially for BNS and TD with their solid operating earnings base. The C$ has appreciated 5% YOY in Q1/11 vs. 4% YOY in Q4/10 and a peak of 21% YOY in Q2/10. The C$ appreciation QOQ is only 3% and we expect the C$ drag to be de minimis going forward.

• Quarterly earnings variables (see Exhibits 7, 8, and 9) are relatively stable for the bank group. Positives are steeper yield curve, higher prime savings rate spread, higher fixed income underwriting, higher equity underwriting, equity trading volume, and higher mutual fund assets. Negatives are higher bond yields, slightly lower wholesale spreads, substantially lower posted mortgage GIC spreads, higher short-term funding costs (BAs), and lower M&A closed.

• Bank profitability this quarter is expected to remain solid, although with a lower return on equity at 16.4% (see Exhibit 12) due to continued wholesale banking weakness, net interest margin pressure, and deleveraging. However, on a RRWA basis, profitability is expected to be near record highs at 2.24% (see Exhibit 13).

• Bank earnings beat Street expectations for most of fiscal 2009 and the first quarter of 2010. However, banks missed earnings expectations the past three quarters (Q2/10, Q3/10, Q4/10). Earnings expectations have now been toned down, especially with respect to capital market or wholesale earnings, thus we would expect banks to meet expectations with some beat possibilities as we progress through 2011.

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

• Bank disclosure on the impact of Basel III is critical as we move through 2011. We are hopeful that banks begin to release pro forma Tier 1 common calculations or a part thereof as early as this quarter, which will provide the necessary clarity that the market is looking for. “Clarity on Capital” is one of the themes we have cited for 2011. This is in addition to the other 2011 themes: “Return to Operating Normalcy,” “Dividend Increases,” “Moderation of Fears about Consumer Debt and House Prices” (see report titled Bank Index Poised to Hit New All-Time High).

Valuations Attractive – High Dividend Yield

• Bank valuations remain very attractive with a dividend yield of 3.6%, which is 102% of the 10-year bond yield and 158% of the TSX dividend yield versus historical means of 59% and 145%, respectively. The bank earnings yield relative to corporate bond yields is 150% versus the historical mean of 131%.

• Bank dividend yield relative to Pipes and Utilities and REITs are also very attractive at 0.4 and 1.4 standard deviations above the historical mean, respectively.

• Bank P/E multiples, we believe, are attractive at 12.7x and 11.3x our 2011 and 2012 earnings estimates and are poised for expansion. Basel III goal is to lower systemic risk, which we believe will ultimately result in a lower risk premium or higher P/E multiples. The resumption of dividend growth is expected to be a further catalyst for higher P/E multiples.

Reiterate Overweight – Bank Index Poised to Hit New All-Time High

• Bank share price performance continues to be resilient despite the hot resource market, with the bank group outperforming early in 2011, which is a very positive sign. January mutual fund data also is bullish for banks stocks as Fixed Income inflows plummeted and banks, we believe, are the premier dividend/income play in the equity markets in Canada.

• We recently boosted our bank share price targets 8% for a total expected return of 22% over the next 12 months. Stock splits may soon be on the horizon. Our new target prices are based on a target P/E multiple of 15.2x our 2011 earnings estimates versus our previous target of 13.9x. Our new target multiple is similar to the highs reached in 2006, which we considered late cycle. We believe we are early cycle in 2011 and earnings growth visibility will improve in 2011.

• Thus, in our view, the beginning of a great decade for bank share price performance. The theme for the decade is expected to be “Generation of Surplus Capital, Capital Deployment, and Share Repurchases.” Share repurchases have never occurred of any consequence in Canadian banking.

• Canadian banks did not repurchase shares between 1967 and 1994. Share repurchases from 1995 to 2010 were insignificant, averaging only 1.0% of shares outstanding, with the highest year being 2.3% of shares outstanding. Bank share repurchases hype over the past 10 years was not matched by actual activity. Thus, the market did not differentiate much between individual bank capital levels or capital generation ability (RRWA). Capital deployment with a focus on share repurchases and RRWA (new profitability paradigm) are expected to be the themes of the next decade, supporting the expected continuation of the bank group’s long term outperformance.

• Bank stocks have substantially outperformed the market since 1967, we believe, because the market underestimates the sustainable earnings power and growth of the sector (barriers to entry and strategic industry) and is slow to attribute an appropriate multiple to reflect the fundamentals, profitability, and structural changes that have occurred in the industry. We expect long-term outperformance to continue and this could be one of the banks’ best decades for absolute and relative share price performance.

• We believe bank fundamentals are strong and valuations are attractive. We reiterate our overweight recommendation and we would have no sells in the group on an absolute return basis. TD Bank is our top pick in the sector. We have 1-Sector Outperforms on TD, CM, NA, and CWB, with 2-Sector Performs on LB, BNS, RY, and BMO.

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Bank Index Poised to Hit New All Time High

Scotia Capital, 16 February 2011

• The Canadian Bank index is poised to hit a new all time high surpassing the previous high reached in May 2007. The bank index hit another 52-week high yesterday and is only 3% below the all time high.

• TD, BNS, NA, and LB recently reached new all-time highs. Individual bank share price performance versus their highs seems to be correlated with earnings performance except forLB, CWB, and NA whose share price performance has lagged their earnings performance.

• Bank earnings level in 2010 was 9% below the bank group earnings peak of 2007. Bank earnings in 2011 are expected to surpass the 2007 peak by a modest 2%. Return on equity in 2011 is expected to be 16.7%, down from the record level of 23% in 2007. ROE in 2007 was driven by trough loan loss provisions, strong capital markets, high consumer and mortgage loan growth, and lower equity levels. Common equity in 2010 was $45 billion or 50% higher than 2007 levels. Consequently, Return on Risk Weighted Assets (RRWA) in 2010 was 2.12%, only slightly below 2007 level of 2.28%.

• Earnings growth for the bank group peaked in 2007 (see Exhibits 7, 8), with 2008 and 2009 representing the bottom of the cycle. Earnings recovery in 2010 was anaemic due to the countercyclical high wholesale earnings in 2009. We expect the earnings cycle recovery to gain momentum throughout 2011 (see Exhibit 8). Although earnings growth in this recovery cycle is expected to be solid but lower than most past cycles due to lower GDP growth, lower earnings leverage to the credit cycle, and countercyclical slowing of consumer and mortgage credit growth. Earnings growth is expected to remain at or above long-term rates over the next five years. RRWA for the bank group is expected to reach new highs in 2011 and 2012 of 2.32% and 2.31%, respectively (see Exhibit 20).

• The themes for 2011 are a "Return to Operating Normalcy for the Banking Industry," "Dividend Increases," "Improved Clarity on Capital Levels," and "Moderation of Fears about Consumer Debt and House Prices." Thus, the beginning of a great decade for bank share price performance, in our opinion. The theme for the decade is expected to be "Generation of Surplus Capital, Capital Deployment, and Share Repurchases." Share repurchases have never occurred of any consequence in Canadian banking.

• Canadian banks did not repurchase shares between 1967 and 1994. Share repurchases from 1995 to 2010 were insignificant averaging only 1.0% of shares outstanding with the highest year being 2.3% of shares outstanding. Bank share repurchases hype over the past 10 years was not matched by actual activity. Thus, the market did not differentiate much between individual bank capital levels or capital generation ability (RRWA). Capital deployment with a focus on share repurchases and RRWA (new profitability paradigm) are expected to be the themes of the next decade, supporting the expected continuation of the bank group's long-term outperformance.

• Bank stocks have substantially outperformed the market since 1967 (see Exhibits 4 and 12), we believe, because the market underestimates the sustainable earnings power and growth of the sector (barriers to entry and strategic industry) and is slow to attribute an appropriate multiple to reflect the fundamentals, profitability, and structural changes that have occurred in the industry. We expect long-term outperformance to continue and this could be one of the banks' best decades for absolute and relative share price performance.

• Basel III goal is to lower systemic risk, which we believe will ultimately result in a lower risk premium (see Exhibit 27) or higher P/E multiples as the quality of the ROE has improved considerably as reflected in the RRWA trend (see Exhibit 20). We also believe the market will focus more on bank dividend yields, especially given renewed expectations of dividend growth returning to the long-term rate of 10%.

