Thursday, November 13, 2008

Scotiabank Struggles to Gain Share in Wealth Management

  
Dow Jones Newswires, Monica Gutschi, 13 November 2008

When it comes to wealth management, Bank of Nova Scotia is the banking equivalent of the 90-pound weakling who sends away for the Charles Atlas body-building kit and quickly bulks up.

Scotiabank has developed some wealth-management muscles in the past two years: it purchased substantial stakes in money managers CI Financial Income Fund and DundeeWealth Inc., bought online brokerages, poached key advisers, launched new funds, and made other investments. Its mutual fund assets have risen to C$20.6 billion from C$12.6 billion.

But just as the former weakling remains slimmer than his beefier rivals - Scotiabank still has a way to go to equal its peers. And that's why you won't see Barb Mason, who heads the bank's wealth-management business, sitting still.

"We still have some gap to close," she said in a recent interview.

Bank of Nova Scotia has a market share of 3.28% of the country's mutual-fund industry. Among the country's banks, it holds an 8.27% market share in mutual funds, up 14 basis points from last year.

However, Mason says that if one considers the bank's share of the country's deposits and mortgages, its "natural" market share in mutual funds would be about 400 basis points higher. That gives her plenty of work to do.

Many analysts believe the easiest solution for the bank will be to purchase the remainder of CI Financial or DundeeWealth, both among the country's most successful asset managers.

"There is a question of whether or not (Scotia) will be able to catch up" to the other banks, says Dan Hallett, a Windsor, Ont.-based independent fund analyst. "If their strategy is to buy up, then they can do it."

With only a few potential acquisition targets in the country, Hallett says Scotia is well-positioned as it has "snagged a piece of two of the bigger players already."

Organic growth is much harder, Hallett says, as Scotia is up against some pretty successful juggernauts in Royal Bank of Canada and Toronto-Dominion Bank. Royal's mutual-fund business is five times Scotia's, and TD's is three times the size. Even Bank of Montreal, whose market capitalization is about 10% smaller than Scotia, has a mutual-fund business nearly twice Scotia's size.

And as wealth management becomes increasingly more important for Canadian banks, Scotia isn't the only one searching for good buys or organic expansion. Royal Bank gave its business a major boost with its recent acquisition of Phillips, Hager and North and Toronto-Dominion became a major presence in on- line brokers with its stake in TD Ameritrade.

National Bank of Canada has made four acquisitions in the field this year, and tiny Canadian Western Bank made its first foray into wealth management with its recent purchase of an Edmonton-based money manager.

In fact, many of the other banks have posted faster rates of growth in mutual- fund assets than Scotia. According to the Investment Fund Institute of Canada, at the end of September, Scotia Securities saw mutual-fund assets grow by 63% since 2002, compared to 224% growth at RBC (including PH&N), 108% growth at Canadian Imperial Bank of Commerce and 163% growth at BMO. Crucially, Scotia and BMO held relatively similar ranks in 2002, with Scotia managing C$ 12.23 billion in mutual funds and BMO C$14.17 billion. BMO now has C$37.2 billion, according to the IFIC, in part boosted by its acquisition of Guardian Group of Funds. That's 81% more than Scotia.

"Scotia is still a relatively small player in terms of overall market share," agrees Arjun Saxena, a wealth-management analyst and partner at consultancy Oliver Wyman. While the bank has made some gains, he says the oligopolistic structure of the Canadian industry means there's "not an easy way for them to grow that."

Mason feels otherwise. She has plans to continue adding advisers, invest in more technology, and expand into third-party channels through its Scotia McLeod wholesale unit. "That's never been a platform for growth for us," Mason says, noting that in the past, Scotia's funds were "invisible" to advisers at other banks or wealth-management companies. She hopes to quickly change that.

As well, Scotia plans to launch Web-based financial planning in the new year, and to leverage the bank's expanded foray into direct investing. Late last year, Scotia purchased TradeFreedom Securities, a small online broker, but really boosted its presence in the sector this summer by acquiring the Canadian unit of E*Trade Financial Corp. for US$442 million.

As for any further transactions with CI Financial and Dundee, Mason will only say "we'll see where that goes."

"Our long-term strategy is to grow our wealth-management business organically and through mergers and acquisition," she said in a written statement. The stakes in those two asset managers "were opportunities that aligned with our strategic growth initiatives."

In fact, analysts say those buys, and the acquisition of E*Trade Canada, showcase Scotia's acquisition savvy.

"The deals they've done in a lot of ways have been smart," Hallett says, noting that Scotia got a piece of DundeeWealth because it agreed to take Dundee Bank from parent Dundee Corp. amid the liquidity crisis in asset-backed commercial paper. It also got its hands on Sun Life Financial Inc.'s stake in CI Financial because the insurer wanted to bolster its capital ratios as equity markets slumped.

"In a way, even though they've stumbled overall, those last two deals have been smart and opportunistic," Hallett said. "Now, let's see what they're going to do with them."

