Preview of Banks' Q3 2013 Earnings

Scotia Capital, 19 August 2013

Banks begin reporting third quarter earnings on August 27. We expect underlying operating earnings to increase 4% YOY and 3% QoQ. Our earnings estimates are in line with consensus. ROE 17.0% (18.0% excluding TD), RRWA at 2.25% (2.31% excluding TD).

Implications

• We expect Wholesale earnings to remain strong, up slightly both sequentially and YoY. Domestic/Retail Banking earnings are expected to remain resilient although growth is slowing, with Wealth Management earnings expected to be strong, aided by AUM growth. Wholesale is expected to be benefit from solid fixed income underwriting, strong equity underwriting, and continued strength in corporate lending.

• We expect TD, BNS, RY, and BMO to increase their dividends 4%, 3%, 3%, and 2%, respectively.

• Bank P/E multiples, we believe, are very attractive at 11.2x and 10.2x our 2013E and 2014E EPS. We believe housing concerns and short interest are muting bank valuations and P/E expansion. We expect Canadian bank P/E multiples to hit 15x trailing in 2015 as systemic risk continues to decline, housing concerns moderate, and investors chase banks' high dividend yields.

Recommendation

• We maintain our overweight Canadian banks versus the TSX and our overweight U.S. banks versus Canadian banks recommendations.

• We maintain CM as our FS; an SO rating on RY; SP ratings on TD, BNS, NA, CWB and LB; and SU rating on BMO.

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Why Canada Can Avoid Banking Crises & the US Can’t

The Wall Street Journal, Victoria McGrane, 9 April 2013

Since 1790, the United States has suffered 16 banking crises. Canada has experienced zero — not even during the Great Depression.

It turns out Canada can thank the French for their stable system, according to a paper by Columbia University’s Charles Calomiris, presented at the Atlanta Fed’s 2013 Financial Markets Conference.

When it became a British colony, the majority of Canada’s population was of French origin — and the French inhabitants hated the British government.

So to keep the colony firmly within the Empire, British policymakers steered toward a government structure that would limit the power of the French-majority while also giving Canada more and more self-government. The eventual result was a highly-centralized federal government which controlled economic policy making and had built-in buffers for banker interests against populist forces, the paper argues.

That anti-populist political system — known in political science as liberal constitutionalism or liberal democracy — is a key ingredient in Canada’s stable banking track record, Mr. Calomiris contends in his paper, which is a summary of a much longer book he’s written with Stephen Haber due out in September. That’s because this kind of political system makes it difficult for political majorities to gain control of the banking system for their own purposes, the authors contend.

Populist democracies like the U.S., on the other hand, tend to create dysfunctional banking systems because a majority of citizens gain control over banking regulation that steers credit to themselves and to their friends at the expense of the citizens that are excluded from the banking system, he said.

The contrast between the U.S. and Canada was part of Mr. Calomiris broader argument that dysfunctional banking systems — which are by far the norm rather than the exception around the world — are the result of political factors.

“Whether societies have dysfunctional banking systems is really not a technical issue at all. It’s a political issue,” Mr. Calomiris said at the conference, introducing his premise as “we do know how to avoid dysfunctional banking but that we make political choices – you might even say consciously” not to have functional banking systems for most of the modern era in most countries of the world.

The history of the U.S. banking system is one in which the government forms partnerships with different interest groups at different points in history, and those coalitions jointly influenced the way the banking system was regulated, Mr. Calomiris argues.

“In populist democracies, such as the United States, the regulation of banking is used as a political tool to favor some parties over others. It is not that the dominant political coalition in charge of banking policy desires instability, per se, but rather, that it is willing to tolerate instability as the price for obtaining the benefits that it extracts from controlling banking regulation,” he writes in his paper.

Backing up their argument: Only six countries – including Canada — have been crisis-free and at the same time have banking systems that provide abundant credit. Three of these – Singapore, Malta and Hong Kong – are small, island-bound city-states where the homogeneity of the population makes it politically difficult to create losers. The other three – Canada, Australia and New Zealand – all share histories of liberal democracy.

Mr. Calomiris argues that in the U.S., a coalition that emerged in the 1990s of government, big banks and activist consumer groups came helped fuel the housing crisis. Regulatory changes opened the door to a wave of mergers and acquisitions that created today’s megabanks. But banks still had to get approval – usually from the Federal Reserve – to complete those mergers and outside groups were able to weigh in on the wisdom of the deal as part of the Fed’s decision-making process.

Community groups, with the Clinton administration’s encouragement, used the Fed’s approval process to extract binding concessions from banks to loosen underwriting standards for poor, urban communities – concessions to which the Fed agreed, Mr. Calomiris argues. The banks had to apply the looser standards to everyone. That helped fuel an explosion in poorly underwritten mortgages that contributed to the depth and severity of the housing crisis, he contends.

All in all, Mr. Calomiris’ theory is a bleak one for the ability of financial reform efforts to make much of a difference.

“Smart economists with their regulatory ideas are sort of dead on arrival,” he said. “Political coalitions will decide — not whether you’ve got the right VAR model — [but] whether a banking system is going to be set up with rules that will lead it to be stable and have abundant credit or not.”

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TD Bank’s US Expansion Hasn’t Come Cheap

The Globe and Mail, Scott Barlow, 5 April 2013

The impending ascension of Bharat Masrani to the CEO chair at Toronto-Dominion Bank underscores the strategic importance of U.S. operations for the company as a whole, and provides an excellent opportunity to assess just how well TD Bank’s $17-billion (U.S.) foray into foreign territory is going.

The bottom line: It still faces considerable challenges. While U.S. expansion provides the bank with a useful counterbalance to its Canadian base, the venture is – for now – still a work in progress.

