Investment Summary
We initiate coverage of the large-cap Canadian banks with an overweight stance.
Our target prices suggest moderate total returns from the group over the coming 12
months, averaging somewhere on the order of 15%.
Sentiment on the industry is generally more cautious than fundamentals warrant;
however, we expect the mood to improve gradually over the coming three to six
months, as we receive more clarity around various credit concerns.
We prefer Scotiabank, CIBC and National Bank rated BUYs while Royal Bank of
Canada (Royal Bank, RY-T, N) and Bank of Montreal (Bank of Montreal, BMO-T,
N) are rated HOLDs.
Scotiabank’s international platform should be a source of superior growth and
returns over the medium term, while its domestic operations are improving relative
to fairly conservative expectations. Valuations appear reasonable given
Scotiabank’s superior growth outlook, high returns and strong capitalization.
CIBC underperformed on the back of concerns around its exposure to the U.S. subprime
mortgage market, which we believe are overblown. Its domestic P&C
banking and wealth management operations are improving and reflect
management’s shift toward lower risk and higher quality earnings, which should
garner improved relative valuation over time.
National Bank has underperformed dramatically on back of concerns surrounding
its exposure to third party ABCP. While National Bank’s platform faces some
operating challenges, we believe that the credit risks are manageable and the stock
is trading at an exaggerated discount to its peers.
We expect that industry fundamentals are not going to be as favourable as they
have been for much of the last two to three years. The outlook, however, is still
reasonable in our opinion and is likely better than generally reflected in sentiment
and sector valuations. Nevertheless, we see continued headline risk over the
coming months reflecting ongoing challenges in global credit markets and an
evolving rate and growth outlook.
Even in a less favourable environment, the group should continue to produce high
returns by historical standards and remains exceptionally well capitalized,
supporting the outlook for dividend growth and share buy backs.
Among the Canadian financials, we prefer the large-cap banks over the large life
insurance companies, given that the banks have underperformed by 9% year to
date and the group is trading at a wide discount relative to the insurers.

Table of Contents
Our Investment Case ..................................................................................... 3
Investment Summary..................................................................................... 4
Key Issue – Credit and Liquidity Challenges .............................................. 5
Credit Concerns – Overdone .......................................................................... 6
Macro Outlook – Less Favourable, but Still Reasonable ........................... 10
Operating Outlook – More Moderate Growth Expected ........................... 11
Valuation......................................................................................................... 15
Initiating Coverage
Bank of Montreal ........................................................................................... 17
Bank of Nova Scotia ....................................................................................... 23
Canadian Imperial Bank of Commerce ....................................................... 28
National Bank of Canada .............................................................................. 33
Royal Bank of Canada................................................................................... 38
Appendix I. Comp Table ............................................................................... 43
APPENDIX A. IMPORTANT DISCLOSURES ......................................... 46