Similarly, Saxena says Scotia's buy of E*Trade Canada was "a one in 10-year type of event, an opportunistic buy on their part" that came about because E* Trade was in financial difficulties.
__________________________________________________________
The Globe and Mail, Tara Perkins, 12 November 2008

There is mounting evidence suggesting that U.S. consumers will be a serious drag on Corporate Canada and, eventually, Canadian consumers, and it is causing forecasters to ratchet down expectations for profits from the big banks.

Analysts have been slashing earnings expectations in recent days as the market prepares for the banks' fourth-quarter financial results, which will be released beginning Nov. 25.

"It is still too early to buy Canadian bank shares," RBC Dominion Securities Inc. analyst André-Philippe Hardy wrote in a note to clients.

"The economic outlook has become more challenging with negative implications for loan growth and provisions [for bad loans]," wrote UBS Securities Canada analyst Peter Rozenberg.

The banks have been hit with about $13-billion in writedowns since early 2007 because of their exposure to risky investments and other sore spots, and analysts expect that Canadian Imperial Bank of Commerce could take a further hit of more than $1-billion this quarter. But that's not what's worrying investors right now.

What's causing frown lines these days are ominous signs that the economy is going to be uglier than expected, and Canadian borrowers are less insulated than previously believed.

The big banks have a reputation for being prudent lenders, and it has kept them in good standing as banks in the United States and Britain have struggled with dramatic increases in soured loans. While Canada's banks are expected to remain relatively better off, it's becoming evident that they too will be grappling with growing bad debts.

Since the credit crunch erupted, most of the Canadian banks' loan losses have stemmed from their U.S. subsidiaries, which will undoubtedly be a cause of trouble again this quarter. Bank of Montreal and Toronto-Dominion Bank have the highest exposure to U.S. lending, which makes up 28 and 25 per cent of their total loan portfolios, respectively, according to Mr. Hardy. Royal Bank of Canada, which has 13 per cent of its loans in the United States, has also been affected by struggling debtors south of the border.

But in recent weeks it has become increasingly clear that the U.S. economy's problems have migrated north, increasing the concern surrounding the health of the bank's core lending businesses on this side of the border in the year ahead.

Exports account for about one-third of Canada's gross domestic product, and three-quarters of Canadian exports head to the United States, where consumers are floundering, Mr. Hardy noted.

As a result, the first impact of the U.S. weakness on Canadian loan books is likely to be in business lending, particularly in export-heavy Ontario, which accounts for about half of the big five banks' domestic loans.

"We would then expect the Ontario-centric issues to spread to the rest of Canada, especially now that commodity prices have dropped," Mr. Hardy wrote. "The banks most exposed to business lending are Scotiabank, Bank of Montreal and National Bank."

Mr. Hardy said he's more worried about business lending than consumer lending for the next two or three quarters. "The leading indicators we track for business loan losses are clearly pointing in the wrong direction. It is not the case for personal lending, although we expect the unemployment rate to rise."

But figures released last week show that Canadian personal bankruptcy filings rose nearly 20 per cent between August and September, and were up nearly 30 per cent from a year ago. Business bankruptcy filings were up about 9 per cent over the year.

"Headwinds are starting to accumulate for Canadian consumers," TD Securities economist Charmaine Buskas wrote in a research note. "The channels of wealth are deteriorating and consumers are now looking at smaller personal portfolios, not only due to stock market losses, but also the unwind in housing prices."

Data provided by Moody's last week showed that Canadian credit card performance softened in the second quarter - long before the credit crunch reached crisis status in September. Moody's Canadian credit card indexes, which track the performance of about $65-billion in credit card receivables, showed a net loss rate of 3.07 per cent between April and June, up about 6 per cent from a year ago. It was the second consecutive quarterly increase in the loss rate.

CIBC, the bank with the biggest chunk of the Canadian credit card business, reported higher credit card losses last quarter.

"Canadian credit card performance has so far been remarkably stable" compared with the U.S. and Britain, where the loss rates are 6.38 per cent and 6.57 per cent, Moody's noted. "The trend in Canada, though rising, is not steep."

Banks are also expected to feel pain from an estimated 9.8-per-cent drop in mutual fund fees next year, CIBC World Markets analyst Darko Mihelic wrote in a note to clients. Redemption levels in the mutual fund industry are at their highest in decades. While RBC and TD earn the most in fund fees, a decline would have more of an impact on CIBC as a percentage of total revenue, Mr. Mihelic said.
__________________________________________________________
Dow Jones Newswires, 7 November 2008

What's a casino if not someplace you gamble? And gambling entails risk - as Bank of Nova Scotia may discover. BMO Capital Markets says BNS could have up to C$1B in exposure to Las Vegas Sands and its related properties. Notes that casino operated could technically be in default of various domestic credit facilities, which could trigger various cross defaults. Risk of large losses at BNS is low, but BMO says any substantial uptick in gross impaired loan formations "would impact the market's view of BNS shares - and its risk profile." A "significant" ramp-up in overall loan losses appears to be increasingly likely.
;