One question: can TD Bank maintain loyalty among its U.S. consumers? The Wall Street Journal recently published a brief report highlighting increasing customer dissatisfaction at its U.S.-based branches.

Meanwhile, return on equity (ROE), the most widely used measure of a bank’s profitability, has been running at about eight per cent per year on the company’s approximately $17-billion in U.S. acquisitions since 2004. This pales in comparison to TD Bank’s overall ROE of 14.8.

To be fair, the consumer data highlighted by the Journal is anecdotal and an ROE of eight per cent is perfectly acceptable for a relatively new expansion. But what does seem clear, with the benefit of hindsight, is that TD Bank paid a generous price for its primary U.S. assets.

The broader U.S. banking sector currently trades at an average price-to-book value of 1.2 times, according to Bloomberg data. TD Bank’s two major acquisitions south of the border, Banknorth Group Inc. in 2004 and Commerce Bancorp Inc. in 2007, were completed at far higher book value multiples of 2.6 and 2.8 times, respectively.

TD Bank spokespeople emphasize that the bank’s U.S. acquisition strategy is part of a long term initiative and that it was not trying to time the market when it made its U.S. purchases. Nonetheless, management can’t be thrilled with the evolution of U.S. book value multiples.

According to Brad Smith, analyst and head of research at Stonecap Securities, TD Bank’s U.S. operations have also required considerable financial support from the Canadian parent company. He estimates that TD Bank, N.A., the U.S. based holding company under which the bank’s U.S. operations legally sit, have required approximately $8.6-billion in loans – one assumes on favourable terms – from Toronto.

Mr. Smith also notes that the U.S. regulatory environment is likely to change. Foreign-owned bank holding companies south of the border are currently exempted from the U.S. regulatory system. But under the Collins Amendment, part of the Dodd Frank Financial reform bill, this exemption will end in 2015.

TD Bank spokespeople are correct in pointing out that rule changes will not be certain until the legislation is fully implemented. But under the Collins Amendment, TD Bank, N.A. would have to double its level of tier 1 capital to be considered “well capitalized” by U.S. regulators.

Mr. Masrani, who has been group head of U.S. personal and commercial banking, is well aware of all these issues, and he’s backed by a deep management team that has proven remarkably adept at running the bank’s Canadian operations.

Barring another financial-sector catastrophe, TD Bank N.A.’s balance sheet and its profitability are likely to improve as trust in the U.S. financial system is restored. The question is how high the upside is for the bank’s U.S. arm. To date, blind faith in the bank’s ability to repeat its domestic success in the U.S. appears misplaced.

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TD Bank Faces Loss of Luster

The Wall Street Journal, Suzanne Kapner, 3 April 2013

For two decades, Joanny Campbell of South Philadelphia was satisfied with her bank.

Then her lender, New Jersey's Commerce Bank, was acquired by TD Bank NA, a unit of Toronto-Dominion Bank of Canada. The parent company had no U.S. locations as recently as 2000 but now operates the ninth-largest U.S. bank by assets, a major player in large cities including New York and Boston.

Unhappy with customer service, Ms. Campbell closed her TD account late last year.

"The Commerce employees called me by name," said the 38-year-old Ms. Campbell. "The TD employees didn't know me, and they didn't care to know me."

A TD Bank representative declined to comment on specific interactions with customers.

Ms. Campbell's decision to find a new bank highlights the challenges facing TD as it looks to build on an expansion nearly unmatched in the banking industry, at a time of slow economic growth, profit-crunching low interest rates and intense competition.

The company bills itself as America's Most Convenient Bank, with unusually long hours and many branches open every day except New Year's Day, Easter, Thanksgiving and Christmas. Its branch count has surged 23% in the past five years, a time in which many other large lenders have retrenched.

Toronto-Dominion said Wednesday that the architect of its U.S. expansion, Chief Executive Ed Clark, will retire next year and be succeeded by Bharat Masrani, TD's U.S. head of personal and commercial banking, who has pledged to keep the company expanding.

"If there are three banks on each corner of an intersection and the fourth corner is unoccupied, we would love to have that corner," Mr. Masrani told The Wall Street Journal in January.

But TD's profitability has lagged behind that of many of its peers, and the company's once-sterling reputation for customer service has declined since the 2008 purchase of Commerce.

Although TD Bank NA's net income increased 14% in 2012, to $775 million, compared with $681 million earned the prior year, 90% of its peer group earned more, according to the Federal Deposit Insurance Corp. TD says the numbers reflect in part its low-risk strategy.

Toronto-Dominion avoided getting hit in the U.S. mortgage meltdown, thanks to its conservative lending practices. But some analysts say competition has intensified now that large U.S. rivals have recovered from the crisis.

"It was easier to take share away when competitors were struggling," said Brian Klock, an analyst with Keefe, Bruyette & Woods. "Now, the competition has woken up, and it's going to be a tougher fight."

Mr. Masrani said he is satisfied with TD's performance relative to other banks. "I feel as long as we grow our franchise in the U.S., the returns will take care of themselves," he said Wednesday.

Both Commerce and TD were known for their attention to customers. TD retained some popular Commerce practices, operating coin counters known as Penny Arcades and giving customers pens, dog biscuits and lollipops.

But the products and pricing changed. TD increased minimum-balance requirements on some accounts and started charging for out-of-network ATM use. And it made no apologies about aggressively peddling mortgage and credit-card loans to account holders, a practice known as cross selling that Commerce eschewed.

Some customers have taken to websites Consumeraffairs.com and MyBanktracker.com to complain, using the word "hate" to describe their feelings about what TD has done to Commerce.

TD executives say then-and-now comparisons are unfair given that the environment in which Commerce once operated differed from the low-margin banking world of today.

"With margins compressed, you have to do something," said Linda Verba, TD's executive vice president of retail operations and service programs. Rather than being annoyed by TD's attempts to cross sell, Ms. Verba said, "customers want us to tell them what we have to offer."

