Saturday, September 25, 2010

Review of World Banks' Q3 2010 Earnings Online

Is Canada’s Banking System Conservative as Many Claim?

A good bank is not measured by its ability to make money during the good years. Any bank can do that. It is a big mistake to follow the banks that report record profits when the economy, and especially the real estate market is booming and think that the stock and earnings performance and think that those banks are well managed, According to such standards, Washington Mutual, Fannie Mae, Freddie Mac, Citigroup and others would be well managed banks with amazing risk management. However, since the fall of 2008 everyone knows that isn’t the case and that those financial institutions were not prepared for the great recession/depression that started in the years 2007-2008.

In Canada, like in the Australia, Israel, Brazil, India and other countries around the globe the housing bubble hasn’t popped yet. So the fact that they are reporting record profits while the banks in the United States and Europe are struggling is meaningless. What a prudent investor should examine is how these banks prepared for the inevitable downturn in real estate are. Are they better off than the American banks in 2008?


Scotia Capital, 13 September 2010


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%.


• 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.


• 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

Review of World Banks' Q3 2010 Earnings Online

• 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.


• 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%.
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.

Wednesday, February 10, 2010

International Travel Health Insurance Tips and Tricks

When traveling around the world these days there is
many things to worry about. International Travel
Health insurance is one of them. When you travel
internationally you never know what can happen to you, but
must prepare for the unexpected.

The first thing to do is take a look at their
Health insurance today. Many believe that because
who have medical coverage at home, are covered inother
countries. That is simply not the appropriate time. Even
If your current health insurance covers some medical
treatments, it is likely that covers everything.
So take a good look at your health insurance. Read more
fine print and if you are not sure yet, call the company
on. If the first person to speak does not seem
know the answer, then ask to speak with someone who knows.

If your health insuranceregards international attention, and
may have a time limit. Thirty days is a common term
Travel Health Insurance International. Again, we
want to guarantee this, because if special
international travel insurance, I will
duplicate insurance.

If you are the type of adventure travel, then you need to
have coverage for medical evacuation. Medevac is short of doctors
evacuation, such as the use ofThe evacuation of some
Remote Area. I remember when I was recently in Yosemite Park
California, the ranger said it can cost the mountain
climbers $ 20,000 if they have blocked and they need a helicopter
Rescue! Actually, I heard of an emergency
evacuation costs about $ 100,000! You imagine
injury, no insurance who need urgent
evacuation and then having to pay all this money? That
of coursemy trip more enjoyable.

If for some reason, get very sick and need to remain
hospital for a prolonged period of current health insurance
can not cover a longer period.

If you are elderly, it is important to note that
Medicare does not cover abroad.

According to the Centers for Disease Control, USA and
One way to prevent travelers of the United States abroad will have some sort
health problem.

There are many types ofInternational travel insurance
plans. There are short-term international travel health
insurance plans, travel insurance is a long-term health
plans and is expected to address the problems physicians.
These problems may be non-doctor to begin with, but may
feel bad after. An example of non-medical travel
Travel insurance is the cancellation of international travel.

Another factor in all this is to find low-costInternational
travel medical insurance and medical insurance
still offers good coverage. Remember to shop carefully
policy and do some research. Try to find evidence of
and find the bad reviews of insurance plans. Preparation
and can make a huge difference.

Saturday, January 30, 2010



Indian Farmers Fertilizers Co-operative Limited (IFFCO) along with its associates KRIBHCO & IPL has joined hands with the Tokio Marine & Fire Insurance Co. Ltd, Japan to set up a General Insurance Company in India. IFFCO-TOKIO General Insurance Company (ITGI) came into existence through a MOU signed by IFFCO & Tokio Marine in May 2000. In December 2000, ITGI became the first private sector insurance company, among others, to get a License to transact general insurance business from the Insurance Regulatory & Development Authority (IRDA). IFFCO & its Associates hold a majority stake of 74% in ITGI`s equity and the balance is held by Tokio Marine. It is a pioneering attempt to combine Tokio Marine’s insurance expertise, product range & global service standards with IFFCO’s brand image, wide reach & understanding of Indian market. It is thus a unique blend of insurance technology and reach in the Indian market.


Tokio Marine is a member of the highly diversified Mitsubishi group. Setup in 1879,Tokio Marine is amongst the five biggest general insurers in the world. Currently it operates in 41 countries and the premium income is around Rs 67,000 Crores (US$ 13.67 billion). It has assiduously built up its international reputation through persistent focus on product Innovation, high service standards & focus on information technology driven business process. It is committed to bring world-class products, service standards & business practices to the Indian general insurance market.

Founded in 1967, IFFCO is a leading producer of Fertilizers and is amongst the most successful Cooperative federations in the country. The turnover in year 2001-2002 was Rs. 5,100 crores, with a net worth of Rs 2,786 crores. It has a production capacity of more than 52 lacs tonnes spread over 4 locations in India. It also has a enviable distribution network comprising of 35,973 co-operative societies and 167 farmers service center.

As a Partner in Progress, IFFCO is a household name amongst Indian farmers and is widely regarded as a socially responsible corporate citizen.