The

1
The Financial Sector
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The Global Industry Classification Standard

• The Global Industry Classification Standard is
  an enhanced industry classification system
  jointly developed by Standard Poor's (SP) and
  MSCI Barra in 1999.
• Developed in response to the global financial
  communitys need for one complete, consistent set
  of global sector and industry definitions.
• GICS structure currently has four levels of
  detail 10 sectors, 24 industry groups, 68
  industries, and 154 sub-industries.
• Over 38,000 active, publicly traded companies
  globally are currently classified in 90 different
  markets according to GICS.

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The Global Industry Classification Standard

• The use of this global standard helps
  strategists, analysts and investors compare
  companies outside of their local markets
• The standardized classification system permits
  foreign investors to look into local markets and
  local investors to look out at the rest of the
  world when comparing stocks within the same
  industry.
• GICS helps market participants determine
  whether stock movements are locally based or are
  part of a broader global trend.

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The Financial Sector

• 4 Industry Groups
• 8 Industries
• 27 Sub-Industries

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The Financial Sector
Banks

• Commercial Banks
• Commercial banks whose businesses are derived
  primarily from commercial lending operations and
  have significant business activity in retail
  banking and small and medium corporate lending.
  Excludes banks classified in the Regional Banks
  and Thrifts Mortgage Finance sub-industries.
  Also excludes investment banks classified in the
  Investment Banking Brokerage Sub-Industry.
• Regional Banks
• Commercial banks whose businesses are derived
  primarily from commercial lending operations and
  have significant business activity in retail
  banking and small and medium corporate lending.
  Regional banks tend to operate in limited
  geographic regions. Excludes companies classified
  in the Diversified Banks and Thrifts Mortgage
  Banks sub-industries. Also excludes investment
  banks classified in the Investment Banking
  Brokerage Sub-Industry.

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The Financial Sector

• Diversified Financials
• Diversified Financial Services
• Other Diversified Financial Services
• Providers of a diverse range of financial
  services and/or with some interest in a wide
  range of financial services including banking,
  insurance and capital markets, but with no
  dominant business line.
• Multi-Sector Holdings
• A company with significantly diversified holdings
  across three or more sectors, none of which
  contributes a majority of profit and/or sales.
  Stakes held are predominantly of a
  non-controlling nature. Includes diversified
  financial companies where stakes held are of a
  controlling nature. Excludes other diversified
  companies classified in the Industrials
  Conglomerates Sub-Industry.

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The Financial Sector

• Specialized Finance
• Providers of specialized financial services.
  Includes credit agencies, stock exchanges and
  specialty boutiques. Companies in this
  Sub-Industry derive a majority of revenue from
  one, specialized line of business.
• Consumer Finance
• Providers of consumer finance services, including
  personal credit, credit cards, lease financing,
  travel-related money services and pawn shops.
  Excludes mortgage lenders classified in the
  Thrifts Mortgage Banks Sub-Industry.

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The Financial Sector

• Capital Markets
• Asset Management Custody Banks
• Financial institutions primarily engaged in
  investment management and/or related custody and
  securities fee-based services. Includes companies
  operating mutual funds, closed-end funds and unit
  investment trusts. Excludes banks and other
  financial institutions primarily involved in
  commercial lending, investment banking, brokerage
  and other specialized financial activities.
• Investment Banking Brokerage
• Financial institutions primarily engaged in
  investment banking brokerage services,
  including equity and debt underwriting, mergers
  and acquisitions, securities lending and advisory
  services. Excludes banks and other financial
  institutions primarily involved in commercial
  lending, asset management and specialized
  financial activities.

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The Financial Sector

• Diversified Capital Markets
• Financial institutions primarily engaged in
  diversified capital markets activities, including
  a significant presence in at least two of the
  following area large/major corporate lending,
  investment banking, brokerage and asset
  management. Excludes less diversified companies
  classified in the Asset Management Custody
  Banks or Investment Banking Brokerage
  sub-industries. Also excludes companies
  classified in the Banks or Insurance industry
  groups or the Consumer Finance Sub-Industry.

10
The Financial Sector

• Insurance
• Insurance Brokers
• Insurance and reinsurance brokerage firms.
• Life Health Insurance
• Companies providing primarily life, disability,
  indemnity or supplemental health insurance.
  Excludes managed care companies classified in the
  Managed Health Care Sub-Industry.
• Multi-line Insurance
• Insurance companies with diversified interests in
  life, health and property and casualty insurance.
• Property Casualty Insurance
• Companies providing primarily property and
  casualty insurance.
• Reinsurance
• Companies providing primarily reinsurance.

