‘We like democracy’: Prem Watsa shuns China as Fairfax looks for investments in India, U.S.

Prem Watsa, the billionaire head of Fairfax Financial Holdings Ltd., sees plenty of opportunities for investment in the U.S. and his native India. He’s less interested in the other Asian powerhouse.

“In China, we are less invested,” Watsa said in an interview with BNN Bloomberg Television Friday. “We like democracy. We like business-friendly policies.”

Watsa, who emigrated from India 46 years ago, is most excited about the opportunities being created there due to the policies implemented by Prime Minister Narendra Modi.

“He’s very business friendly and he’s got a great track record,” he said.

Fairfax has launched a public company, Fairfax India Holdings Corp., and invested about $5 billion (US$3.9 billion). Watsa said there’s room to expand Fairfax’s footprint there.

In the U.S., after eight years of poor economic growth of 2 per cent or less, there’s a lot of pent-up demand in several sectors that’s creating investment opportunities as well.

“Housing starts have been very minimal for a long period of time,” he said. “So what that means is that in the next four or five years you have to make up for that. Then you have new households being formed,” he added. “You do that for housing. You do that for automobiles. You do that for infrastructure. We think there might be a pretty long runway.”

Trump Taxes

He said that pent-up demand is also being supported by the Trump administration and the changes they have made to roll back corporate taxes and decrease regulations.

“We see all of that being positive for business and ultimately business drives the economy,” he said.

Watsa said last month his Toronto-based insurance and investment company was stockpiling cash as he looks for cheap stocks. The chief executive officer said at the time about 50 per cent of Fairfax’s portfolio was in cash, up from 39 per cent the previous year. He also joined a chorus of investors and analysts in saying that Canada is facing a harder time competing with the U.S. given higher corporate taxes and delays in getting projects like pipelines built.

He reiterated that Friday, saying that while Canada will benefit from more business-friendly measures being implemented in the U.S., there are downsides to that.

“We have to be careful because we have the United States as our partners next to us and when they get very business-friendly policies then by comparison ours are less friendly,” he said. “If you’re attracting investment, then of course investment could go to the United States as opposed to Canada.”

Bloomberg.com

‘Uncertainty’ is the biggest risk facing Canada, TD Bank CEO says

From trade talks and scrapped deals to elections and government infighting, “uncertainty” has emerged as the biggest obstacle for Canada, according to the head of the nation’s largest lender.

“It’s all this uncertainty we’re looking at,” Toronto-Dominion Bank Chief Executive Officer Bharat Masrani said in a BNN Bloomberg interview when asked what’s the biggest risk to his bank’s Canadian business. “The more certainty we can create in the economy, the better off we are.”

Canada faces a plethora of issues potentially clouding the nation’s future. Those include fallout from Canada rejecting a Chinese takeover of construction firm Aecon Group Inc., bridging differences between British Columbia, Alberta and Justin Trudeau’s federal government on Kinder Morgan Canada Ltd.’s Trans Mountain pipeline, and ongoing talks with the U.S. and Mexico to renew the North American Free Trade Agreement.

“My own belief is that at the end of the day we will get a sensible deal on NAFTA, but in the meantime there’s lots of uncertainty and that does drive investment decisions that are not optimal sometimes,” Masrani said. “We have within Canada our own issues, between B.C. and Alberta, which is not helpful — so overall there is always some headwinds here we have to manage through.”

Canada’s decision this week to kill a proposed Chinese takeover of Toronto-based Aecon may bring further uncertainty, with China warning of an investment chill to the country.

“The global macro and geopolitical risks are a lot different today than they were five years ago, 10 years ago,” Masrani said, while declining to comment specifically on the Aecon decision. “So in a way to some extent it’s not surprising given how the world has evolved, but on the other hand that’s another uncertainty now going forward.”

Masrani also cited elections, such as the June vote in Ontario, Canada’s most populous province, as adding to uncertainty. One area Toronto-Dominion’s chief executive is less worried about is rising levels of consumer indebtedness.

“We don’t have a housing finance market that is not prudent, and a lot of this debt is still in mortgages, which is a good thing,” Masrani said. “As long as we have a growing economy and unemployment at the levels that we have now, then I think this thing is manageable. But if it turns out that unemployment were to go up substantially, then this will of course hurt.”

Masrani also commented on changing U.S. banking regulations, including President Donald Trump’s latest step in his push to ease regulations of banks with changes to the 2010 Dodd-Frank Act this week.

“We don’t see a dramatic shift for TD, but having said that there are certain changes that are very helpful, in stress testing and how that will be conducted in the future,” Masrani said. “So it is positive from that perspective.”