• Bank dividend yields are extremely attractive relative to Government Bonds, Equities (TSX), Pipes & Utilities, and REITs (see Exhibits 23, 24, 25, and 26).

• We expect that TD and BNS will be the first major banks to increase their dividends in 2011, which should be a positive catalyst for bank stocks. NA, LB, and CWB are also likely to increase in 2011 following up on their modest increases in 2010.

• Banks are currently trading at a P/E multiple of 14.1x trailing earnings, below the 15.1x level reached in February and November of 2006 or 14.5x in February 2007.

• We are increasing our share price targets for the bank group (see Exhibit 1) with our target P/E multiple on 2011 earnings estimates increasing to 15.2x from 13.9x, which brings our target up to the 2006 peak levels. The P/E multiple in 2006 was late cycle where we believe 2011 is early cycle (see Exhibit 8).

• We are increasing our 12-month share price targets on TD and CM to $100, NA to $90, BNS to $72, BMO to $68, RY and LB to $65, and CWB to $38. Stock splits may soon be on the horizon.

• We reiterate our Overweight recommendation and we would have no sells in the group on an absolute return basis. TD Bank is our top pick in the sector. We have 1-Sector Outperforms on TD, CM, NA, and CWB with 2-Sector Performs on LB, BNS, RY, and BMO.

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Manulife Q4 2010 Earnings

Scotia Capital, 11 February 2011

Event

• The incremental cost of hedging more equity market and interest rate risk of C$0.08 per share garnered a disproportionate amount of attention compared to decent underlying trends in the business and the substantial reduction in risk exposure.

Implications

• We estimate base line run-rate earnings on a normalized basis of C$1.50 per share, including incremental costs of hedging and assuming no growth in 2011; when adding growth in the business, we lower our 2011 and 2012 EPS estimates to C$1.70 and C$1.93 from C$1.82 and C$2.15, respectively. Admittedly, we had factored hedging costs of C$300-$350M and higher earnings on surplus, now reconsidered given the cost of financial leverage and increased costs of hedging.

Recommendation

• The MFC stock got ahead of itself, in our view, in recent months, rising 35% since early December. We are lowering our 12-month PT to C$19, based on our new blended valuation model of 10x 2011E EPS (30%) and 1.25x BVPS (70%), which considers greater earnings stability, partially offset by lower ROE expectations. We would be more constructive closer to $16

Our main takeaways from the conference call include:

• We found it interesting that there was such an intense focus on the actual costs of hedging over the next few years, and little attention to the company being substantially ahead of plan in reducing earnings sensitivity to equity markets and interest rates. Through actions taken during the quarter, MFC decreased equity market and interest rate sensitivities by 43% and 18%, respectively.

• We expect the rating agencies to respond favorably to these developments, particularly when combined with early signs of fundamental improvement in the U.S. business, although we do not expect ratings upgrades until there is more evidence of the sustainability of these improvements and a demonstration of more stable earnings trends. Ratings upgrades could occur in late 2011, in our view.

• Our base line run-rate normalized earnings estimate of C$1.50 per share is based on calculations in Exhibit 1. We have revised our 2011E and 2012E EPS based on these estimates, which we believe to be conservative given they take into account more than the direct impact of equity markets and interest rates (C$933M). As such, we begin with adjusted earnings from operations of C$692 million.

• Sales results in Q4/10 were strong among the products that MFC has targeted for growth. Sales of individual life, travel insurance, and mutual funds posted records.

• In the U.S., the company made progress in sales of individual life products excluding universal life with secondary guarantees, which rose 14% in the quarter; John Hancock Mutual Funds recorded record sales for the year, at US$9.7 billion, and total AUM ended the year at US$98 billion.

• Sales in Asia rose 56% and reflected diversification of products and distribution channels throughout Asia, particularly in Japan and Hong Kong. The bank channel is becoming an increasingly important network, and MFC is making considerable progress in expanding relationships in this system.

• In terms of earnings, the most significant progress was seen in the U.S., where earnings before the impact of investment and market related experience gains more than tripled in the insurance segment and rose 14% in the wealth management business.

• Book value per share ended the year at C$14.23, an increase of 3% from Q3/10. The MCCSR rose 15 bp to 249%. Management suggested that, despite the improvements in the risk profile of the business, the substantial capital cushion, and improved macro environment, no action to redeploy capital will be taken until future capital regulations are clear, as requirements in many jurisdictions are under review.

• We expect ROE's of 11.3% to 11.5% in 2011 and 12.4% to 12.6% in 2012.

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Great-West Lifeco Q4 2010 Earnings

Scotia Capital, 11 February 2011

Event

• GWO's Q4/10 reported EPS of C0.54 per share included non-operating items which, in total, added C$0.09 per share, resulting in adjusted EPS of C$0.45, below our estimate of C$0.48, and consensus of C$0.51. Results varied from strong (U.S.) to mixed (Canada) to weak (Europe).

Implications

• While we were not surprised by the asset impairment provision in Europe, the size (C$121 million, or C$0.13 per share) was considerable compared to overall EPS, and Canada's mixed results are worth watching as IIIP earnings appear to have leveled off. Europe is another source of risk as the investment portfolio's exposure to "PIIGS" is high relative to equity (6%).

Recommendation

• GWO trades at a considerable premium to its peers at 13x our 2011E EPS and 2.3x BVPS, and while earnings have proven to be quite resilient and stable, the company's investment portfolio and high financial leverage continue to warrant caution.

Q4/10 Highlights

• Reported earnings included items that we believe do not represent core run-rate income - the benefit from a tax related item of C$0.04 per share, the benefit from an adjustment to the acquisition cost of Canada Life of C$0.07 per share, and the negative impact of currency translation of C$0.02 per share. All in, we calculate adjusted EPS as C$0.45 per share.

• Sales were strong pretty much across the board, with Canada individual sales up 20%, U.S. single premium whole life insurance policy sales rising 104% (on a constant currency basis), Putnam mutual fund sales jumping 16% (on a constant currency basis), and sales in the U.K. up 57%.

• Earnings were more of a mixed bag. In Canada, adverse mortality impacted the IIIP segment, which held down total segment earnings, after adjusting for unusual items.

• In the U.S., earnings improved significantly, even after adjustments for unusual items, primarily on higher interest margins, strong equity market performance, and sales. Partially offsetting these were lower mortality charges and higher expenses.

• In Europe, earnings were negatively impacted by C$121 million related to asset impairment provisions of C$50 million and a related increase in actuarial liabilities of C$71 million. These were partially offset by excess interest margins of C$43 million and a C$24 million positive adjustment to the acquisition price of Canada Life in 2003.

• We calculate ROE (excluding AOCI) on an annualized basis of 11.0% for Q4/10.

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TD Bank CEO Says Capital Push Won't Impact M&A & Dividends

Bloomberg, Sean B. Pasternak, 3 February 2011

Toronto-Dominion Bank Chief Executive Officer Edmund Clark came to Wall Street this week with a simple recipe for bankers trying to avert another financial crisis: more transparency and less arrogance.

“Hubris is the biggest risk in the banking system,” Clark said in an interview at Bloomberg’s headquarters in New York. “It is the most dangerous emotion to run a financial institution.”

Clark is in a position to dispense advice. As head of Canada’s second-largest bank, he averted most of the writedowns and credit losses that led to the financial crisis in 2008. The bank is one of five lenders rated Aaa at Moody’s Investors Service and its stock gained 24 percent in the past three years, compared with a 40 percent drop in the KBW Bank Index.

Toronto-Dominion exited a structured products business in 2005, which included collateralized debt obligations, after Clark said he didn’t understand the risks associated with it. As a result, the lender recorded less than C$1 billion ($1 billion) in debt-related writedowns during the financial crisis, compared with the $1.49 trillion recorded by banks and brokers worldwide.

Canada’s banks received no government bailouts during the crisis and has been ranked the world’s soundest for three straight years by the Geneva-based World Economic Forum.

Clark warned against Canadian lenders resting on their laurels after weathering the crisis better than many U.S. or European competitors.

“The risk in Canada is we get too comfortable with how well we did,” Clark said.

Clark, 63, says he’s tried to foster transparency and openness at his Toronto-based company so that employees and executives aren’t afraid to speak up when they think the bank is heading in the wrong direction.

“You’ve got to build cultures of transparency; comfort where people say ‘Ed, I don’t agree with this. It’s a really stupid idea,’” Clark said.