TD ranked at the top of its class in customer satisfaction surveys compiled by J.D. Power & Associates, a West Lake Village, Calif., research firm, for four straight years in the 2000s. But TD hasn't held the honor since 2009.

Mr. Masrani acknowledged that TD made mistakes in its $8.5 billion purchase of Commerce, including a botched attempt to transfer data that prevented customers from checking their account information online for two days.

"When you bring banks together, there are cultural things that you have to overcome," Mr. Masrani said in January. A TD spokeswoman added Wednesday that the bank has retained the vast majority of customers it inherited from Commerce.

TD recently opened its 100th branch in New York City, making it the sixth-largest lender in the Big Apple by retail outlets and the fifth by a measure of retail deposits known as capped deposits. TD has plans to open 50 more branches in New York City and become No. 3 in capped deposits by 2015. Similar expansions are planned for parts of Florida and Boston.

Mr. Masrani said in January he isn't worried by the competition: "When they are closed, we'll be open."

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CIBC’s Stay-at-Home-Strategy Could Prove Costly

The Globe and Mail, Sean Silcoff, 3 April 2013

With Toronto-Dominion Bank CEO Ed Clark announcing his impending retirement, it’s too early to declare TD’s big bold foray into U.S. retail banking a success – returns are still low and it has yet to prove it can increase its relatively weak loan business. But looking ahead, few would doubt the wisdom of diversifying out of Canada, at a time when a long runup in the growth of household debt appears to be peaking.

If a solid Canadian economy and ever-growing borrowing by Canadians has lifted all Big Five banks for years, a receding one will split them into two groups: TD, Bank of Nova Scotia and Bank of Montreal, which are more heavily exposed to growing retail banking operations in the U.S., Latin America and Asia and poised to do better; and Royal Bank of Canada and Canadian Imperial Bank of Canada, which are much more exposed to Canada.

But among the second tier, CIBC would likely stand alone as the clear underperformer in the Canadian recession scenario. Poor CIBC earned a reputation last decade as the bank most likely to run into sharp objects. Then CEO Gerald McCaughey committed to make it the most risk-averse bank of the Big Five by retreating largely to its home market.

Unfortunately, CIBC might have to dust off the Kick-Me sign once again. The low-risk strategy seems destined to put CIBC at the greatest risk among its peers of suffering the worst effects of a drifting Canadian economy, should that happen. Fully 66 per cent of CIBC’s estimated earnings for 2014 will come from the Canadian personal and commercial banking sector – the next highest is Royal at 52 per cent, TD and BMO in the low 40s and Scotia at 29 per cent, according to National Bank Financial analyst Peter Routledge. About half of CIBC’s total assets are loans to households, compared to about one-third or less for other banks.

The biggest risk is CIBC’s credit card portfolio, which stood at $14.8-billion as of Jan. 31. That only amounts to about 6 per cent of the bank’s outstanding loan book, but that is much higher than other banks and accounts for more than 15 per cent of its profits, Mr. Routledge estimates. Typical credit card losses in the 3 to 4 per cent range could easily double in bad times, taking a big bite out of profits. Commercial loans would also likely take a relatively bigger hit than other Canadian banks.

Fear not, this wouldn’t be a crisis situation: CIBC’s earnings growth rate would flag but its capital situation wouldn’t be threatened. Even the worst of the Canadian banks is still a solid performer by many standards. The difference is that three of them have figured out strategies to grow beyond Canada and create substantial long-term value by deploying their capital adventurously. RBC won’t be far behind. At some point, CIBC will have to have to find ways to do the same. The head-in-the-sand strategy worked for a while; perhaps a Canadian recession will prompt CIBC to take a second chance at becoming a first-tier bank again.

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BMO Q1 2013 Earnings

Scotiabank, Global Banking and Markets, 27 February 2013

Event

BMO cash operating EPS increased 7% YoY to $1.52, beating street expectations. The $1.52 includes $0.06 per share related to recoveries on M&I purchased credit impaired loans versus $0.13 per share in the previous quarter and $0.13 per share last year. BMO also announced a 3% annual dividend increase to $2.96 per share from $2.88 per share.

Implications

• Earnings growth was driven by strong U.S. P&C results as credit losses declined; continued strong Wholesale banking earnings driven by solid trading revenue and very strong underwriting and advisory fees, and solid performance in PCG. Lower PCLs in P&C Canada also contributed to earnings growth.

• Wholesale Earnings remained strong, declining a modest 2% from the strong Q4/12, and increasing 38% YOY. P&C Canada earnings increased 4% as solid volume growth of 9% YOY and lower PCLs, helped offset margin compression, with NIM declining by 27 bps YOY and 3 bps QOQ.

• Operating ROE: 14.8%, RRWA: 1.86%, CET1: 9.4%.

Recommendation

• Our 2013E and 2014E EPS are unchanged at $6.20 and $6.60 per share, respectively. We are increasing our one-year target price slightly to $70 from $66 supported by higher dividend. Maintain Sector Underperform based on high relative P/E multiple given its low relative profitability.

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Moody's Downgrades 5 Canadian Banks by One Notch

Scotiabank, Global Banking and Markets, 29 January 2013

Event

• Moody's downgraded the credit ratings of BMO, BNS, CM, NA and TD by 1-notch. The outlook for the banks was set to Stable.

• The downgrades were expected as Moody's had placed the five banks on review for downgrade on October 26th 2012.

Implications

• Moody's highlighted the increase in house prices in Canada, high consumer indebtedness, downside risks to the Canadian economy, and risks inherent in capital markets activity as factors for the downgrades.

• However, Moody's acknowledged the credit strength of Canadian banks, supported by the strength and stability of the earnings generated by their domestic retail banking franchises.