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The Financial Sector

• Real Estate
• Real Estate Investment Trusts (REITs)
• Industrial REIT's
• Companies or Trusts engaged in the acquisition,
  development, ownership, leasing, management and
  operation of industrial properties. Includes
  companies operating industrial warehouses and
  distribution properties.
• Mortgage REIT's
• Companies or Trusts that service, originate,
  purchase and/or securitize residential and/or
  commercial mortgage loans. Includes trusts that
  invest in mortgage-backed securities and other
  mortgage related assets.

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The Financial Sector

• Diversified REIT's
• A company or Trust with significantly diversified
  operations across two or more property types.
• Office REIT's
• Companies or Trusts engaged in the acquisition,
  development, ownership, leasing, management and
  operation of office properties.
• Residential REIT's
• Companies or Trusts engaged in the acquisition,
  development, ownership, leasing, management and
  operation of residential properties including
  multifamily homes, apartments, manufactured homes
  and student housing properties

13
The Financial Sector

• Retail REIT's
• Companies or Trusts engaged in the acquisition,
  development, ownership, leasing, management and
  operation of shopping malls, outlet malls,
  neighborhood and community shopping centers.
• Specialized REIT's
• Companies or Trusts engaged in the acquisition,
  development, ownership, leasing, management and
  operation of properties not classified elsewhere.
  Includes trusts that operate and invest in health
  care, leisure, hotel/resort and storage
  properties. It also includes REITs that do not
  generate a majority of their revenues and income
  from real estate rental and leasing operations.

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The Financial Sector

• Real Estate Management Development
• Diversified Real Estate Activities
• Companies engaged in a diverse spectrum of real
  estate activities including real estate
  development sales, real estate management, or
  real estate services, but with no dominant
  business line.
• Real Estate Operating Companies
• Companies engaged in operating real estate
  properties for the purpose of leasing
  management.
• Real Estate Development
• Companies that develop real estate and sell the
  properties after development. Excludes companies
  classified in the Homebuilding Sub-Industry.
• Real Estate Services
• Real estate service providers such as real estate
  agents, brokers real estate appraisers.

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Financials SPDR - XLF
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Financials SPDR - XLF
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iShares CDN Financial Sector Index Fund (XFN)
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Investment Banking

• The investment banking industry in the US is
  comprised of approximately 3,000 companies, with
  combined annual revenue of about 100 billion.
• Major companies include Morgan Stanley and
  Goldman Sachs.
• The global financial crisis of 2008-2009
  dramatically altered the landscape of the
  investment banking industry.
• Morgan Stanley and Goldman Sachs, the only large
  firms still intact, have changed their status
  from investment banks to bank-holding companies.

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Investment Banking

• Investment banking is heavily concentrated the
  largest 50 firms hold 90 percent of the market.
• Demand is driven by economic activity that
  results in company mergers, acquisitions, or
  public financing.
• The profitability of an investment bank depends
  on its ability to accurately assess both the
  value of a business transaction and the readiness
  of the market to buy the attendant debt or
  equity.
• The primary revenue sources of the investment
  banking industry are from actively trading
  financial instruments, providing asset management
  services for wealthy clients and retirement and
  investment funds, placing new debt and equity
  issues with public and private investors, and
  from fees associated with MAs.

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Investment Banking

• Of industry revenue, approximately 50 percent
  comes from trading 35 percent from asset
  management and securities services and 15
  percent from MA fees and public offerings.
• Investment banks are intermediaries between
  corporations issuing new debt and equity
  securities and investors that buy the securities.
  
• An investment bank buys new securities from the
  issuing company at a negotiated price and resells
  them to its investor base, other investment
  banks, and the investing public. (IPOs)

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Investment Banking

• MA activity, a driver of demand for investment
  banking services, slowed considerably this past
  year due to tighter financing conditions fees
  for completed US deals were down nearly 60
  percent from the previous year.
• After months of inactivity, several large
  corporate mergers in September 2009 could signal
  a revival of mergers and acquisitions (MA).
• Disney's acquisition of Marvel and Kraft Foods'
  bid for Cadbury suggest funding for deals is
  becoming available. (4bn 17bn)