He cites an example of a bank teller who posted a comment on the company’s internal message board complaining about Clark’s compensation package, which totaled C$10.4 million last year.

“This teller in one of the branches writes ‘Ed, I love you to death, but this is ridiculous how much you get paid.’ Someone sees that, then they say ‘maybe it’s alright for me to push back here.’”

He warned against banks believing “their own propaganda” and creating a culture where people don’t push back.

“I always tell my people, take the business totally seriously but don’t take yourself too seriously,” Clark said.

Clark, who holds a Doctorate in economics from Harvard University, has no plans to extend his term beyond 2013, when he will retire. He was appointed CEO in 2002.

“I look at myself as being lucky to get a chance, for 10 years or whatever, to run a 155-year-old institution in Canada, have a shot at making it better for my successor to do the same,” he said. “To go and blow up those institutions, is a terrible, terrible thing to have done, just by letting your ego get out of control.”

Clark said the lack of hubris applies to his investment- banking unit TD Securities, which last year trailed RBC Capital Markets and BMO Capital Markets in Bloomberg rankings for stock issuance and merger advice.

About 21 percent of Toronto-Dominion’s C$4.6 billion in profit last year came from wholesale banking, compared with 32 percent at domestic rival Royal Bank of Canada. Clark said he doesn’t want TD Securities to make risky bets on capital markets.

“It’s a totally different strategy,” to what other investment banks have done in Canada, said Clark, who spoke yesterday at an investor conference in New York sponsored by Morgan Stanley. “I’ve always said ‘I don’t care what percentage you are; I care what you do’.”

The investment bank will continue to earn about C$800 million to C$1 billion a year working on large Canadian transactions and assisting clients in the U.S. and abroad.

“The trick is not to let them drift and say, ‘why don’t I take on Goldman, or why don’t I take on Morgan Stanley?’” Clark said. “Because I don’t think it’s a space we can occupy.”

Toronto-Dominion will focus expansion mostly in North America instead of markets such as China, Clark said.

“Trying to figure out an Asian strategy would be one of our harder tasks,” said Clark. “If I would go head to head with a competitor, why am I going to get more, on average? What’s my competitive edge?”

Toronto-Dominion rose C$1.45, or 1.9 percent, to C$77.63 at 4:28 p.m. on the Toronto Stock Exchange. The shares have climbed 4.6 percent this year.

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Reuters, 2 February 2011

The head of Toronto-Dominion Bank says a push to rapidly phase in tighter capital rules won't affect the bank's plans for dividend hikes or acquisitions.

The Basel III rules, unveiled last year, set higher capital ratio levels for global banks, and Canada's financial regulator said this week that Canadian banks should meet the new levels "as soon as possible".

The Office of the Superintendent of Financial Institutions, also said banks should be cautious on "actions that weaken their capital position", such as dividends and acquisitions.

"It doesn't change the way I feel about acquisitions," TD Chief Executive Ed Clark said at the Morgan Stanley Financials Conference in New York. He said TD would issue equity in conjunction with an acquisition if it felt it was necessary.

"I believe you shouldn't do acquisition unless you were prepared to issue shares," Clark said.

The bank's capital ratio under Basel III rules is believed to be well below the 7 percent standard that must be in place by 2019.

Clark said the bank sets dividend on earnings levels, targeting a payout ratio of 35-45 percent.

He has said the bank will issue guidance on dividends when it reports first-quarter results next month. Analysts have taken that to mean the bank will raise its payout at that point.

Canada's other big banks are also expected to raise dividends over the next year. Most of the banks have not raised their payouts since 2008, when the financial crisis took hold.

Brad Smith, an analyst at Stonecap Securities, said the banks with lower capital levels, like TD, may feel compelled to implement a smaller dividend hike than a better-capitalized bank.

The Basel rules are designed to stave off a repeat of the global financial crisis. Canada's banks emerged from the crisis relatively unscathed, without needing any government bailouts, unlike many U.S. and European rivals.

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TD Bank to Buy Chrysler Financial

Bloomberg, Sean B. Pasternak, 22 December 2010

Toronto-Dominion Bank may continue to make acquisitions in the U.S. after increasing its bet there with the $6.3 billion purchase of Chrysler Financial Corp., capping a record quarter for U.S. takeovers by Canadian lenders.

Toronto-Dominion’s bid for the auto-finance company “doesn’t really alter” the Toronto-based bank’s appetite for smaller transactions, Chief Executive Officer Edmund Clark said.

“We’re not deal junkies, but we keep saying what we’re looking for,” Clark said yesterday in a telephone interview. “We want $10 billion (in assets) or less deals; tuck-ins that add to our franchise and meet our strategy.”

The purchase of Chrysler Financial adds to the more than C$20 billion ($19.6 billion) that Canada’s second-largest bank spent on U.S. acquisitions since 2004. Toronto-Dominion’s U.S. territory spans 16 states from Maine to Florida with 1,269 branches, the first time a Canadian bank has more locations south of the border than at home.

“These small transactions have ended up with us having a pretty significant franchise in the United States,” said Clark, 63. “We clearly have very strong market presence down the east coast of the United States; now we’ll be in the top five for bank-owned auto lending.”

Toronto-Dominion and Bank of Montreal are among Canadian banks that are taking advantage of their relative strength to add assets in the U.S. as troubled Europeans lenders pull back. Bank of Montreal last week agreed to buy Wisconsin’s biggest bank for $4.1 billion.

HSBC Holdings Plc, Britain’s biggest bank, bought U.S. subprime lender Household International Inc. in 2003 for $15.5 billion, in its biggest-ever acquisition. Following the bursting of the subprime bubble, HSBC closed the U.S. consumer finance division to new customers in 2009 after more than $53 billion of loan-loss provisions in North America. London-based HSBC also sold a $4 billion U.S. car loan portfolio this year, while Allied Irish Banks Plc sold its stake in Buffalo-based M&T Bank Corp. for $2.1 billion.

“The European banks are not in any kind of a position to compete for these assets, and the Canadian banks certainly are,” said Tony Demarin, chief investment officer at BCV Asset Management in Winnipeg, Manitoba, which manages about C$250 million, including Toronto-Dominion shares. “This is a once-in- a-decade, once-in-a-20-year opportunity.”

Canada’s banking system has been ranked the world’s soundest for three straight years by the Geneva-based World Economic Forum. Lenders including Toronto-Dominion and Royal Bank of Canada withstood the worst financial crisis since the Great Depression without taking government bailouts, and recorded only a fraction of the $1.31 trillion in writedowns taken by banks and brokers worldwide.

Toronto-Dominion’s purchase follows the bid last week by Bank of Montreal to buy Milwaukee-based Marshall & Ilsley Corp., The acquisitions mark the biggest quarter for Canadian bank deals in the U.S. in at least 12 years, according to Bloomberg data.

Toronto-Dominion, which operates south of the Canadian border as TD Bank, began its U.S. expansion in 2004, convinced that there were limited opportunities once the federal government blocked Canadian banks from buying each other.

In August 2004, Toronto-Dominion announced it would buy 51 percent of Portland, Maine-based Banknorth Group Inc. for $3.5 billion. A year later, the bank sold TD Waterhouse to TD Ameritrade Holding Corp., making it the largest shareholder in the Omaha, Nebraska-based brokerage.

By 2007, Toronto-Dominion acquired the rest of Banknorth for $3.19 billion, with Clark installing former risk officer Bharat Masrani as head of the U.S. operations. In March 2008, the bank bought Cherry Hill, New Jersey-based Commerce Bancorp for about $8.33 billion. Toronto-Dominion added South Financial Group Inc. this year for $191.6 million and now has about 200 branches in the U.S. southeast.

“We obviously have an unbelievable deposit-gathering machine,” said Clark, who joined the bank in 2000 and became CEO in 2002. “Now we need to complement it with an asset- gathering machine.”

The purchase of Chrysler Financial from Cerberus Capital Management LP will add $100 million to Toronto-Dominion’s earnings by 2012, and the bank forecasts new loan originations of about $1 billion a month the following year. The bank expects to surpass a target of $1.6 billion a year in U.S.-based profit within three years, compared with $1 billion in earnings last fiscal year.

“It gives them a big book of auto-loan business you will have gone through with a fine-toothed comb, and TD has the ability to borrow at a better rate than Cerberus would,” said Terry Shaunessy, President of Shaunessy Investment Counsel in Calgary, which manages about C$200 million. “TD has shown it has very good credit analysis.”

