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Canadian banks' decline benign next to U.S.
Big Six report 21-per-cent
drop in profits in past three days, but remain among highest-valued stocks in
industry
TARA PERKINS and BOYD ERMAN AND ANDREW WILLIS
From Friday's Globe and Mail
August 29, 2008 at 10:03 AM EDT
Canada's banks are hanging on to some of the highest financial service
stock values in the Western world, despite taking more than $11-billion in
writedowns as a result of the liquidity crisis.
Canadian Imperial Bank of Commerce and Bank of Montreal have
cemented their status as the banks in this country most bruised by the
turmoil. Most of the banks announced profits this week that fell below
analysts' expectations, but one glance toward Wall Street highlights the
disparity between the financial institutions of both countries.
Figures released Tuesday showed an 86.5-per-cent drop in profits for the
U.S. banking sector in its most recent quarter. In comparison, Canada's Big
Six banks collectively reported a 21.2-per-cent drop in profits over the last
three days.
Sure, Bank of Montreal took a $28-million severance charge after deciding
to cut about 150 jobs from its investment banking operations, but that too
pales in comparison to U.S. reports yesterday that Lehman Brothers Inc. is
about to cut around 6 per cent of its work force, or 1,500 employees, on top
of the 6,000 or so it has eliminated since last summer. Financial institutions
around the world have cut more than 101,000 jobs and announced more than
$500-billion in writedowns and bad debts since the financial crisis began. In
both the United Kingdom and the United States, bank customers have lined up
for blocks to take their money out of a failed lender.
So, investors were impressed this week by the relatively benign
$885-million writedown at CIBC and $498-million hit at Royal Bank of Canada.
Over all, the Big Six banks still managed to earn $4.15-billion.
It's not that they haven't had their problems. This year kicked off with
CIBC putting its hat out to the market for a $2.9-billion equity injection.
BMO has been defusing a number of troublesome exposures to complicated
products, ranging from commercial paper to structured investment vehicles in
recent months. Toronto-Dominion Bank is still dealing with U.K. regulators
after a London trader allegedly lied about the value of securities he traded.
And RBC is still negotiating with U.S. regulators about a potential buyback of
as much as $1-billion worth of auction-rate securities that it sold to clients
before that market froze.
But the issues are mostly in a different league than those faced by
European and U.S. counterparts.
"On balance, Canada's banks trade at the highest [price to book] and
[price to equity] multiples" of competitors in the Western world, Genuity
Capital Markets analyst Mario Mendonca said.
Troubles in the U.S. financial sector remain so severe that RBC chief
executive officer Gordon Nixon suggested his appetite for a U.S. takeover
right now is small, despite some attractive valuations.
With its $58-billion (U.S.) market value yesterday, Royal Bank ranked as
the fifth largest bank in North America and 18th in the world.
Its profits were 10 per cent lower than a year ago, largely because of its
U.S. exposure. "The only blemish was the U.S., which was very weak,"
BMO Nesbitt Burns Inc. analyst Ian de Verteuil wrote in a note to clients.
TD, which recently paid $8.5-billion (U.S.) for New Jersey-based Commerce
Bancorp Inc., posted U.S. banking revenues slightly short of the bank's stated
expectations, but made up for it by cutting expenses, noted Blackmont Capital
analyst Brad Smith.
Like RBC, TD saw its profit fall by 10 per cent, but it surprised the
market with a 3-per-cent dividend increase, a rarity in these times when banks
are trying to preserve capital.
Looking to the future, TD CEO Ed Clark said he's still worried that the
economic slowdown will hurt Canada, and reduce growth rates here for the
Canadian banks.
At the end of the day, the only issue to watch is the health of the U.S.
housing market, he told analysts on a conference call. He believes that at
some point in the first half of 2009, the market will be able to get a better
sense of when the bottom will come.
***
How the Big Six fared
TORONTO-DOMINION BANK
Highlights:
Better-than-expected contribution from its U.S. retail bank
Rising market share at TD Canada Trust
Lowlights:
Weak results from investment banking
A $96-million trading loss raises concerns over risk management
BANK OF NOVA SCOTIA
Highlights:
Domestic retail banking profits are soaring
Fixed-income traders posted record results at Scotia Capital
Lowlights:
Problem loans led to higher provisions for bad debts
Profit missed lofty expectations
NATIONAL BANK OF CANADA
Highlights:
The bank made more money lending funds to individuals
Reaped a gain on shares of the Montreal Exchange Inc. when it was sold to
TSX Group Inc.
Lowlights:
Loan losses are climbing
The bank lost money on asset-backed commercial paper.
ROYAL BANK OF CANADA
Highlights:
Insurance profits rose 33 per cent
Strong asset growth
Lowlights:
While lower than some expected, the bank still had a $498-million writeoff
Much higher provisions for bad debts from the U.S.
CIBC
Highlights:
The bank earned its first profit of the year
Its Tier 1 capital ratio, a measure of its financial cushion, is strong
Lowlights:
While lower than expected, it still had an $885-million writedown
Consumer banking profits were down from a year ago
BANK OF MONTREAL
Highlights:
Revenue increased 7.5 per cent
Gained market share in personal loans
Lowlights:
Two very high provisions for bad loans related to U.S. real estate
Announced $134-million in capital markets-related charges
- 2008 August 29 GLOBE
& MAIL
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