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Regulation

• After the stock market crash of 1929, Congress
  passed the Glass-Steagall Act of 1933 that
  separated commercial and investment banks and
  defined the permissible activities of each.
• In 1999, Congress passed the Financial Services
  Modernization Act (FSMA), also known as the
  Gramm-Leach-Bliley Act, that eliminated the
  Glass-Steagall separation.
• The repeal of the Glass-Steagall Act in 1999
  empowered financial institutions to expand their
  services beyond the traditional commercial
  banking functions of collecting deposits and
  making loans.
• By incorporating large investment banking
  divisions, financial firms were able to undertake
  riskier operations and generate large returns
  when the economy was growing.
• Firms that acquired assets comprised largely of
  collateralized debt obligations and
  mortgage-backed securities experienced
  substantial losses when the late 2000s recession
  hit.

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Regulation
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Flash Orders

• Of industry revenue, approximately 50 percent
  comes from trading 35 percent from asset
  management and securities services and 15
  percent from MA fees and public offerings.

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Flash Orders

• Federal legislation to prohibit a trading
  technique allegedly giving high frequency traders
  an unfair advantage could be introduced by the
  end of 2009. The practice uses flash orders,
  which allegedly allow traders using fast
  computers to peek at stock orders before they are
  sent to the broader marketplace, according to
  Senator Charles Schumer (D-NY), who wrote to the
  SEC in July 2009 demanding a ban on flash orders.
• "Flash orders may create a two-tiered market by
  allowing only selected participants to access
  information about the best available prices for
  listed securities," said SEC Chairman Mary
  Schapiro. "These flash orders provide a momentary
  head-start in the trading arena that can produce
  inequities in the markets and create
  disincentives to display quotes."
• http//www.youtube.com/watch?v0romsKwOncIfeature
  related
• http//www.youtube.com/watch?vbOmt-zFaBE8
• http//www.youtube.com/watch?vPRaGw0SKPqI

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Flash Orders
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U.S. Banks

• The US banking system includes about 7,100
  commercial banks, 1,200 savings banks, and 8,000
  credit unions, with combined annual revenue of
  about 630 billion.
• Large commercial banks include Bank of America,
  Citibank, JPMorgan Chase, and Wells Fargo. ING
  Direct.
• Commercial banks account for 81 percent of
  industry revenue savings banks, 13 percent and
  credit unions, 6 percent.
• Between 2008 and 2013, the US commercial banking
  industry is expected to see slower growth than in
  the 2003-2008 period because of an economic
  slowdown at the beginning of the forecast period,
  evidenced by decelerating growth in GDP,
  disposable income and personal spending.

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U.S. Banks

• Commercial bank assets are expected to reach
  18.0 trillion in 2013 based on growth of 7.9
  percent per year from 2008, boosted by baby
  boomers saving for retirement.
• Commercial bank net income fell precipitously to
  16.0 billion in 2008 after hitting a peak of
  128.2 billion in 2006. Exceptionally low
  interest rates led to average annual net income
  declines in the 2003-2008 period of 31.0 percent.
• Because banking services are vital to the US
  economy, depository institutions are highly
  regulated by state and federal governments. The
  differences among commercial banks, savings
  institutions, and credit unions arise mainly from
  regulatory restrictions on the types of loans and
  investments they can make.

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U.S. Banks

• Reversing a trend toward deregulation of the
  financial markets, the US government intervened
  aggressively during the global financial crisis
  of the late 2000s through a series of seizures,
  bailouts and cash injections into credit markets.
• March 2008, the Federal Reserve intervened to
  force a sale of investment bank Bear Stearns,
  providing a loan to the purchaser JPMorgan Chase.
• September 2008, the US Treasury took over Fannie
  Mae and Freddie Mac, two quasi-private
  institutions that had operated under federal
  charters to increase mortgage lending activity.
• September 2008, no government aid was offered to
  the investment bank Lehman Brothers, which ended
  up filing for bankruptcy.

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U.S. Banks

• Forty billion dollars was used to buy shares of
  American International Group, which was the
  largest single infusion of capital by any
  government. (150bn total)
• The demise of Lehman Brothers led to rising
  uneasiness in world financial markets, as many
  different entities held the firms debt or
  participated in transactions in which Lehman
  Brothers was part.
• The Federal Reserve injected 105 billion into
  money markets to prevent a collapse, and the FDIC
  launched the Temporary Liquidity Guarantee
  Program (TLGP) to back unsecured bank debt.
• The US government also passed the Troubled Asset
  Relief Program (TARP), which allowed the Treasury
  to purchase up to 700 billion in distressed
  assets from US banks.