Bloomberg.com

Granite REIT’s ex-COO facing assault charge after alleged incident involving CFO

In the small, leaky village of Bay Street, things eventually get out.

That’s a lesson the board at Granite REIT may have cause to reflect on following an alleged incident involving two of its senior executives in early November.

According to court filings, that is when the company’s then-chief operating officer and co-head of global real estate, John De Aragon, allegedly assaulted the company’s chief financial officer, Ilias Konstantopoulos, contrary to section 266 of the Criminal Code of Canada.

De Aragon is now facing one charge of assault. The allegation has not been proven in court.

De Aragon ceased being COO on Nov. 13 according to a company circular released this month, though the company did not publicly announce the change at the time.

Granite did, however, apparently pay De Aragon significant compensation and incentives in 2017 and 2018.

In an information circular dated May 17, 2018, and prepared for its upcoming June 14 annual general meeting, De Aragon’s total compensation for 2017 is listed as $1,146,170, made up of salary ($450,000), annual incentive plans ($687,500) and all other compensation ($8,670).

In the notes to that table, we are told that because De Aragon ceased to be COO on Nov. 13, 2017 — and would be departing Granite altogether in 2018 — “the board determined to make Mr. De Aragon’s long-term incentive plan (LTIP) award in respect of 2017 of his target of $350,000 payable in cash in lieu of RSUs restricted share units.” We are further told that the $350,000 cash payment was “in addition” to the $337,500 short-term incentive plan (STIP) award De Aragon also received.

Elsewhere in the circular we are told that as of Dec. 31, 2017, De Aragon had $1,728,909 of value in “market or payout value of share-based awards that have not vested.” It is not clear if those were paid out in their entirety.

In 2016, De Aragon received $1.24 million in share-based awards, of which $890,000 was for RSUs granted and $350,000 was “a regular annual LTIP award.” It’s understood from Granite’s 2017 circular that the $890,000 was to vest and be paid out on March 31, 2018, pursuant to his amended employment agreement.

In its recently released first-quarter financial statements, Granite made a reference to recent events in the “general and administrative expenses” section of its MD&A.

In that section, unitholders were told that during the first quarter of 2018, G&A expenses “increased $1.3 million in comparison to the prior year period primarily as a result of compensation paid to a former officer who departed in the first quarter of 2018. The compensation paid included unit-based compensation awards that were settled in cash.”

From the language, it is unclear when precisely De Aragon became a “former” officer — was it back in November or was it when he received his final compensation? It is also unclear whether he continued to draw a salary or received any additional compensation in 2018.

Either way, it raises the question as to why De Aragon was paid at all after the assault charge was laid and the matter was still before the courts, especially given current debates over appropriate workplace behaviour.

If a similar allegation surfaced between a staffer and, say a director, would the staffer be treated in the same manner by the board?

“This is a story of a very dysfunctional organization that is transitioning into a new company,” said one well-placed observer, adding that in the past 18 months, the majority of Granite REIT’s board has been replaced, in part, because of pressure from activists. As part of that transition, Granite is expected to name a new chief executive within a few weeks. “The real story is that there is friction and disagreement as this organization remakes itself.”

When reached for comment, a company spokesperson said: “Granite REIT’s policy is not to comment on employee matters.”

Meanwhile, the assault charge remains before the courts. Court records show there have already been six scheduled appearances, with the next slated for May 29.

Toronto law firm Heller, Rubel Barristers is acting for De Aragon. “Our practice is we don’t comment on any of our on-going cases,” said one of its lawyers.

Konstantopoulos could not be reached for comment.

Banks downplay impact of new housing rules

Halfway through their latest earnings season, Canada’s big banks have downplayed the spectre of new housing regulations.

Results reported by three of the Big Six lenders have been relatively rosy, despite underwriting changes that kicked in at the start of the year, including a new stress test for uninsured mortgages that banks anticipate will slow their originations.

Royal Bank of Canada reported Thursday net income of $3.1 billion for the quarter ended April 30, up about nine per cent from a year ago.

RBC chief financial officer Rod Bolger said the bank also saw six per cent growth in mortgage volume for the quarter, and that it continues to expect mid-single-digit mortgage growth for the full year.

Even if growth slows more than expected, he said the benefits from central bank rate hikes would offset that hit.

“For example, if mortgage balances grow at half our expected rate, the impact on 2019 revenue would be less than the benefit we receive from one Bank of Canada rate hike,” Bolger said.

Bolger said in an interview that the dollar value of such a rate-hike-related benefit would be about $110 million in the first year after each quarter percentage point increase. 

“I don’t believe it’s going to be a significant impact for us,” Bolger said of the new housing regulations.

