Buy BNS, Sell BMO

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Bank of Nova Scotia (BNS): Buy Bank of Montreal (BMO): Sell Buy / Sell Presentation January 31, 2007 Western Investment Club – Created by Financial Group, January 31, 20

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Transcript of Buy BNS, Sell BMO

Page 1: Buy BNS, Sell BMO

Bank of Nova Scotia (BNS): BuyBank of Montreal (BMO): Sell

Buy / Sell Presentation

January 31, 2007

Western Investment Club – Created by Financial Group, January 31, 2007

Page 2: Buy BNS, Sell BMO

Western Investment Club – Created by Financial Group, January 31, 2007

Outline of Presentation

Canadian Banking - Industry Analysis

Company Overview: Bank of Nova Scotia

Company Overview: Bank of Montreal

Summary of Thesis

Financial Analysis

Recommendation

Questions

Page 3: Buy BNS, Sell BMO

Western Investment Club – Created by Financial Group, January 31, 2007

Canadian Banking Sector

Page 4: Buy BNS, Sell BMO

Western Investment Club – Created by Financial Group, January 31, 2007

Industry Analysis

Highly Concentrated Industry Canada: Fewer than 20 domestic commercial banks United States: Over 7,600 commercial banks 90% of the industry’s $1.8 trillion assets are held by six institutions (RBC, TD,

Scotia, CIBC, BMO, National Bank) Major banks are looking outside of Canada for growth opportunities

High Dividend Yield ~ fairly consistent at approximately 3-4%

Advanced Systems Canadians are the highest per capita users of ABM and debit card services in

the world 88.2 debit card transactions per person High use of online banking compared to other countries

Strong and Consistent Historical Performance

The Canadian Banking industry provides strong upside exposure, with limited downside risk

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Western Investment Club – Created by Financial Group, January 31, 2007

Historical Price Chart

Historical Performance - Canadian Banks

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The five major Canadian banks have returned an average of 22.1% over the last seven years compared to the TSX’ annual return of 7.8%

Page 6: Buy BNS, Sell BMO

Western Investment Club – Created by Financial Group, January 31, 2007

Historical Performance

The Bank of Nova Scotia has provided an above average return and has not experienced a down-year since 2000

Average Performance - Last Seven Years

Bank Average High Low

Royal Bank 25.3% 66.3% 2.9%Bank of Montreal 26.8% 69.7% -14.0%Bank of Nova Scotia 23.5% 56.8% 7.3%CIBC 20.5% 56.1% -17.0%TD 14.6% 37.8% -21.5%

Average - Banks 22.1% 57.3% -8.5%TSX 7.8% 29.8% -18.0%

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Western Investment Club – Created by Financial Group, January 31, 2007

Bank of Nova Scotia

Page 8: Buy BNS, Sell BMO

Western Investment Club – Created by Financial Group, January 31, 2007

Company Overview

Second Largest Bank in terms of Market Cap. ($50bn)

2006 Revenue of $11.6bn

2006 Net Income of $3.55bn

13% Growth in EPS for 2006

Large presence in Central and South America compared to other Canadian banks

57,000 employees with operations in 50 countries

Liked by Mr. Jim Cramer!!!

Page 9: Buy BNS, Sell BMO

Western Investment Club – Created by Financial Group, January 31, 2007

Divisional Breakdown

Domestic Banking: 36% of Net Income Retail & Small Business: 67% of Division’s Revenue Commercial Banking: 16% of Division’s Revenue Wealth Management: 18% of Division’s Revenue

Scotia Capital: 30% of Net Income Global Capital Markets: 52% of Division’s Revenue Global Corporate and I-Banking: 48% of Division’s Revenue

International Banking: 30% of Net Income Caribbean & Central America: 40% of Division’s Revenue Mexico: 37% of Division’s Revenue Latin America, Asia, and Other: 23% of Division’s Revenue

The Bank of Nova Scotia has significantly more exposure to Mexico, Central America and Latin America than other Canadian banks

Page 10: Buy BNS, Sell BMO

Western Investment Club – Created by Financial Group, January 31, 2007

What is Domestic Banking?

Retail & Small Business Provide mortgages, loans, credit cards, investments, insurance and

day-to-day banking products to individuals and small businesses Have 972 branches and 2,742 ABMs throughout Canada

Commercial Banking Serve large corporate customers with a full suite of products including

accepting deposits and making loans Revenues grew by 6% in 2006

Wealth Management Includes retail brokerage, investment management advice, mutual

funds and savings products, and financial planning

Overall growth for the division in 2006 was 2% and the division is not expected to grow substantially in the future

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Western Investment Club – Created by Financial Group, January 31, 2007

What does Scotia Capital do?