• Despite the downgrades, Canadian banks remain amongst the highest rated banks globally.

Recommendation

• The downgrades are a continuation of the trend by credit rating agencies in downgrading the global banking sector, with RY previously downgraded by Moody's in June 2012.

• We view the downgrades as mildly negative, with no impact on cost of funds and bank share prices. The concerns highlighted by Moody's have been the cause of headline risk for Canadian banks and, we believe, have been fully reflected in bank valuations.

• Maintain Overweight recommendation.

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TD Bank Makes Big Money Off Real Estate Banking

The Globe and Mail, Tim Kiladze, 10 December 2012

The hot real estate market is boosting the fortunes of Toronto-Dominion Bank.

More than any other Canadian bank, TD has tied itself to the real estate market, ramping up corporate lending to the sector and cashing in on a flurry of equity offerings for real estate investment trusts.

As of early December, the bank’s capital markets arm ranks third in the overall equity league tables, according to Bloomberg, but has the highest share of real estate equity deals, topping even league table leader RBC Dominion Securities. In calendar 2012, TD’s share of equity offerings – after splitting co-lead status amongst all bookrunners – is about $1.6-billion. RBC’s share, which is the second highest, is just north of $1.4-billion.

The same story played out last year, as real estate underwriting helped drive TD to the top of the equity league tables.

TD can thank the Dundee family of REITs for its success. Nearly two-thirds of TD’s $1.6-billion share of real estate deals came out of Dundee REIT, Dundee International REIT and Dundee Industrial REIT.

But the bank is also heavily weighted to real estate in its corporate lending book. As of fiscal year end, TD had about $33-billion in loans outstanding to real estate companies, comprising 31 per cent of its total corporate and government loan book. That’s the highest total and percentage in the Big Five. Bank of Nova Scotia’s loans are more heavily skewed to financial services and retail, while Bank of Montreal’s are more heavily weighted toward service industries and manufacturing.

RBC – TD’s biggest rival – currently has about $21-billion of loans outstanding to real estate companies, comprising about 23 per cent of its corporate lending book.

The question now is how much longer the strength will last. While the real estate sector in Canada has been incredibly hot and retail investors still can’t get enough of their REITs, every sector has its ebbs and flows. Nothing stays hot forever. Just look at the dearth of mining deals for proof.

However, on the corporate lending side, about 30 per cent of TD’s real estate loans are to U.S. companies. Expanding that business could pay off if the U.S. real estate recovery takes shape the way so many people expect it to.

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Behind Scotiabank's Global Push

The Wall Street Journal, Caroline Van Hasselt, 5 December 2012

Canadian bankers haven't been shy about seizing on the global financial crisis, snapping up assets from U.S. and European peers scrambling to raise cash. None have done so as aggressively as Rick Waugh, chief executive of Bank of Nova Scotia.

The bank is Canada's third-largest by assets, often overshadowed by its bigger and better-known competitors, Royal Bank of Canada and Toronto-Dominion Bank. RBC is pushing to build a world-class investment-banking franchise, while TD Bank has focused on US growth.

But in recent years, Scotiabank has quietly bought up an international portfolio of personal- and commercial-banking assets far surpassing those competitors, while bolstering its retail presence in Canada. Over the past five years, Mr. Waugh has clinched 30 acquisitions, valued at more than $15 billion, by the bank's estimates.

The buying binge puts Scotiabank at No. 2 in the world, behind U.S. Bancorp, in the number of banking deals since 2007, according to Dealogic. It ranks No. 5 for the period, by value, counting only disclosed deals.

"They have really said, 'We are going to be an international bank and be in a position to take advantage of the growth of emerging markets,'" said Paul Cantor, the former chief of National Trust Co., a Canadian lender that Scotiabank bought in 1997.

The overseas acquisitions have helped boost revenue and profit at a time when Scotiabank — which reports quarterly results Friday — and its Canadian peers have struggled to offset weak capital-markets and wealth-management profits. Domestic, retail-banking profits have been strong, but after several years of low interest rates here, Canadians have loaded up on debt. Many economists say they are now tapped out, with lending recently shrinking. Banks have looked abroad for new growth.

Revenue from Scotiabank's international personal and commercial banking surpassed its Canadian banking revenues last quarter for the second quarter in a row, though the domestic unit remains more profitable. The international unit accounted for 26% of the bank's net income last quarter. Overseas profits have grown 46% since 2007, outstripping the domestic retail division's 30% profit growth over the same period.

Mr. Waugh closed his biggest deal — the 3.1 billion Canadian dollar ($3.16 billion) purchase of ING Groep NV's Canadian unit—just a few weeks after elevating a longtime Scotiabank executive as president. That lieutenant is now widely tipped to take over as CEO in as little as a year's time.

Nearing the end of his tenure, the 64-year-old Mr. Waugh (who turns 65 later in December) has more than doubled the bank's assets to some $700 billion since taking over in 2003. Most of that increase has come in the years following the economic crisis.

Mr. Waugh, in an interview, says his push is an extension of the bank's longtime overseas-focused strategy, based on conservative and local personal and commercial businesses.

"It's very straightforward and conservative, but underpinning it is diversification," he said. "It's having the right risk appetite and staying to your fundamental business."

Mr. Waugh has tended to pick off assets in countries from the Caribbean, where the bank has long had a foothold, to emerging markets from Mexico and Brazil to Vietnam and Thailand. His purchases have come from the likes of BNP Paribas SA, Royal Bank of Scotland Group PLC, and Commerzbank AG, as those banks sought to shore up capital or repay government bailouts.

Scotiabank has also moved aggressively into China, agreeing last year to purchase a 20% stake in Bank of Guangzhou. And the bank already has an 18.1% stake in Xi'an City Commercial Bank and owns a 33% stake in a joint-venture fund-management company with Bank of Beijing Co.