Chrysler Financial, based in Farmington Hills, Michigan, has about 1,850 employees and will have $7.5 billion in loans when the transaction closes. About 90 percent of the loans are in the U.S., and 10 percent in Canada. Chrysler Financial isn’t related to Chrysler Group LLC, the company that’s now controlled by managers from Fiat SpA.

“In our view, the largest risk in the transaction is that the company will be unable to hit its average loan balance targets for 2012 of $10 billion,” said Brian Klock, an analyst at Keefe, Bruyette & Woods. “We believe this target should prove manageable.”

Citigroup Inc., JPMorgan Chase & Co., and Sandler O’Neill & Partners LP are advising New York-based Cerberus on the transaction. Goldman Sachs Group Inc. advised Toronto-Dominion.

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Financial Times, Bernard Simon, 21 December 2010

Toronto-Dominion Bank is set to become one of North America’s top five auto lenders after agreeing to pay $6.3bn in cash for Chrysler Financial, the vehicle finance group owned by Cerberus Capital Management.

The bank said it aimed to restore Chrysler Financial to its former strength.

“This is an opportunity for us to take advantage of a market that was clearly disrupted,” Bharat Masrani, head of the bank’s US operations, said of the deal, announced on Tuesday.

The deal also allows Cerberus to extricate itself with a modest loss from its ill-fated $7.4bn acquisition of Chrysler in 2007. Cerberus retained the financing arm when Chrysler, the smallest of Detroit’s three carmakers, was restructured under bankruptcy protection last year.

Apart from receiving the $6.3bn of cash, Cerberus is retaining about $1bn of non-auto assets.

Ed Clark, TD’s chief executive, said the car loan business had held up well during the recession: “People want to keep their cars, because if they don’t have cars, they don’t have jobs.” he said.

Chrysler Financial’s loan portfolio has shrunk from a peak of $75bn during the last economic upswing to just $7.5bn now, and it has laid off half of its workforce. “During this time our origination engine was idling but we knew we had a valuable franchise,” said Tom Gilman, Chrysler Financial’s chief executive.

The group, which will be rebranded under the TD name by next spring, aims to sign up at least $1bn a month in new loans within the next three years, expanding its portfolio to a book value of $20bn-$30bn. It will focus on prime and near-prime customers.

It has recently signed up 400 car dealers a month, and expects to have relationships with 5,000 by 2013, more than double the number before the crisis in the North American car and banking sectors. TD said that Chrysler Financial could generate a return on capital of about 20 per cent within three to four years.

Mr Gilman said the company had preserved its technology and retained critical expertise under Cerberus’s ownership. It has repaid much of its debt, including funds advanced under the US government’s Tarp programme.

TD, one of only a handful of banks worldwide that has retained a Moody’s triple-A credit rating, has been looking for some time to expand its US assets in line with the growing deposit base.

TD has more retail outlets in the US than in Canada as a result of a series of acquisitions over the past six years., including New Jersey-based Commerce Bank (subsequently rebranded TD Bank) and, most recently, four banks in the south-east put up for sale by US regulators. The carmaker is now controlled by a union healthcare fund, and the US and Canadian governments.

Mr Clark said the addition of Chrysler Financial did not signal a drive to expand the US branch network beyond the east coast: “This gives us a national asset strategy to complement our local deposit-gathering strategy.”, he told the Financial Times.

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Wall Street Journal, Phred Dvorak & Caroline Van Hasselt, 21 December 2010

Toronto-Dominion Bank took another step toward its goal of becoming a top retail player in the U.S. with the $6.3 billion purchase of the former auto-lending arm of Chrysler.

TD said Tuesday the purchase of Chrysler Financial Corp. from private-equity fund Cerberus Capital Management LP gives the bank a big presence in a growing and profitable part of the consumer-loan business, as well as another place to invest some of the roughly $80 billion in U.S. deposits that exceed its loans.

The acquisition, which is slated to close before the end of April, will make Canada's No. 2 bank one of the five biggest auto lenders in the U.S., on top of the top-ten ranking the bank already has in terms of deposits, said Chief Executive Ed Clark.

The purchase is also the latest sign of how Canadian banks, which came through the downturn relatively unscathed, are using their financial strength to expand in markets like the U.S. TD earlier this year bought four small, troubled banks from the Federal Deposit Insurance Corp. to extend its footprint down the U.S. eastern seaboard from Maine to Florida. Last week, Bank of Montreal said it was buying a big Midwestern bank in a $4.1 billion share swap.

TD's auto-loan sales pitch will be, "Here's a bank that was not touched by the downturn, has more deposits than it has assets, and it wants to lend you money," said Mr. Clark, in an interview.

Mr. Clark said TD chose auto loans over other types of assets it looked at because losses in the U.S. stayed relatively low throughout the downturn, and industry watchers think volume is poised to grow quickly as the economy recovers.

"It's clear people want to have cars, because if they don't have cars, it's hard to have jobs," said Mr. Clark.

But the expansions down south, while the U.S. economy remains in a funk, are risky as well.

"Whether you're looking at Royal Bank [of Canada], Bank of Montreal or Toronto-Dominion, none of them on their U.S. banking businesses are generating adequate rates of return in the current environment," said Brad Smith, an analyst at Stonecap Securities in Toronto. "The big risk now is that the U.S. economic environment does not snap back in a sustainable way, which means that you're putting more capital in" and still getting a poor return.

Chrysler Financial, which was peeled off from its car-making parent after Chrysler filed for bankruptcy protection, hasn't made many loans since the U.S. government bailed out the car company in late 2008. It has seen its loan book shrivel to an expected $7.5 billion by the time the deal closes, from $26 billion just more than a year ago. That shrinkage could be hard to turn around, with a reduced sales force pushing car loans that last an average of three years.

"We are having trouble understanding where the loan volume growth will come from and how TD will be able to jump-start Chrysler Financial to generate exceptionally large loan growth after effectively being dormant for well over two years," wrote Barclays Capital analyst John Aiken in a comment on the deal.

Last week, Mr. Aiken lowered his target on Bank of Montreal's share price by 14% to C$60.00, saying the acquisition it announced would lower profitability for several years.

TD estimates Chrysler Financial's portfolio is worth only about $5.9 billion when liabilities are stripped out. It is paying a $400 million premium for what it believes is the value of Chrysler Financial's business, including loan-processing infrastructure, a sales force of 100, relationships with 2,000 car dealers and a million outstanding customers.

The biggest risk is "the time it's going to take us" to get that auto-loan book back up to an average of $20 billion-$30 billion, said Mr. Clark—close to the amount of business Chrysler Financial was doing at its peak. Mr. Clark said TD is planning to double the car-loan sales staff to about 200 and invest about $500 million in operating capital. It is hoping to reach a sales volume of $1 billion a month by 2013, and its targeted loan amount in three or four years, for a 20% return on invested capital. Mr. Clark said TD will offer the auto loans under the TD name and drop the "Chrysler" moniker—a move that will help the bank expand its brand beyond the East Coast, where most of its U.S. branches are based, with minimum cost and integration headaches.

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Bloomberg, Cristina Alesci & Zachary R. Mider, 21 December 2010

Cerberus Capital Management LP will recoup about 90 percent of its initial investment in Chrysler after the sale of the automaker’s former lending unit to Toronto-Dominion Bank, according to two people with knowledge of the transaction.

Cerberus will get about 75 cents on the dollar in cash when the sale of Chrysler Financial Corp. closes, said the people, asking not to be identified because the New York-based firm is private. Including about $900 million of assets Cerberus is retaining as part of the deal, the company will be left with a loss of 10 percent on the initial investment in the automaker and its finance arm.

Toronto-Dominion Bank today agreed to buy Chrysler Financial for $6.3 billion in cash, adding an auto-finance company in its second-largest acquisition. The purchase includes $5.9 billion in assets and about $400 million in goodwill. Cerberus, the hedge-fund and buyout firm led by founder Stephen Feinberg, bought a majority stake in Chrysler for $7.4 billion from DaimlerChrysler AG in 2007, part of a wager on the U.S. auto industry that included the 2006 takeover of General Motors Corp.’s auto lender.