The banks have also used the occasion to highlight the importance and performance of other businesses.

RBC chief executive Dave McKay noted during his bank’s conference call that they saw continuing momentum in business lending for the second quarter. Bolger said that business lending had grown nearly 13 per cent year-over-year, as the bank kept gaining market share.

On Wednesday, Canadian Imperial Bank of Commerce said second-quarter profit shot up 26 per cent compared with last year, hitting $1.3 billion. And in reporting results, CIBC noted revenue growth at the bank has shifted somewhat away from housing.

A year ago, two-thirds of revenue growth for CIBC’s Canadian personal and small business banking unit stemmed from its real estate secured lending business, chief financial officer Kevin Glass told analysts during a conference call. For the three months ended April 30, that lending was less than a third of its year-over-year revenue growth, “with over two-thirds driven by higher-volume growth, margin expansion and higher non-interest income growth across other lines of business,” Glass said.

“We’re continuing to diversify our platform for growth,” said Victor Dodig, president and chief executive of CIBC, during an analysts’ conference call.

The shift comes as the bank is expecting mortgage originations in the latter half of this year to decline by about 50 per cent when compared with the same period last year, according to Christina Kramer, head of Canadian personal and small business banking for CIBC.

It also follows the bank’s US$5-billion acquisition last year of Chicago-based PrivateBancorp Inc. and its subsidiary, The PrivateBank, which was rebranded as CIBC Bank USA and contributed $94 million to CIBC’s net income for the quarter.

The bank had missed some growth opportunities over the past decade, and has been trying to put the “commerce” back in its name, Dodig said.

“We’re doing that in the Canadian market,” he told analysts. “We’re doing that now in the U.S. market. We’re doing that with the capital markets business that’s highly aligned with the rest of the bank. And we’re simply trying to recapture some of the ground that we had lost in the first half of that decade.”

Toronto-Dominion Bank, meanwhile, posted $2.9 billion in earnings for the second quarter, a 17-per-cent increase year-over-year. The bank also saw net income for its Canadian retail banking unit climb 17 per cent from a year ago, to approximately $1.8 billion.

Moreover, the bank’s total real-estate-secured lending, including mortgages and home equity lines of credit, was up about five per cent year-over-year. TD even noted in its results that it launched a digital “pre-approval tool” for mortgages in the second quarter, streamlining the experience for Canadian customers.

TD’s chief executive Bharat Masrani said it was “another terrific quarter” for the bank, with all its businesses on both sides of the border performing well.

“Canadian retail had a banner quarter…. We benefited from our No. 1 share in core deposits, with rising rates driving further margin expansion,” Masrani told analysts on a call Thursday.

A note from Eight Capital on TD’s earnings was headlined: “This is the reason TD is the consensus long.”

Financial Post

Email: gzochodne@nationalpost.com | Twitter: GeoffZochodne

Deutsche Bank axes at least 7,000 jobs, with up to 10,000 cuts possible, in trading retreat

FRANKFURT — Deutsche Bank is slashing more than 7,000 jobs to cut costs and restore profitability, while keeping its international reach as its new CEO seeks to reassure investors and clients.

Germany’s biggest bank said global headcount would fall to well below 90,000 from 97,000, with a 25 per cent cut in equities sales and trading jobs, which are mainly in New York and London and where it has been losing ground to U.S. rivals.

Deutsche Bank did not give a specific number, but a person with knowledge of the matter told Reuters ahead of the lender’s annual general meeting on Thursday that it was aiming to axe 10,000 positions.

Christian Sewing, who became CEO in an abrupt management reshuffle last month, said the bank was committed to its international presence, fleshing out his plan to scale back its global investment bank and refocus on Europe and its home market after three consecutive years of losses.

Last month the bank flagged cuts to U.S. bond trading, equities, and its business serving hedge funds.

“We remain committed to our Corporate & Investment Bank and our international presence — we are unwavering in that,” Sewing said, while acknowledging a “challenging” revenue environment.

Deutsche Bank has already dismissed 600 investment bankers over the past seven weeks and will cut spending by 1 billion euros (US$1.17 billion) by the end of 2019 in its investment bank.

“This reduction is already fully underway, and so far, due to the considered way we’ve handled this, we have not seen any meaningful revenue attrition,” Sewing said.

EUROPE’S ALTERNATIVE

Deutsche Bank has long been a default source of lending and advice for German companies seeking to expand abroad or raise money through the bond or equity markets, a role which has had the tacit backing of successive governments in Berlin.