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U.S. Banks
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U.S. Banks

• Also affecting the banking industry is the FDIC,
  which, in order to shore up its depleted reserves
  because of the record number of bank failures,
  wants to charge a special premium on all
  institutions based on asset size. As of March
  2009, FDIC reserves totaled 13 billion, the
  lowest level since the end of the savings and
  loan crisis in the 1990s.
• The Federal Deposit Insurance Corporation FDIC
  announced five new bank failures on Friday (Nov
  6), bringing the nations tally to 120 for the
  year. Assets of more than 11.5 billion and
  deposits of nearly 8 billion from the five banks
  were turned over to new lenders at a total cost
  of 1.5 plus billion to the FDICs Deposit
  Insurance Fund, according to agency

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U.S. Banks
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U.S. Banks
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U.S. Banks

• During the financial crisis of 2007-09, DIF
  reserves were hard-hit. The reserves fell to 1.01
  percent of insured deposits on June, 30, 2008,
  and they decreased by 15.7 billion (45 percent)
  to 18.9 billion in the fourth quarter of 2008
  plunging the reserve ratio to 0.4 percent of
  insured deposits, its lowest level since June 30,
  1993.
• In the first week of March 2009, the FDIC
  announced plans to charge 20 cents for every 100
  of insured domestic deposits to restore the DIF.
• On March 5, 2009, Sheila Bair, Chairperson of
  the FDIC, said that her agency would lower the
  charge to approximately 10 basis points if the
  FDICs borrowing authority were increased.
• Subsequently, U.S. senators Christopher Dodd and
  Michael Crapo introduced a bill that would
  permanently raise the FDICs borrowing authority
  to 100 billion, from 30 billion, as well as
  temporarily allow the agency to borrow as much as
  500 billion in consultation with the President
  and other regulators.

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U.S. Banks Q3/09 Key Trends

• Following a 30 rally over the past 6 months,
  the response to Q3/09 results out of the U.S.
  banking sector was tepid at best, despite a
  number of results that beat posted expectations.
• Themes were similar again this quarter, with
  continued strong capital markets activity, but
  further credit deterioration.
• Q3 saw further credit deterioration, but the
  pace seems to be moderating. Also, the credit
  deterioration appears to be shifting from
  personal to commercial credit.
• Net Charge Offs to Average Loans is a financial
  metric used to measure the percentage of bad debt
  that a company has outstanding over a specific
  period. A company's net charge off is the amount
  of debt that they have deemed uncollectible less
  any collections from loans that were previously
  charged-off.

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U.S. Banks Q3/09 Key Trends
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U.S. Banks Q3/09 Key Trends
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U.S. Banks Q3/09 Key Trends
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U.S. Banks Q3/09 Key Trends

• In July 2010, new credit card regulations will
  go into effect and change the manner in which
  credit card issuers market, bill and advertise
  credit cards.
• The most significant changes include a limit on
  certain interest rate increases for existing
  balances elimination of universal default, or
  the practice of raising interest rates based on a
  consumers nonrelated (e.g., utility company)
  credit history an extension of payment times
  and clearer dates and payment times.
• Credit terms will be made more understandable
  and certain fees will be eliminated, which favor
  the consumer.

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U.S. Banks Q3/09 Key Trends

• BofA Invests in Mobile Banking - Industry leader
  Bank of America (BofA) is moving quickly to build
  its mobile banking customer base.
• In second quarter 2009, BofA formed a joint
  venture with leading payment processor First
  Data, which has gone to market with wireless
  chips that can store banking information in
  mobile phone handsets, allowing users to complete
  transactions securely.
• Since introducing mobile banking in August 2007,
  BofA has signed more than 2.5 million active
  users, and the company may seek to convert online
  banking customers to mobile payments, according
  to US Banker.
• Major banks like BofA may increase investments
  in mobile banking technology in coming years.

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Canadian Banks - Q4/09

• Despite the severe impact of the global crisis,
  the Canadian financial system has continued to
  perform well compared with those of other
  countries.
• Canadian households, businesses, and financial
  institutions had not built up levels of debt to
  the extent that made other countries vulnerable.
• There have been no bank failures in Canada, nor
  have Canadian banks required any capital from the
  government.
• Capital ratios have remained high and have been
  strengthened by additional capital from private
  investors. (Tier 1 Ratio)
• While wholesale funding conditions proved
  difficult towards the end of 2008, funding
  spreads have since narrowed markedly,
  particularly at the short end.