The deals preceded a decline in U.S. auto sales that sent both carmakers into bankruptcy. Feinberg, 50, subsequently lost control of both GMAC and Chrysler and held on to Chrysler Financial. The lender repaid its $1.5 billion in U.S. Treasury Department bailout funds last year and in July sought to return to large-scale lending. The automaker, known as Chrysler Group LLC, is now controlled by managers from Italy’s Fiat SpA.

Chrysler Financial, based in Farmington Hills, Michigan, has about 1,850 employees and will have about $7.5 billion in loans at the closing of the transaction, according to an investor presentation Toronto-Dominion released today. About 90 percent of the loans are in the U.S., and 10 percent in Canada.

Toronto-Dominion is recognizing the net value of the assets at $5.9 billion on its own books, more than the $5.2 billion value on Chrysler Financial’s, according to a person with knowledge of the transaction. Based on Chrysler Financial’s value, Toronto-Dominion is paying about 1.2 times the book value, the person said.

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BMO to Buy Marshall & Ilsley

The Wall Street Journal, David Reilly, 18 December 2010

Bank of Montreal's acquisition of Marshall & Isley may signal the start of a hoped-for wave of regional bank consolidation. But others shouldn't follow its lead when it comes to price.

BMO is buying M&I for $4.1 billion, equivalent to a 33% premium over the prior day's close for a bank hit hard by the financial crisis. M&I has yet to pay back $1.7 billion in Troubled Asset Relief Program funds and has racked up eight consecutive quarterly losses.

No wonder BMO's stock sank nearly 7% Friday. M&I shareholders, on the other hand, aren't complaining. And the announcement had investors speculating about other possible takeovers; shares of banks such as KeyCorp and Regions Financial rose smartly.

Many regional banks are seen as vulnerable because they are finding the road to recovery tough. With demand for loans still tepid, there may be few opportunities, outside mergers, to boost growth.

Deals also could allow weaker banks to be weeded out without hitting the Federal Deposit Insurance Corp.'s already strained funds. "Regulators may encourage many of the more stressed regional banks to sell to stronger regional banks," analysts at CreditSights said in a note Friday. They highlighted U.S. Bancorp, PNC Financial Services Group and BB&T among potential acquirers.

But there still is the small issue of price to consider.

BMO ostensibly is paying one times tangible book value, and with stock. That assumes, though, that M&I's loan book is worth its carrying value. It isn't. In its most recent quarterly filing, M&I shows its loan book has a market value 10% below its balance-sheet value. That tallies with BMO's own estimate of an additional 12% of loan losses.

Apply M&I's market-value estimate, tax-adjusted, and the bank's tangible common equity falls to $1.56 billion. At the adjusted level, BMO, whose own shares trade at 1.8 times book, is actually paying 2.62 times book value. If the market-value adjustment isn't tax-affected, because M&I hasn't been profitable, the multiple soars to more than 20 times.

Even the lower valuation would be rich for a pristine bank whose assets can be counted on to hold their value. That's not the case with M&I, whose loan book still is shaky.

Over the past two months, Standard & Poor's downgraded M&I, while Moody's Investors Service placed the bank on review for possible downgrade. Both firms noted weakness in M&I's commercial real-estate and construction-lending portfolios, which make up more than a third of the loan book.

In its defense, the deal makes strategic sense for BMO, which already owns Chicago-based Harris Bank and is looking to expand in the Midwest. BMO also expects to reap about $250 million in pretax cost synergies. As good as that is, it's still not justification for overpaying.

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The Wall Street Journal, Caroline Van Hasselt & Randall Smith, 18 December 2010

Bank of Montreal unveiled plans to buy Milwaukee-based Marshall & Ilsley Corp. in a $4.1 billion stock swap, triggering speculation that other faltering U.S. regional banks may be snapped up as well.

Shares of SunTrust Banks Inc., KeyCorp, Regions Financial Corp., Synovus Financial Corp., and Fifth Third Bancorp, all of which have yet to repay $1 billion or more in government aid, rose as investors sought out other possible takeover targets.

"The first question is 'who's next?'" said Chris McGratty, a bank stock analyst at Keefe Bruyette & Woods, which included M&I on a list of 26 possible takeovers in June. However, Mr. McGratty cautioned that other such scenarios may take time to play out.

With the U.S. economy showing signs of life, bank takeover speculation has rarely been as active since the subprime-mortgage meltdown hit. Banks that haven't repaid government aid under the Troubled Asset Relief Program have been a focus of investors.

On Wednesday, stock of Regions, which owes $3.5 billion, surged as much as 5.6% in early trading on rumors that it might be acquired. The same day, BankAtlantic Bancorp Chief Executive Alan Levan said that while the lender has expressed intent in the past to remain independent, "we believe it is in our shareholders' best interest for us to be flexible and open to opportunities as they may be presented."

The Marshall & Ilsley acquisition, the largest U.S. bank acquisition in two years, is the latest in a string of U.S. purchases by Canadian banks, which have weathered the financial crisis and recession better than most U.S. peers.

Unlike U.S. banks, Canada's didn't require bailout funds, avoiding the subprime-mortgage crisis with the help of conservative lending practices and tight regulation.

Toronto-Dominion Bank bought Commerce Bancorp Inc. for $8.7 billion in October 2007. Earlier this year, TD acquired Greenville, S.C.-based South Financial Group Inc. among others.

The Marshall acquisition was the largest U.S. bank deal since PNC Financial Services Group acquired National City Corp. for $5.6 billion in October 2008, according to KBW.

Marshall & Ilsley became vulnerable with pricey acquisitions in Florida and overexpansion in Arizona, triggering an overexposure to construction loans and $4.8 billion in losses since 2007, Mr. McGratty said. Marshall shares had been sliding amid fears over its ability to raise funds to repay $1.7 billion in government aid.

Still, the acquisition came at a 34% premium to Marshall & Ilsley's stock price, based on where the two stocks closed on Thursday.

Alan Villalon, a bank stock analyst First American Funds in Minneapolis, which owned 824,347 Marshall shares, said the deal shows that there are still healthy banking assets, which wasn't so clear in recent weeks after Wilmington Trust was sold at a steep discount.

But the $7.75-a-share offer sparked a 6.5% slide in the stock of Bank of Montreal, commonly referred to as BMO, cut the deal's price tag and reduced the premium. One reason for Friday's slide is that BMO said it plans to write down another $4.7 billion in Marshall assets. Investors also were concerned about the bank's ability to digest Marshall.

Under a definitive agreement, BMO is offering 0.1257 of its shares for each M&I share.

To keep its capital strong after the acquisition, the bank plans to issue an additional 800 million Canadian dollars (US$795.3 million) in equity before the deal closes prior to July 31, 2011. BMO also will repay Marshall's $1.7 billion in TARP debt.

The purchase bolsters BMO's position in the Midwestern states, where it operates Chicago-based Harris Bank, and will more than double its branches in the U.S. to 695. BMO has struggled to formulate a clear growth strategy since the Canadian government nixed domestic bank mergers in 1998.

"BMO had to do something. They've been in the Midwest for a long time, and this is the time to take the plunge," said John Kinsey, who helps manage C$1 billion at Caldwell Securities Ltd. in Toronto. "Most Canadian companies have not fared well at all in the U.S., so there may some execution risk."

In Toronto Friday, BMO stock fell C$4.05, or 6.5%, to C$58 on more than 13 million shares. In New York, M&I gained US$1.06, or 18%, to US$6.85

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RBC Q4 2010 Earnings

Scotia Capital, 6 December 2010

• RY cash operating EPS declined 20% YOY to $0.84, significantly below expectations due to weak Wholesale and International Banking results. Operating ROE: 13.5%, RRWA: 1.85%, Tier 1 Capital: 13.0%.

Implications

• Reported cash EPS was $0.76 per share including a $116M after-tax or $0.08 per share loss on the announced sale of Liberty Life.

• Fiscal 2010 operating EPS declined 17% to $3.70 per share from $4.45 per share in 2009 due to a 33% decline in Wholesale Banking earnings. Operating ROE 2010: 15.9%, RRWA: 2.11%.

• RBC Capital Markets earnings declined 35% YOY to $374M, although recovering from the extremely low level of $202M in the previous quarter. International Banking operating loss in Q4 deteriorated to $132M versus a loss of $52M in the previous quarter.