Sewing said that Deutsche Bank’s position as a competitor to the Wall Street banking heavyweights such as Goldman Sachs, JP Morgan, Morgan Stanley and Bank of America, whose clout has grown in recent years, remained an important focus.

“We are Europe’s alternative in the international financing and capital markets business. However, we must concentrate on what we truly do well,” he said.

Another big European bank, BNP Paribas, effectively ruled out any tie-up with the German lender as the French bank’s chief executive told its shareholders that it was not considering big deals.

“In the foreseeable future, the group has no intention to carry out large-sized operations, because it is not possible,” Jean-Laurent Bonnafe said, when asked by an investor at its AGM if BNP was “analyzing” Deutsche Bank.

Deutsche Bank has been losing ground to rivals in investment banking in all regions, Thomson Reuters data shows. Its ranking for investment banking fees fell to 10th from 8th in the Americas between 2010 and 2017, to 15th from 6th in Asia-Pacific and to 3rd from 2nd in Europe.

Coalition data shows that in global equities, Deutsche has also lost market share in the cash, derivatives and prime services businesses over the same period. Overall in global equities it ranked between 7th and 9th in 2017 against a ranking of between 4th and 7th in 2010.

The reductions will reduce the investment bank’s leverage exposure by 100 billion euros, or 10 per cent, but KBW analysts said the moves were disappointing and its shares, down more than 31 per cent this year, were down 3.7 per cent at 1221 GMT.

“We view this as confirmation of our view that drastic but necessary restructuring is impossible at this stage,” KBW wrote.

“We remain concerned with their ability to generate free cash flow to support business growth post restructuring,” it said, adding that to achieve its target for a return on tangible equity of 10 percent, Deutsche would need 6 billion euros of profit, something the broker viewed as highly unlikely.

The cuts are merely a first step and further details are needed, Ingo Speich, a fund manager at Union Investment which holds Deutsche Bank shares, said.

“We would have liked to see concrete announcements at today’s shareholder meeting,” he told Reuters. “We need clarity on how the decisions will affect the bottom line.”

SHAREHOLDER PRESSURE

Deutsche Bank shareholders, who were fed with Frankfurter sausages and pretzels at the AGM, called on it to speed up the recovery process after months of internal turmoil.

“It is high-time to … end the years-long and still-popular ‘Deutsche Bank bashing’ and get to work finally getting our bank back on its feet after six long years of restructuring,” Klaus Nieding of shareholder lobby group DSW said.

Chairman Paul Achleitner last month abruptly replaced CEO John Cryan with Sewing amid investor complaints the bank was falling behind in executing a turnaround plan.

Achleitner defended his decision, adding that U.S. banker John Thain would head a new strategy committee on the supervisory board of the bank, which is also under pressure from credit ratings agencies.

© Thomson Reuters 2018

RBC beats expectations with 9% per cent profit rise

TORONTO — Royal Bank of Canada, Canada’s biggest lender by market value, on Thursday posted an 11 per cent rise in its second-quarter earnings, helped by strong growth at its wealth management and retail businesses.

The bank said earnings per share totalled $2.06 in the quarter to Mar. 31. Excluding one-off items, earnings per share rose to $2.10. Analysts had on average forecast earnings of $2.05, Thomson Reuters I/B/E/S data showed.

Net income increased by 9 per cent compared with the previous year to $3.1 billion. That included net income of $1.46 billion at its personal & commercial banking business, up 7 per cent reflecting improved margins and sales.

The bank’s wealth management business lifted net income by 25 per cent to $537 million, in part reflecting benefits from tax reform in the United States.

RBC’s investment banking business fared less well, with net income totalling $665 million, roughly unchanged on a year ago amid less favorable market conditions.

© Thomson Reuters 2018

Canada’s $35 billion Infrastructure Bank picks Pierre Lavallee to become CEO

The $35 billion (US$27 billion) Canada Infrastructure Bank has found its chief executive officer, with Pierre Lavallee soon taking the helm of an agency Prime Minister Justin Trudeau hopes will spur widespread spending on things like transit and trade links.

Lavallee will be announced Thursday as the new president and CEO of the Toronto-based bank and is scheduled to start on June 18. He was formerly senior managing director and global head of investment partnerships for the Canada Pension Plan Investment Board, where he spent six years.

The arm’s-length, government-financed lender will have “a lot of flexibility as to where in the balance sheet we can position ourselves” to spur relatively large-scale revenue-generating projects, Lavallee said in an interview Wednesday. He said the bank could build on the global reputation of Canada’s pension funds, that projects will be assessed case-by-case and that the bank can be “creative” in how it structures a deal.