But the strategy also carries risks, tethering the bank's fortunes more than many of its peers to the developing world. "It remains to be seen whether by going into all these different countries, whether that's going to pay off well," said Stephen Jarislowsky, chief executive of Jarislowsky Fraser Ltd., one of Scotiabank's largest investors.

After Mr. Waugh's first job as a Scotiabank teller in a strip mall in his hometown of Winnipeg, he quickly rose up the ladder. He moved to Scotiabank headquarters in Toronto, and then around the bank in several, increasingly senior positions — a way the bank's top management has long tested rising stars.

After taking over international and wealth management in 1998, he impressed then-CEO Peter Godsoe by focusing his energies looking for overseas expansion potential, instead of the domestic market. Mr. Waugh is known to preside over marathon meetings, debating and poring over details of potential deals. He's also notorious for mangling names and phrases and mixing metaphors, malapropisms that have come to be known inside the bank as "Rick-isms."

Despite his push to set Scotiabank up for the future, Mr. Waugh holds on to some of the 180-year-old's bank old-world traditions. He marks up documents in red — a carry-over from a Scotiabank tradition of identifying senior managers' input in paper work by the color of their pencils. His expected successor—Brian Porter, who took on Mr. Waugh's title as president on November 1 — uses brown.

Scotiabank was set up in Halifax, the capital of the Canadian province of Nova Scotia, almost two centuries ago. It financed trade in sugar, rum and fish between the West Indies, the U.K. and Canada. It opened an office in Kingston, Jamaica, in 1889, eight years before opening a branch in Toronto. It now operates more branches overseas than in Canada.

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28 Global Systemically Important Financial Institutions (GSifi) List

Financial Times, Brooke Masters, 2 November 2012

Standard Chartered and BBVA have joined the global banks that will be required to hold extra capital because of their importance to the world financial system, the Financial Stability Board announced on Thursday.

Lloyds Banking Group, Commerzbank and Dexia, have dropped off the list of 28 'global systemically important financial institutions.' Dexia is being restructured and Lloyds and Commerzbank are shrinking.

Banks on the list will be required to hold additional capital equal to between 1 per cent and 2.5 per cent of their assets, adjusted for risk, on top of the Basel III minimums, for a total ratio of 8 per cent to 9.5 per cent, starting in 2016.

The Financial Stability Board, made up of regulators, central bankers and representatives of international bodies, plans to update its list of GSifis every November, and the methodology for determining which banks are systemic will also be reviewed every three years.

Currently, banks make the list based on their size, riskiness and importance to the broader financial system.

This year’s announcement also marks the first time regulators have officially stated how big the surcharges will be for each bank.

Previously the expected surcharges were based on estimates.

Citigroup, Deutsche Bank, HSBC and JPMorgan Chase were hit with the top charge of 2.5 per cent.

Most of the banks were on last year’s list and have either boosted their capital ratios or made plans to do so in time to meet the FSB deadline. Both Lloyds and Standard Chartered already have to meet UK requirements, which are stiffer than the global rules.

The GSifi banks and their regulators have also been required to draft “recovery and resolution plans”, also known as “living wills”, that lay out how they could be stabilised or shut down in a crisis.

The FSB said on Thursday that “considerable but uneven progress” had been made.

Cross-border “crisis management groups” of national regulators have been set up for most banks and they have begun reviewing the “recovery” part of the plans, which focus on which business lines could be sold to avoid insolvency.

The FSB said regulators hope to come up with windup strategies for each GSifi bank by the end of the year, with operational plans to follow later.

The full list of banks and surcharges is below:

2.5%
Citigroup
Deutsche Bank
HSBC
JPMorgan Chase

2.0%
Barclays
BNP Paribas

1.5%
Bank of America
Bank of New York Mellon
Credit Suisse
Goldman Sachs
Mitsubishi UFJ FG
Morgan Stanley
Royal Bank of Scotland
UBS

1.0%
Bank of China
BBVA
Groupe BPCE
Group Crédit Agricole
ING Bank
Mizuho FG
Nordea
Santander
Société Générale
Standard Chartered
State Street
Sumitomo Mitsui FG
UniCredit Group
Wells Fargo

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Who’s In Line to Run Canada’s Banks

The Globe and Mail, Boyd Erman, 31 October 2012

Go for lunch with a bank analyst or any major investor, and odds are one big question will come up: Who is in line to run each of Canada’s major banks when the current boss steps aside?

The job of bank CEO fascinates, because of its high profile at the centre of the Canadian economy, and quite frankly, its huge paycheque.

Bank of Nova Scotia answered the succession question on Wednesday by naming Brian Porter president, with the bank’s key operations reporting to him. It seems very clear that Mr. Porter, long expected to be the heir to chief executive officer Rick Waugh, has officially assumed the title.

But what about the other big four banks? None of them are nearly as obvious as Scotia — or even as clear as Scotia was before Mr. Porter’s promotion.

TD Bank

The background

The bank has been expanding in the United States, and is a major player in the U.S. northeast. It has long focused on retail banking, over and above areas such as wealth management and securities. That means that the likely winner in the CEO race will come from a strong retail banking background. But will it be Canada or the United States?

The incumbent

Ed Clark signalled earlier this year that he was in no hurry to leave. However, at 65, he is not going to be in the chair for another decade.

The candidates

Bharat Masrani

• Mr. Masrani been with TD since 1987, when he joined as a trainee. He has had key roles in risk and wealth management, but it his job running the bank’s huge U.S. operations that makes him a leading candidate for CEO.

Tim Hockey

• Mr. Hockey has come up through the Canadian consumer side of TD, where it is one of the dominant players. He currently runs Canadian banking. Lately, the buzz has been more around Mr. Masrani, but if the U.S. operations stumble, Mr. Hockey could become the leader.