Recommendation

• We are reducing our 2011E EPS to $4.20 from $4.40 and introducing 2012E EPS of $4.80. Our one-year share price target is unchanged at $60. We maintain our 2-SP rating as the premium P/E multiple remains vulnerable given RY's declining relative profitability and earnings risk.

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The Globe and Mail, Eric Reguly, 26 November 2010, Friday

Nattily dressed, minus a tie, Gord Nixon saunters into the Blue Bar at The Berkeley Hotel in Knightsbridge, orders a Hendrick’s gin and tonic, reaches into his breast pocket and presents me with a folded piece of paper. I think I know what’s coming and my heart sinks.

It is a photocopy of a column I wrote in May, 2007, when Fred Goodwin, then boss of Royal Bank of Scotland, was on top of the banking heap, buying everything in sight and putting Edinburgh on the global financial services map. The headline, “Bold RBS puts our banks to shame,” suggested that another blue-blooded bank – Royal Bank of Canada – could leap into the international big leagues too if only one Gordon M. Nixon had Mr. Goodwin’s famous bravura.

Today, RBS, minus Mr. Goodwin, is 84-per-cent owned by Her Majesty’s Treasury after reporting a stunning £24.1-billion loss in the 2008 crisis year. The market value of what was once the world’s fifth-biggest bank is now the equivalent of about $38-billion (Canadian). And RBC? It’s worth $77-billion, putting it among the planet’s top 15. What’s more, it has become Canada’s corporate ambassador to the world, the textbook example of a bank that used classic Canadian caution, backed by sound regulation, to survive and thrive while many others around it toppled like dominoes.

Mr. Nixon, who became chief executive officer of RBC in 2001, chuckles and tells me not to feel bad about the article; pre-crunch, all sorts of misguided reporters and analysts were telling him to go big or go home. Some members of his own executive team heaped pressure on him to do the same.

To his credit, he resisted. Indeed, RBC’s rise can’t be down to sheer dumb luck. It was due ultimately to Mr. Nixon’s strength of personality and belief that banks shouldn’t take the easy route to growth. “A lot of CEOs who fell by the wayside lost sight of the fact that they were supposed to be growing franchises,” he says. “Instead, they were growing assets. The easiest thing to grow is a bank’s assets. We could double our balance sheet tomorrow if we went out and made a lot of loans, bought securities and businesses that don’t have good returns.”

That’s what Mr. Goodwin did and that’s why Sir Fred – he was knighted in 2004 – is now often referred to as a “villain” or the “world’s worst banker.”

Gin and tonics downed, we repair to Koffmann’s at The Berkeley, next door for dinner. It is chef Pierre Koffmann’s comeback restaurant after a decade-long absence. Koffmann’s specialty is hearty Gascon fare, supported by fine French wines, a combination that has made it the newest darling of London’s fine-cuisine scene.

Mr. Nixon orders fish soup and Dover sole on the bone. I opt for the black pudding and mackerel. In spite of his laidback, boyish air, Mr. Nixon knows a thing or two about wine and is especially fond of Italian whites from Piedmont. But this is a French restaurant and Mr. Koffmann doesn’t put Italians on the menu. Mr. Nixon picks a Domaine Alain Chavy premier cru, 2006, from the Puligny-Montrachet vineyards. I wouldn’t know until the bill arrived that it cost almost as much as my flight to London from Rome.

When he realizes that my fish comes with a cup of gorgeously plump French fries, and his doesn’t, he orders his own. “I’m a French fry fiend,” he explains. When they arrive, he goes into rapture: “That’s perfect; much better than bread.”

Mr. Nixon is in a good mood, in spite of complaining about having overindulged the previous evening. He is in town to attend the Duke of Edinburgh’s Award ceremony at Buckingham Palace – RBC is a sponsor of the award – see his daughter Jackie, who works as a Goldman Sachs investment banker in London, and visit RBC’s ever-expanding London capital markets and wealth-management operations. They were recently bolstered by the £963-million purchase of BlueBay Asset Management, a British bond trader.

Less than two months short of his 54th birthday, he is a different sort of executive than he was a decade ago, when he went from relationship manager at RBC’s investment arm to the CEO’s suite at Canada’s top bank virtually overnight. “I would say they were all surprised when I came in,” he says.

The new boy might have exuded confidence, but it was something of a show because he had a big hole in his knowledge: As a career investment banker, he knew almost nothing about RBC’s retail business, which was not without its problems at the time. “The business I was least comfortable with was [retail] banking, which was our biggest business,” he says. “It probably took a few years to get comfortable with decision making around the retail bank.”

That was one problem; another was being surrounded by Type A executives, some of whom had different views on how the bank should be run and many of whom didn’t get along with each other. “There was a lack of functionality across my executives in the early years,” he says. “It wasn’t a team. You had very different views, very different perspectives, and a lot of turf wars between various members of the executive committee.”

Two of the executives, chief financial officer Peter Currie and banking chief Jim Rager, wanted RBC to make a big splash in the United States, where RBC’s capital markets and banking assets, such as Centura, were too small, too scattered and struggling to make a buck. Mr. Nixon kept fighting them, not, he says, because he was a quivering M&A coward, but because he never liked the American banking model.

“It was a very low-return business and extremely competitive,” he says. “They all compete for retail deposits and they have to deploy these deposits, which means plowing money into the real estate market, which allowed them to grow. How do you justify paying three times book for a bank with a 9-per-cent return on equity?” (RBC’s overall returns on equity typically range from the high teens to the low 20s).

Mr. Nixon won the internal battle. RBC did not go big in the United States (though it was an open secret that it looked at Bear Stearns and Lehman Bros., among others). Mr. Currie and Mr. Rager hit the road in 2004 and chief risk officer Suzanne Labarge, who had sided with Mr. Nixon on his anti-M&A strategy, retired. In came a new senior executive team. It wasn’t until that point that Mr. Nixon was in full control of RBC. At least, that was the view of the analysts.

“It seemed from the outside, that after 2004, Gord really began to put his stamp on the company and ushered in an era of significant operating improvements across the entire bank,” says Rob Wessel, the former banking analyst turned managing partner of Toronto’s Hamilton Capital Partners. “Gord’s management changes laid the groundwork for the great performance that followed.”

The next four years were uneventful, in the sense that rising markets lifted all banks and hid a lot of mistakes. “Those were enjoyable years,” Mr. Nixon says. “All businesses were growing and gaining market share; all were doing well.”

Still, he resisted making a big U.S. acquisition, opting instead to pump capital into investment banking, insurance, wealth management and other businesses with the aim of creating a stable, diversified bank with relatively low earnings volatility. “The best decision he ever made was not making a big U.S. retail acquisition in 2006 or 2007; he would have bought at the top of the market,” Mr. Wessel says.

In spite of RBC’s caution, the stupidly inflated U.S. real estate market did bite RBC in the butt. RBC Dominion Securities took $4-billion in financial crisis-related writedowns. That wasn’t huge, compared with the damage suffered by other banks, but it wasn’t fun. Neither was going through the post-Lehman banking crisis. Mr. Nixon says there were moments when he thought RBC might collapse, not because RBC had hidden time bombs primed to explode at any moment, but because the global banking system was at risk. “There’s no such thing in financial services as the last man standing,” he says. “If the system falls apart, everyone goes down with it.”

Two years after the banking crunch, RBC and Mr. Nixon are on top of the world. Even in the meltdown year, RBC was hugely profitable – its profit was $3.86-billion in the year to the end of October, 2009. Which begs the question: Why not quit at the top?

The rumour indeed is that he will hit the links full-time when he turns 55 (Nixon loves golf and plays well, though a friend describes him as “hypercompetitive”). His answers to the retirement question are tantalizingly vague and he gives no clue about the identity of his preferred successor. “I’m only 53. I’d be very surprised if I made it to 60, but I have no intention of leaving in the near term, so it’s somewhere between now and 60,” he says.

He insists there’s a lot left to do before he’s truly happy with the bank, which was actually the worst performer of the Big Five Canadian banks in the last year. RBC’s international bank – the U.S. and Caribbean operations, plus RBC Dexia – needs fixing. That division has lost money in the past two years, though Mr. Nixon expects vast improvements under Jim Westlake, the head of international banking and insurance. Investment banking, wealth management and insurance will be pumped up and made more efficient. Each of the bank’s main businesses is capable of far greater profitability, he says.