“There is a real demand for infrastructure assets that I think the bank can help attract into Canada, and this is both from Canadian institutional investors and foreign institutional investors,” Lavallee said. “It’s really not everyday someone offers you the ability to lead the startup and build-out of an institution like that.”

The bank is mandated to invest in revenue-generating projects in three categories: public transit, green infrastructure and trade-and-transportation. Finance Minister Bill Morneau has said the bank’s goal is to leverage its funding — drawing five or six dollars of private money for every one of its own.

‘Open Mind’

The infrastructure bank was a key platform commitment by Trudeau’s Liberals in the 2015 election, but was launched only last year. It hasn’t yet invested in a project, though the enacting law has been passed and the board selected.

Setting up a major agency takes time, Lavallee said, “and I personally don’t feel like it’s actually been a long time, but that’s one man’s view.” Morneau has said $15 billion of the bank’s capital will be concessional capital, or direct funding to push projects to approval, while the remaining $20 billion will be for loans or equity stakes.

Lavallee’s appointment comes with one Canadian infrastructure project in the spotlight: Kinder Morgan Canada’s Trans Mountain oil pipeline expansion. The federal government is in talks with the company to somehow backstop the project after the company threatened to walk away in the face of provincial opposition.

Lavallee demurred when asked if the bank could invest in Trans Mountain or other pipelines, declining to comment on a specific project but citing the mandate to invest in revenue-generating projects from the three categories. “We’re keeping a very open mind, so I expect that there will be lots of opportunities that will come our way over time,” he said.

‘Transformational’ Projects

Infrastructure projects are notable for how long they take, and typically take more time than a buyout. “I wish I could tell you this is a few weeks’ cycle-time, but the reality is, it’s going to be several months and the timing is going to be very project-specific,” he said, adding the focus will be on a smaller number of big projects, rather than a large number of smaller-scale ones. “We are going to focus on relatively large transformational-type projects.”

Lavallee will lead strategy and day-to-day operations of the bank while reporting to the board. At CPPIB, Lavallee led a team managing about $94 billion in assets, the bank said in a statement. He was previously executive vice-president at Montreal-based Reitmans Canada Ltd. and a partner with Bain & Co.

“With an exceptional combination of investment and public-sector expertise, Pierre is well placed to set the strategic course and direction of Canada Infrastructure Bank and develop a high-performing management team,” Janice Fukakusa, the bank’s chair said. Annie Ropar, incoming chief financial officer and chief administrative officer, begins June 1.

Bloomberg.com

Canada’s biggest banks shrug off mortgage slowdown with profit beats

TORONTO — Royal Bank of Canada and Toronto-Dominion Bank, Canada’s two biggest lenders, reported second-quarter earnings that exceeded market expectations on Thursday, shrugging off concerns over slowing mortgage growth.

Canadian authorities have introduced policies, including taxes on foreign buyers, intended to cool rampant housing markets in Toronto and Vancouver and bring about a “soft landing,” where prices stabilize gradually.

Canada’s banking regulator introduced new regulations in January, requiring borrowers taking out uninsured mortgages to be stress-tested to determine their ability to make repayments at a rate 200 basis points above their contracted mortgage.

TD’s Chief Financial Officer Riaz Ahmed said the new rules had slowed new mortgage applications but he was happy with the direction the broader market was taking.

Ahmed said the bank had seen some reductions in mortgage applications in the second quarter, reflecting the slowdown in the overall market, but remained comfortable with its previous expectation of mid-single-digit growth for the year.

“I think we’re happy with how this ‘soft landing’ appears to be emerging at the minute. Sales activity is down and prices are down. The market cooling seems to be working and we’ll hope that it continues to play out that way,” he said.

RBC, Canada’s biggest lender by market value, posted an 11 per cent rise in earnings per share to $2.06 in the quarter to March 31. Excluding one-off items, earnings per share rose to $2.10. Analysts had on average forecast earnings of $2.05 a share, Thomson Reuters I/B/E/S data showed.

RBC said net income increased by 9 per cent compared with the previous year to $3.1 billion. That included net income of $1.5 billion at its Canadian retail business, up 7 per cent, reflecting improved margins and sales.

Rival TD said earnings per share, excluding one-off items, totalled $1.62 in the quarter to March 31, compared with $1.34 a year ago. Analysts had on average forecast earnings per share of $1.50, according to Thomson Reuters I/B/E/S data.

Canadian banks are also benefiting from improved margins as a result of the country’s central bank having raised its key interest rate three times since July 2017.

TD said net income at its Canadian retail business grew by 17 per cent to $1.83 billion.
Smaller rival CIBC said on Wednesday it expected new mortgage sales to drop by 50 per cent in the second half.

© Thomson Reuters 2018