RBC

The background

Canada’s largest bank has been on an expansion tear, adding wealth management and growing its securities and investment banking businesses. But at its heart, it’s still a retail bank. After a long period with an investment banker at the helm, there is a sense that the next person to get the CEO job may be a return to those roots in retail banking.

The incumbent

Gord Nixon has been CEO of RBC for a decade, and is only in his 50s. Like Mr. Clark, he has signalled he is no rush to leave. When he does, there are a number of potential replacements, though of late, just one has set himself apart.

The candidates

David McKay

• Mr. McKay is the head of Canadian banking for RBC, and has emerged lately as the leading candidate to replace Mr. Nixon, both in the view of those outside the bank and many inside it. His business is RBC’s biggest. He hasn’t run many other businesses, but with Mr. Nixon not likely to leave soon, the bank has time to groom Mr. McKay by adding other responsibilities to his CV.

Doug McGregor

• Mr. McGregor is one of the two co-heads of RBC’s investment banking and securities division, which has in recent years expanded from a dominant player in Canada to one that can credibly play with much larger firms in the U.S. market.

Mark Standish

• Mr. Standish is the other half of the co-head tandem in investment banking and securities. He oversees the business from New York, where most of the growth has been. The two investment bankers can take credit for turning a platform that was less than the sum of its parts into something more.

George Lewis

• As head of RBC’s wealth management business, Mr. Lewis has been at the centre of what has been a strategic focus for the bank.

CIBC

The background

CIBC has spent the past five years building a bank that could avoid the kind of mistakes that CIBC made in the credit crisis, which cost the bank billions. That included changing over many senior names in the executive suite, meaning that this is a race that could be won by someone without a long history at the company.

The incumbent

Gerry McCaughey — Mr. McCaughey was given one big job as CEO of CIBC — de-risk the bank. And he has done that admirably. The bank is now a safe, cash-generating company that is very unlikely to end up in big trouble as it has in past. But what’s next? The next person in the top job at CIBC will be charged with finding a way to grow while remaining true to the new safety-first ethos at the bank.

The candidates

Richard Nesbitt

• Mr. Nesbitt has to be considered the leading candidate. He hasn’t been with the bank long in a senior executive role, having come from exchange operator TMX Group Inc. in 2008. But he does have the advantage of having run a large financial company thanks to his role at TMX. At CIBC, he was brought in to run the securities business, but he has been progressively handed more responsibility, including being put in charge of strategy. Inside the bank, he has steadily won over doubters. He is the front-runner.

David Williamson

• Mr. Williamson is another relative newcomer to the banking business, having come from outside CIBC in the post-crisis shakeup. He first worked as chief financial officer before being named head of Canadian retail banking in March 2011.

BMO

The background

BMO is the bank that you don’t hear a lot of succession speculation about. Of the big five banks, its CEO has been in his job the fewest years, so this race has time to develop.

The incumbent

Bill Downe

Mr. Downe has made a big bet on the U.S., building up BMO’s investment banking capabilities there and paying $4-billion to buy a large bank in the midwest. So far, it’s a work in progress, but if it works, he will have differentiated his bank’s strategy and given it a growth engine that it has not had for years.

The candidates

Frank Techar

• Mr. Techar is head of Canadian personal and commercial banking, a business where BMO is not dominant but increasingly seen as more competitive.

Tom Flynn

• Mr. Flynn is the bank’s chief financial officer. The knock on him at this point is he needs experience running a business rather than just overseeing the books. But there’s time in Mr. Downe’s tenure to make that happen.

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Scotia Capital Introduces Guesstimates for Banks' 2014 Earnings

Scotia Capital, 29 October 2012

Introducing 2014 Earnings Estimates for Canadian Banks - 9.0% Growth

• We are introducing our 2014 earnings estimates for Canadian banks with expected earnings growth of 9.0% versus 7.6% earnings growth in 2013.

• We believe the bank group's profitability will remain strong in 2014 with ROE expected at 17.5%, down slightly from 18.0% in 2013. CM is expected to lead in terms of ROE at 21.0%, followed by RY and NA at 18.8% and 18.3%, respectively. We estimate RRWA to be very strong at 2.45%, up from 2.35% in 2013, with CM leading the bank group at 3.02% followed by TD and RY at 2.76% and 2.44%, respectively.

• Earnings growth is expected to be led by Wholesale banking earnings as capital markets activity normalizes and Canadian banks gain market share. Wealth Management earnings growth is also expected to be solid.

• We expect domestic Retail banking earnings growth to be 7%-8%, with moderate loan growth and stabilizing retail net interest margins. We believe cost controls will be a major focus for the banks in this segment.

• Banks with International exposure are expected to have higher earnings growth relative to domestically focused banks in 2014.

• We believe share repurchase announcements will accelerate in 2014 as the banks continue to generate excess capital at a high rate. Earnings accretion from share repurchase is expected to offset the potential for weaker-than-expected operating environment.

Increasing Our Share Price Targets for BNS, CM and RY

• We are increasing our share price targets for BNS, CM, and RY to $65, $95 and $70 from $62, $93, and $68, respectively.

Valuation Compelling - Remain Overweight

• Bank valuations remain compelling with P/E multiples very attractive at 11.4x, 10.2x, and 9.4x trailing 2013E and 2014E.

• We maintain 1-Sector Outperform ratings on TD, RY, and CM, with 2-Sector Perform ratings on CWB, BNS, and LB, and 3-Sector Underperform ratings on BMO and NA.

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Review of Banks' Q3 2012 Earnings

Scotia Capital, 5 September 2012

Event

• Canadian banks recorded strong Q3/12 results despite nervous and volatile market conditions and increasing concerns over a housing market correction and slower consumer loan growth.