I suggest that sticking around to squeeze another 10 or 20 per cent or so from an unbroken bank seems rather unambitious. What about something big and bold, something that would define his management of the company? Forget it, he says. “I’m very happy to stick around and build our businesses. When a CEO starts talking about his legacy, it’s time to short the stock.”

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Curriculum Vitae:

Beginnings

Born in 1957 in Montreal

Educated at Queen’s University, graduating with an honours degree in commerce

Home life

Lives in Toronto and has holiday homes in Muskoka and Florida

Married to Janet. Three children, each of them outside Canada for work or schooling (London, Paris and North Carolina)

Sports and other passions

Golf, tennis, sailing Olympic-class Lasers, Pilates and the odd game of hockey

Drives a Mercedes S500

Likes Italian white wine from Italy’s Piedmont region

Career

Made more money in 2001, when he spent almost half the year at RBC Dominion Securities, than he did last year ($10.4-million)

Began career in 1979 at Dominion Securities in Toronto

Worked for Dominion in Tokyo from 1986 to 1989

Became CEO of RBC Dominion Securities in 1999

Appointed president of RBC in 2001

Other interests

Chairman of MaRS, a not-for-profit organization that connects science, business and capital

Co-chairman, Toronto Region Immigrant Employment Council

Chairman of the Queen’s University Capital Campaign

Appointed a member of the Order of Canada this year

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Viewpoints:

On the future of banking

“I don’t think banks any longer will be measured by size. It’s not a game to show that you’re bigger than the next guy. I think the world has changed dramatically, which is why you’re seeing very little in terms of M&A activity in financial services. If you can’t deploy capital in a way that gives you a good return, you shouldn’t be doing it.”

On the 2008 financial crisis

“We didn’t have [a backup plan]. There was nothing you could do. You were basically ensuring the bank had liquidity in the event there was a complete collapse of the global financial system, which almost happened in Europe, where the interbank lending system disappeared.”

On Lehman Brothers’ collapse

“Letting it go was way more damaging to the system. I think it could have been managed down.”

On reporters’ tape recorders

“I’m more honest when they’re off. That way I can deny it.”

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TD Bank Q4 2010 Earnings

Scotia Capital, 2 December 2010

TD Q4/10 Earnings Miss - Higher Expenses

• TD operating EPS declined 5% to $1.38, below expectations, due to lower-than-expected earnings from Canadian P&C (TDCT) as a result of high operating expenses including non-recurring items.

Implications

• TD recorded strong retail earnings with TDCT earnings up 24% YOY and U.S. P&C up 34%, which were offset by Wealth Management down 3% and a 42% decline in Wholesale. Although Wholesale earnings rebounded 21% from previous quarter.

• ROE, RRWA, and Tier 1 was 12.4%, 2.47%, and 12.2%, respectively.

• Fiscal 2010 operating EPS increased 8% to $5.77 from $5.35 in 2009. Operating ROE in 2010 was 13.7%, RRWA 2.63%.

Recommendation

• Our 2011E EPS is unchanged at $6.50. We are introducing 2012 EPS estimate of $7.20. Our one-year share price target is unchanged at $90.

• Reiterate 1-Sector Outperform rating based on valuation discount, favourable earnings mix, industry high RRWA, and U.S. retail bank earnings leverage.

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CIBC Q4 2010 Earnings

TD Securities, 3 December 2010

Q4/10: Another Good Quarter; See More Upside in Retail

Yesterday before the open, the bank reported Core Cash FD-EPS of C$1.68 versus TD Newcrest at C$1.57 and Consensus at C$1.63.

Impact

Positive. The bank reported better than expected numbers on the back of good Retail and good Credit; earning through some weakness in Wholesale and elevated expenses. We are very comfortable with the earnings power here and we nudged up our estimates. The stock has had a very good run (roughly 20%+ returns on 5-months), but we think there is some more to go on our upwardly revised Target Price. Reiterate BUY.

Details

Retail is contributing nicely, with some more to come. NI was better than we expected despite higher expenses and with less help from Treasury versus Q3. Volumes are building and the MasterCard portfolio has yet to fully contribute. We are comfortable with the earnings power here and the prospects of reaching the bank’s C$3 billion 2013 earnings objective.

No help from Wholesale, but it should be back. The quarter earned through a largely absent Wholesale segment. It should bounce back and contribute to the run rate going forward.

Further leverage from improving credit should be more modest. PCLs were surprisingly good, supported by strong underlying trends. From here, we should see modest improvement in PCL rates.

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National Bank Q4 2010 Earnings

Scotia Capital, 2 December 2010

Q4/10 Strong Earnings - 6.5% Dividend Increase

• NA reported a 17% increase in operating EPS to $1.63 in line with our estimate but above consensus of $1.57. NA announced a 6.5% annual dividend increase to $2.64, slightly below our 10% increase estimate.

Implications

• Earnings were driven by strong retail earnings, which increased 34% YOY and Wealth Management, which was up 27% YOY, offsetting a 19% decline in Financial Markets earnings, although Financial Markets rebounded 21% from a very weak Q3/10.

• Bank earnings growth was driven by volume growth of 5% YOY, revenue growth of 2%, with expenses declining 1% for positive operating leverage of 3%. Earnings quality was relatively high with modest reliance on security and securitization gains and trading revenue. Operating ROE was 17.5%.

Recommendation

• Our 2011E EPS is unchanged at $6.80. We are introducing our 2012E EPS at $7.50. We are increasing our one-year share price target to $82 from $77 as strong earnings, dividend increase, and high capital levels are supportive of higher absolute and relative valuations. We reiterate our 1-Sector Outperform rating.

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Preview of Banks' Q4 2010 Earnings

Scotia Capital, 17 November 2010

Banks Begin Reporting November 30 – Earnings Sluggish

• Banks begin reporting fourth quarter earnings with National Bank (NA) on November 30 (after market close), followed by Canadian Imperial Bank of Commerce (CM) and Toronto-Dominion (TD) on December 2, Royal Bank (RY) and Bank of Nova Scotia (BNS) on December 3, Bank of Montreal (BMO) and Canadian Western (CWB) on December 7, and Laurentian Bank (LB) closing out reporting on December 8.

• Scotia Capital’s earnings estimates are highlighted in Exhibit 1, consensus earnings estimates in Exhibit 2, and conference call information in Exhibit 3.

Fourth Quarter Earnings – Sluggish – Moderate Growth

• We expect fourth quarter operating earnings to increase 6% year over year (YOY) and 5% sequentially (partial recovery in trading revenue). We expect retail banking earnings growth to begin to slow, with wholesale earnings remaining weak, although partially rebounding from the previous quarter. We also expect wealth management earnings to improve.

• Earnings growth YOY is expected to be led by CWB, BNS, NA, CM, and LB at 26%, 20%, 16%, 16%, and 16%, respectively. On a quarter-over-quarter (QOQ) basis, RY should have the biggest rebound at 14%, but the weakest YOY down 7%, as it is up against tough comps.

• We believe dividend increases are possible this quarter, which would be the first increases in two years. This is the longest dry spell for dividend increases since 1957. The release of Basel III capital requirements and the OSFI advisory removing Capital Conservatism has paved the way for increases – payout ratios permitting.

• In terms of dividend payout ratios, CWB, LB, NA, and to a lesser extent, TD, have an opportunity to increase their dividends. We expect CWB, LB, and NA to announce increases of 18%, 11%, and 10%, respectively (see Exhibit 4). TD could surprise with a 7% increase, but it is unlikely. The other banks, we expect, need some earnings growth and greater clarity on earnings for 2011 and 2012, given their payout ratios are above their target ranges.

• Earnings and payout ratios, we believe, are constraining dividend growth, not capital, as our pro forma Tier 1 common at the end of fiscal 2010 is estimated at 8.9%, and given the transition period, will be far in excess of minimum requirements, including proposed and possible capital buffers. Tier 1 common could reach over 13% by 2018. Also, it is important to note that a 5% dividend increase only consumes 5 bp of capital, and if Canadian banks are generating well over 200 bp per annum or 100 bp even assuming a 50% payout ratio, this capital consumption is a moot point.

• Banks’ fourth quarter earnings are expected to be solid but sluggish compared to past cycle recoveries as the last half of 2010 has been negatively impacted by weak wholesale earnings, especially compared to the record wholesale earnings in fiscal 2009. Also, the recovery in Canadian banks’ net interest margin has stalled in the past few quarters. Retail banking earnings are being driven by volume growth, which is slowing, and operating leverage.