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Canadian Banks - Q4/09
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Canadian Banks - Q4/09

• The liquidity of bank balance sheets has
  improved as government and central bank
  initiatives took effect and as bank liquid assets
  rose in response to the combined effect of strong
  
• deposit inflows and some slowdown in credit
  expansion.
• This has led to some reduction in Bank of Canada
  liquidity support at the short end and has
  lowered demand from banks for term funding
  through the Government of Canadas program to
  purchase insured mortgages.
• Canadian banks are very well capitalized by
  international standards and significantly less
  leveraged in absolute terms than many of their
  international counterparts.

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Canadian Banks - Q4/09

• The major Canadian banks are in a solid
  financial position and have improved their
  liquidity positions since the December FSR
  (Financial system review conducted by the BoC).
• Nonetheless, downside risks remain.
• In particular, losses on the banks loan
  portfolios are expected to increase, although the
  magnitude of ultimate losses is still uncertain.
• The strong capital position of the banks, and
  their ability to raise capital through the growth
  of retained earnings and from the markets provide
  a substantial buffer against these headwinds.

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Canadian Banks - Q4/09
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Canadian Banks - Q4/09

• Group lagging in recent rally. Having recovered
  from dramatically oversold levels, the group has
  been largely range bound recently.
• The stocks have been somewhat range bound over
  the past three months as other sectors have taken
  over leading the equity rally. With some recent
  weakness, the group is actually flat over the
  past three months. Decent Q4 results could offer
  some potential relief that fiscal 2009 is over
  while 2010 offers some optimism as it comes into
  focus.
• Generally, the group should respond favourably
  to the results. However, the stocks are not
  inexpensive at current levels, and that should
  limit the potential for further outsized returns
  from here. Expect total returns on the order of
  10-15 over the coming 12-months.

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Canadian Banks - Q4/09

• Looking for a decent Q4 with familiar themes.
• Expect another decent quarter, with themes
  similar to those of Q3 strong capital markets
  offsetting mild credit deterioration. Also look
  for some possible year-end clean-up.
• Expect a repeat of now familiar themes in
  Q4/09.
• Namely, Wholesale results should be buoyed by
  healthy capital markets activity. Further, credit
  should continue to deteriorate, but trends should
  remain much better than some had feared only
  months ago.
• Finally, core underlying operating trends (i.e.
  loan volume growth) should be respectable, albeit
  slower.
• Like last year, expect banks to take a hard
  look at their credit and asset exposures at
  year-end which could see some lumpy items
  (although much improved markets and spreads
  should help).

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Canadian Banks - Q4/09
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Canadian Banks - Q4/09

• Reflecting the global recession and the related
  deterioration in the quality of household and
  business credit, Canadian banks have begun to
  experience higher loan losses.
• They increased their general and specific
  provisions for credit losses in 2009,
  particularly for loans to U.S. households and
  businesses (Chart 26).
• Specific provisions feed directly through to net
  income and capital.
• Credit losses are expected to remain elevated
  through 2009 and 2010.

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Canadian Banks - Q4/09
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Canadian Banks - Q4/09
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Canadian Banks - Q4/09

• In the December 2008 Financial System Review
  (FSR), five key sources of risk to the stability
  of the Canadian financial system were identified.
  Those remain the key risks facing Canadas
  financial system.
• The following analysis explores how those risks
  have evolved in the first half of 2009, with
  Table 1 summarizing the assessments of the Bank
  of Canadas Governing Council.

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Canadian Banks - Q4/09

• It should be kept in mind that the five
  identified risks are highly interdependent.
• For example, a sharper global economic downturn
  than currently expected (risk 4) would likely
  have an adverse impact on the balance sheets of
  Canadian households (risk 3) and businesses.
• This would increase the loan losses of Canadian
  banks, which might lead them to curb balance
  sheet growth to maintain their capital ratios
  (risk 2).
• A weaker-than-projected global economic
  environment would also likely be accompanied by a
  worsening of financial market conditions, which
  might exacerbate risks to Canadian banks relating
  to funding and liquidity (risk 1), while also
  raising the potential for heightened currency
  volatility (risk 5).

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CDN IB Sector
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CDN IB Sector