• Third quarter earnings were ahead of forecasts, increasing 12% YOY and 5% sequentially. Earnings growth was led by strong Wholesale, with trading revenue surprisingly strong. Also, Retail performance was resilient, as volume growth offset modest margin pressure. International earnings were solid and lower taxes also contributed to the solid beat.

• ROE: 18.6%, RRWA 2.49%, CET1: 8.0%

Implications

• RY produced the largest beat, followed by BMO, CM, NA and TD. We are restricted on the shares of BNS.

• RY's beat was 11%, with BMO at 7%, CM at 6%, NA at 4%, and TD at 4%.

Recommendation

• Maintain Overweight recommendation based on compelling valuation, high capital and capital generation rates, superior profitability, and resilient business models.

• Reiterate 1-Sector Outperform on TD, RY, and CM. Maintain 2-Sector Perform on CWB and LB, with 3-Sector Underperform on NA and BMO. We are restricted on the shares of BNS.

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TD Bank Looks to Fill the Gap in US Banking

Financial Times, Tom Braithwaite and Tracy Alloway, 22 July 2012

An 80-year-old former games show host hammily promotes the bank with a rictus grin.

Its slogan is “America’s most convenient bank” and, with its Sunday opening hours, it has a fair claim to the title.

But although the company wraps itself in American cheesiness and service standards, it is a Canadian group, TD Bank, that is in full invasion mode.

TD’s growth in the US is part of a trend that is redrawing the map of overseas financial groups’ presence in the country.

According to interviews and an FT analysis of Federal Reserve data, the Canadians are coming in a big way. Meanwhile, some eurozone banks are packing up and many more are selling loans and shrinking as they fight fires on the home front.

For the past few years more of TD’s green and white logos have been put up in US cities as the bank opens accounts and writes mortgages, taking market share from American groups such as Bank of America. “We have completely eclipsed the US peers over that period,” says a confident Colleen Johnston, chief financial officer of TD.

In 2000 TD had $21bn of assets in the US. By 2009, after a series of acquisitions, it was at $170bn. Over the following three years, as US banks such as Bank of America struggled in the crisis and Europeans reduced their presence, TD continued to grow, reaching $251bn of assets, according to the most recent Fed data.

Today Canadian bank assets in the US stand at $654bn, outstripping French banks at $373bn, which have traditionally had a much larger presence.

BNP Paribas shares TD’s colour scheme but not its plans. Though it retains a sizeable presence in the US, with a big wholesale banking operation and a California-based retail bank, Bank of the West, the French bank has been selling assets.

“US banks get their US dollars a lot cheaper these days than the European banks,” says Guido Van Hauwermeiren, head of international coverage, who has had to rethink strategy since the eurozone crisis flared up last summer. “The train went off the track circa August last year and we have been addressing this issue ever since with high liquidity costs.”

Among its deleveraging actions, BNP has sold an energy business to Wells Fargo, one of the few large US banks healthy enough to pursue acquisitions.

While part of the impetus is the need to strengthen capital, a related factor is a lack of dollars. With huge retail operations, US banks have access to plentiful dollar funding in the form of deposits, but many eurozone competitors are reliant on the more fickle funding of money market funds.

“The money market funds that used to be big depositors with European banks took their deposits away from these institutions,” says Mr Van Hawermeiren. “That exacerbated a stress for US dollars for European banks. European banks are revisiting and deleveraging their US dollar consuming operations.”

A US-based executive for another large European bank says: “If you were to say the European banks are pulling in the size of the balance sheets, everyone and their mother is doing that since the crisis – we were criticised for being over-levered and as a liquidity risk management perspective the size of your balance sheet and how much you can actually fund is finite.”

But he insists his bank and other large competitors are trimming their sails, rather than abandoning ship: “In terms of leaving the US or not leaving the US, we would not be spending time, effort and money figuring out US regulatory reform and what we need to do to be compliant if we were pulling out."

The emergent forces in US banking are not just Canadians like TD or stronger megabanks like Wells Fargo.

Capital One, the Virginia-based lender, is another big acquirer. In the past 12 months it bought branches from HSBC and acquired ING’s online banking business.

Much of the global map is being redrawn along national lines, and even stronger groups face increased scepticism from regulators worried about crossborder banking operations.

One key question for the US banking industry is whether Chinese lenders will start to play an important role. Five years ago only $4.4bn of US assets were identified as belonging to Chinese banks. That number has soared to $63.8 billion. While that is still insignificant compared with Canada, it could be the tip of the spear.

In May Industrial & Commercial Bank of China gained US approval to purchase the US subsidiary of Hong Kong’s Bank of East Asia. It was the first time the Fed allowed a Chinese institution to buy an American bank.

Though Chinese lenders – which include the world’s biggest banks by market capitalisation – have taken only a few tentative steps in this direction so far, in time they could join their Canadian peers in the new land grab in the US.

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CIBC Q2 2012 Earnings

Scotia Capital, 1 June 2012

• CM cash operating EPS increased 9% YOY to $2.00, a solid beat.

• Operating ROE (industry high): 23.3%, RRWA (highest): 2.91%, CET1 (highest): 8.5%.

Implications

• Earnings were driven by strong results from Retail & Business Banking, up 12% YOY, with Wealth Management also solid, up 8% YOY and rebounding 23% sequentially. Wholesale earnings declined 11% YOY and 3% QOQ.

Recommendation

• Our 2012E and 2013E EPS are unchanged at $8.05 per share and $8.80 per share. Our one-year share price target is unchanged at $93 per share based on a target P/E multiple of 10.6x our 2013 earnings estimate.

• We believe CIBC has upside potential to gain market share in various retail and business banking products as it has an 18.6% market share in terms of a domestic branch network, yet only 8.1% market share in CIBC branded mortgages. Clearly the CIBC branch channel is underutilized and has significant upside potential. We reiterate our 1-Sector Outperform rating based on upside potential from retail branch network, industry high profitability and capital, large valuation discount, as well as prospects for significant accretive share buybacks.