• The banks’ overall net interest margin could be under some renewed pressure with higher BA costs, a flatter yield curve, and increased retail bank price competition. The positive impact of higher short-term interest rates takes time to filter through, and there are offsetting pressures. Volume growth slowing is expected to keep pressure on pricing. The residential mortgage GIC spread (posted) in both the one- and five-year term has declined meaningfully in Q4, even from Q3 levels. This is the biggest breakdown in posted spreads since 1982. The caveat is that drawer rates have become more of a factor in the past 10 years; nevertheless, this may be a signal of more aggressive competition.

• Wholesale banking earnings are expected to remain weak, although we expect a partial recovery in trading revenue to $1.9 billion versus $1.2 billion in the previous quarter, but significantly below the $2.9 billion level a year earlier. We expect sequential partial trading revenue recoveries from BMO and RY. Underwriting and advisory revenue is expected to be down YOY and QOQ.

• Credit trends remain positive, with gross impaired loan formations declining. Loan loss provisions are generally declining but lumpy and are expected to be up slightly sequentially, but down 31% YOY to $1.7 billion and expected to remain in the 50-60 bp range, with further declines expected to begin again in 2011.

• International earnings should begin to improve, as the drag from the high C$ is declining. The C$ has appreciated 4% YOY in Q4 vs. 9% YOY in Q3 and a peak of 21% YOY in Q2. The C$ appreciation QOQ is only 1% and we expect the C$ drag to be de minimis going forward. Notwithstanding the currency, International earnings improvements are expected to be modest.

• Quarterly earnings variables (see Exhibits 5, 6, and 7) remain mixed this quarter, with positives such as lower bond yields, higher prime savings rate spread, higher fixed income underwriting, higher equity trading volume, and higher mutual fund assets, offset by negatives such as flatter yield curve, slightly lower wholesale spreads, substantially lower posted mortgage GIC spreads, higher short-term funding costs (BAs), lower equity underwriting, and weaker M&A activity.

• Bank profitability this quarter is expected to remain solid, although with a lower return on equity at 16.3% due to continued wholesale banking weakness, net interest margin pressure, and deleveraging. However, on RRWA, profitability is expected to hit a new high of 2.20%.

• Bank earnings beat Street expectations for most of fiscal 2009 and the first quarter of 2010. However, Q2/10 earnings marked the first quarter since the earnings recovery began in which banks did not exceed expectations, with Q3/10 being weaker than expected.

• We expect another soft quarter, as we believe earnings estimates are still a little aggressive given the slowdown in capital market (including Euro Crisis hangover), low growth, and increasing retail banking competition. BMO, CM, and NA are back competing strongly in the retail space, and non-traditional players are entering the market.

• We believe that CM and NA (aided by dividend increase) will have the best share price momentum post the quarter and TD should also recover from its weak relative performance since third quarter results. We expect BMO and RY trading revenue to recover somewhat, but we believe earnings estimates are too aggressive and valuations susceptible to some retracement.

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

Valuations Attractive – High Dividend Yield

• Bank valuations remain very attractive with a dividend yield of 3.9%, which is 126% of the 10-year bond yield and 172% of the TSX dividend yield versus historical means of 59% and 145%, respectively. The bank earnings yield relative to corporate bond yields is 179% versus the historical mean of 131%.

• Bank P/E multiples, we believe, are attractive at 11.5x 2011 earnings estimates and are poised for expansion. In our opinion, bank P/E multiples have formed a base and support at 12x, which we expect will expand to the 15x-16x range, similar to the post-2002 cyclical recovery. The resumption of dividend growth is expected to be the catalyst for higher P/E multiples.

Maintain Overweight – Dividend Increases Needed to Fuel Rally

• Bank share price performance has been muted in the past quarter based on sluggish earnings, concerns about the economic recovery, and nervousness about sovereign debt, as well as a hot commodity market. Investor interest in bank stocks have fallen off a cliff, with commodities in vogue, which has coincided with bank stocks not participating in rallies but showing modest but continual weakness in pullbacks. These have not been positive signs for the overall market in the past.

• We believe bank fundamentals are strong and valuations are attractive; however, we continue to believe that the key catalysts for a sustained rally in bank stocks and higher P/E multiples are dividend increases.

• We are hopeful that banks that can increase their dividends this quarter will do so, rather than having a wait-and-see approach (Q1/11 or Q2/11).

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

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RBC Investor Day

Scotia Capital, 28 October 2010

Royal Bank Investor Day - Canadian Banking

• Royal Bank (RY) held an Investor Day yesterday focusing on its Canadian Banking segment. The bank highlighted its track record of outperformance and leading market position, breadth of distribution network and cross-sell ability, and operational efficiency as key areas for the bank in light of the potential for slower volume growth and moderating economic outlook.

Outperformance and Leading Market Position

• Canadian Banking earnings have grown at a CAGR of 10% from 2005-2009 and in 2010 YTD are up 17%.

• In terms of market position, RY highlighted it was #1 in business loans and deposits (next competitor 700 bp behind), consumer lending, and personal investments, and #2 in personal core deposits.

• RY's solid operating performance and market leading position have provided RBC with one of the world's top 50 globally recognized brands (ahead of Mercedes, Pepsi, Nike, and MasterCard). RY believes that this brand stature will allow the bank to remain top of mind with consumers and help the bank achieve its 25% above-market volume growth target.

Breadth of Distribution Network and Cross-Sell Ability

• RY currently has the most branches in Canada, the largest ATM network and active online customer base, which they believe is the largest most integrated distribution network in the country. RY plans on increasing hours and days of business by 15%, opening 20 new branches in 2011, and creating new online and mobile banking functionality.

• RY believes that its scale advantage, depth of product lineup, and channel capabilities, will provide the cross-sell opportunities and sales power to acquire and deepen relationships to drive top line growth despite the industry headwinds.

• RY also unveiled a new prototype of RBC branches, which will be vastly different from the current typical retail outlet. RY's new branch concept will move tellers to the back area of the branch and use the front area to showcase new products and technology, with a goal of attracting non-customers as well as regulars into the branch.

Operational Efficiency

• RY highlighted its better-than-average efficiency ratio, which has been driven by revenue growth and spend control. RY continues to invest in driving further efficiencies and has targeted an efficiency ratio in the low 40s in the medium term, which they believe will help deliver market leading growth at a lower cost.

• RY's plan to achieve market leading efficiency is the following:
1) Simplifying its product offering, policy and procedures to enhance sales capacity by making it easier for clients and staff.
2) Streamlining internal processes to provide opportunities to significantly lower costs.
3) Optimizing internal resources to liberate sales time and enhance sales capacity.

Recommendation

• Overall, the presentations were positive.

• We believe that RY's Canadian Banking segment has a very strong operating platform and is well positioned particularly, in light of the moderating economic outlook. However, our overall near-term concerns remain RY's cost structure in Wholesale Banking given lower capital markets activity, lack of earnings out of the U.S. (retail), and low profitability of Wealth Management.

• We maintain our 2-Sector Perform rating based on decline in relative profitability and near term earnings risk.

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CIBC Investor Forum

BMO Capital Markets, 1 October 2010

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

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

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Scotia Capital, 1 October 2010

Summary CIBC Investor Forum - Retail Markets

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

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

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

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

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

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

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

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

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

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

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

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

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Barron's on TD Ameritrade

Barron's, Sandra Ward, 18 September 2010

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Did somebody say animal spirits?

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

Review of Banks' Q3 2010 Earnings

Scotia Capital, 13 September 2010

Event

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

Implications

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

Recommendation

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

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

Earnings Miss – First of Recovery – Tough Comps

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Third Quarter Highlights

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

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

Domestic Banking & Wealth Management – Strong

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

Wholesale Banking Earnings Weak

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

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

Trading Revenue Collapses

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

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

Net Interest Margin Declines QOQ

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

Credit Losses Decline

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

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

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

Gross Impaired Loan Formations Decline

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

Gross Impaired Loans Stable

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

Capital Ratios Remain High

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

Profitability

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

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Dow Jones Newswires, Caroline Van Hasselt, 9 September 2010

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

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

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

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

But Canada still lags on plenty of other indicators.

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

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

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

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

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

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

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