Global Capital Markets Provide product / services in a variety of areas including fixed income,

derivatives, foreign exchange, precious metals and equity sales, trading and research

Corporate derivatives team and foreign exchange team ranked #1 in Canada

Global Corporate & Investment Banking Provides corporate lending, equity underwriting and mergers &

acquisitions advisory services

While growth in this division was 14% in 2006, it is expected to grow at a lower rate going forward

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Western Investment Club – Created by Financial Group, January 31, 2007

International Banking

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Western Investment Club – Created by Financial Group, January 31, 2007

International Banking

Caribbean and Central America 15% organic growth in 2006 Low banking penetration in region attractive market Commercial lending, credit cards and mortgages are driving growth Largest private bank in Costa Rica after acquisition of Interfin, giving it

a market share of 14% Named Bank of the Year in Jamaica and the Dominican Republic by

Euromoney magazine well reputed 15.6% annual growth rate since 2001

The full-year impact of acquisitions in 2007 and high organic growth should result in strong 2007 performance in the region

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Western Investment Club – Created by Financial Group, January 31, 2007

International Banking

Mexico Revenue grew 14% (including 5% currency loss) in 2006, while

contribution grew 62% Strong growth in credit cards, brokerage fees, mortgages and

commercial loans Partnered with the NFL to issue co-branded cards in Mexico Planning on adding 100 branches in Mexico in 2007

Latin America, Asia, and Other Revenues grew 27%, primarily due to acquisition in Peru Slowest growth in International Banking Segment Management is not as focused in this region

With 32% earnings growth in 2006 (including 8% decrease for FX), the outlook for the international banking segment is favourable

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Western Investment Club – Created by Financial Group, January 31, 2007

Bank of Montreal

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Western Investment Club – Created by Financial Group, January 31, 2007

Company Overview

Fourth Largest Bank in terms of Market Cap. ($35bn)

2006 Revenue of $10.1bn

2006 Net Income of $2.60bn

11.6% Growth in EPS for 2006

Pursuing growth in the US acquired First National Bank & Trust in Indiana, a personal and commercial bank in the US Midwest

Not recommended by Mr. Jim Cramer!!!

Page 17: Buy BNS, Sell BMO

Western Investment Club – Created by Financial Group, January 31, 2007

Company Overview

Net Income by Geography Canada: 75% United States: 17% Other: 8%

Operating Groups Personal & Commercial Banking: 47% of net income Private Client Group: 14% of net income Investment Banking Group: 32% of net income 2/3rds of US net income is from I-Banking, while 1/3 is from the

personal and commercial banking division

BMO has very little exposure to emerging countries compared to the Bank of Nova Scotia, but is more exposed to the US

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Western Investment Club – Created by Financial Group, January 31, 2007

Divisional Overview

Personal & Commercial Banking Provide consumers with every day banking needs, including financing,

investing, credit card and insurance needs; offer corporate customers a full range of banking products / services

90% of revenue is from Canada, but they face aggressive competition in the US (US cash earnings declined 19% in 2006)

Negative income growth

Private Client Group Represents BMO’s wealth management business including full-service and

direct investing, private banking and investment products One of the strong areas of BMO with double digit growth

Investment Banking Group Provide standard banking services such as equity / debt underwriting, sales &

trading, institutional research, M&A advisory, etc. Expected to grow at mid-single digits

Growth in the Private Client Group should help offset decline expected in Personal and Commercial Banking

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Western Investment Club – Created by Financial Group, January 31, 2007

Summary of Thesis

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Western Investment Club – Created by Financial Group, January 31, 2007

Highlights of Investment Thesis (BNS)

Positives Large exposure to emerging markets with significant growth potential 2006 acquisitions should be accretive in 2007 Management signalling confidence in 2007, raising EPS growth

targets to 7-12% from 5-10%

Risks Foreign Exchange Risk in International Banking Segment Slow growth in domestic franchise, which is not viewed as highly as

other domestic banks Political risk in emerging countries

While there are risks to the investment, we believe that there is significant upside potential going forward

Page 21: Buy BNS, Sell BMO

Western Investment Club – Created by Financial Group, January 31, 2007

Highlights of Investment Thesis (BMO)

Negatives Weak US retail performance and increasingly competitive

environment Limited growth potential relative to BNS Most attractive prospects (wealth management) are in the smallest

division

Risks Lower earning expectations may already be factored into price Has been the best performing bank (in terms of stock price) over the

last seven years Management change

The outlook and growth prospects for BMO are weak relative to other Canadian banks, especially BNS

Page 22: Buy BNS, Sell BMO

Western Investment Club – Created by Financial Group, January 31, 2007

Financial Analysis

Page 23: Buy BNS, Sell BMO

Western Investment Club – Created by Financial Group, January 31, 2007

Historical Performance

Scotiabank is trading slightly above market, but has a fair amount of upside.

Market Price / Earnings Dividend PEGCompany Price Cap. ($bn) 2006E 2007E Yield Ratio

Royal Bank 54.09$ 71.01$ 15.02 x 13.94 x 2.59% 1.31Bank of Montreal 68.78 34.55 13.14 12.87 2.13% 1.55Scotiabank 51.72 51.55 14.51 13.67 2.88% 1.25Toronto Dominion 69.15 50.02 10.91 13.33 2.55% 1.26CIBC 98.81 33.03 13.11 13.85 2.81% 1.90

Average 48.03$ # 13.34 x 13.53 x # 2.59% 1.45 High 71.01$ # 15.02 x 13.94 x # 2.88% 1.90 Low 33.03$ # 10.91 x 12.87 x # 2.13% 1.25

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Western Investment Club – Created by Financial Group, January 31, 2007

Recommendation

Page 25: Buy BNS, Sell BMO

Western Investment Club – Created by Financial Group, January 31, 2007

Recommendation

Buy 200 Shares of BNS

Sell 200 Shares of BMO