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National Bank Q2 2012 Earnings

Scotia Capital, 1 June 2012

NA cash operating earnings increased 10% year over year (YOY) to $1.95 per share, a solid beat. NA increased its annual dividend by 5% to $3.16 per share and announced the intention to reactivate a 2% share buyback program.

• Operating ROE: 21.3%, RRWA: 2.42%, CET1: 8.0%.

Implications

• Operating earnings were strong, driven by a 14% YOY increase in Retail earnings, with strong loan growth at 12% YOY with deposit growth trailing at 4%. Retail NIM was down 7 bps sequentially to 2.19%. Wholesale earnings were relatively stable at $126 million, flat quarter over quarter (QOQ) and YOY. Wealth Management earnings were weak, declining 15% YOY, although up 8% sequentially.

Recommendation

• We are increasing our 2012E and 2013E EPS to $7.90 and $8.50 from $7.75 and $8.40, respectively, due to strong results this quarter and strong momentum in retail. Our share price target to remains unchanged at $88.

• We maintain our 3-SU rating due to high relative valuation versus its earnings mix, although the bank has done an excellent job of sustaining its earnings with low volatility.

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Scotiabank Q2 2012 Earnings

TD Securities, 30 May 2012

Yesterday, before the open, the bank reported Core Cash (f.d.) EPS of $1.18 versus TD Securities at $1.15 and consensus of $1.15.

Impact

Neutral. It was a reasonable quarter, in our view, with some gives/takes in the underlying composition. Domestic P&C was strong and Wealth was steady while Wholesale was a bit outsized. International was a bit light, but it continues to post strong growth. Credit was also very well behaved. We trimmed our estimates slightly mainly around the outlook for Wholesale, and our Target Price is down slightly. Against that, with the recent weakness in the stock, we see compelling returns from current levels. Concerns around the outlook for global growth are likely to offer some headwinds for the stock in the immediate term, but Scotiabank remains one of the best fundamental stories in the space, in our view. We reiterate our Action List Buy rating.

Details

Continued work on delivering expense leverage. There was a fair amount of acquisition-related noise, but on a segment basis Domestic P&C saw good operating leverage, and management expects it to continue in H2/12. International is struggling to get there consistently, but management continues to suggest that investment spending has leveled off and has now indicated some specific cost cutting measures will hit in H2/12 to deliver positive operating leverage on the year. If successful, this could be an important lever supporting our constructive view on International growth and return prospects.

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TD Q2 2012 Earnings

Scotia Capital, 25 May 2012

• TD's cash operating EPS was $1.82, a modest beat. Earnings increased 12% YOY, driven by exceptionally strong results from TDCT, strong Wealth & Insurance performance, and high security gains.

• Operating ROE: 16.6%, RRWA: 2.78%, CET1: 7.4%.

Implications

• Canadian P&C (TDCT) earnings increased 14% YOY, leading the bank group, driven by strong loan growth of 10%, with margins declining a modest 2 bps sequentially. U.S. P&C earnings were solid, up 13% YOY, with Wholesale solid, increasing 5% YOY due to strong investment banking revenues and solid trading revenue. Wealth & Insurance earnings increased 16% YOY, with Insurance strong.

• We are increasing slightly our 2012E EPS by $0.05 per share to $7.35 per share, with 2013E EPS unchanged at $8.00 per share. Our one-year target price is unchanged at $100

Recommendation

• Maintain 1-Sector Outperform rating based on a very high capital generation rate (RRWA), low balance sheet risk, low earnings volatility, and a strong competitive positioning.

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RBC Q2 2012 Earnings

Scotia Capital, 25 May 2012

• RY cash operating earnings from continuing operations were solid at $1.17 per share, in line with expectations.

• Cash operating earnings increased 5% YOY driven by strong wholesale banking, up 10% YOY, and resilient Canadian retail, up 7% excluding the prior year's gain related to the sale of Visa shares.

• Operating ROE: 19.0%, RRWA: 2.50%, CET1: 8.3% (IFRS phase in).

Implications

• Strong wholesale banking earnings were driven by solid investment banking and trading revenue. Fixed income trading revenue was solid with equity particularly strong.

• Canadian Banking earnings were resilient with loan growth of 7% YOY, while NIM declined 3 bps sequentially to 2.72%.

Recommendation

• Our 2012E and 2013E EPS estimates remain unchanged at $4.90 and $5.30 respectively. Our share price target remains unchanged at $68.

• We maintain our 1-Sector Outperform rating based on above industry group profitability and capital, as well as substantial earnings

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BMO Q2 2012 Earnings

Scotia Capital, 24 May 2012

• BMO cash operating earnings increased 15% YOY to $1.44 per share, above our expectations of $1.40 per share and IBES at $1.36 per share. The $1.44 includes $72 million after-tax or $0.11 per share related to recovery of provisions for credit losses on M&I purchased credit impaired loans versus $0.13 per share recovery in the previous quarter. Earnings in Q1/12 were $1.42 per share, which included the $0.13 per share recovery.

Implications

• Earnings growth was led by resilient P&C Canada, up 8% YOY, with Private Client Group earnings rebounding and BMO Capital Markets producing a relatively strong quarter driven by strong investment banking revenue and very solid trading revenue.

• Operating ROE: 15.4%, RRWA: 1.81%, CET1: 7.6%.

Recommendation

• Our 2012E EPS is unchanged at $5.75 per share; however, we are trimming our 2013E EPS to $6.20 per share from $6.30 per share. Our one-year target price is unchanged at $66 based on a target P/E multiple of 10.6x our 2013 earnings estimate.

• Maintain 3-Sector Underperform based on high relative P/E multiple given its low relative profitability.

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