CANADIAN FINANCIAL SERVICES

EQUITY RESEARCH 9 September 2010 CANADIAN FINANCIAL SERVICES Banks Q3-10 Review: A New Environment After the Positive Earnings Surprises End The recurring dominant theme of the third quarter was the significant decline in trading revenues, down an average 48% for the ‘Big 6’. With the slide in trading revenues more than offsetting the continued dramatic improvement in credit quality, Q3 results were somewhat mixed and uninspiring, with only CIBC and National managing to exceed Street estimates. As a result, Canadian banks’ share prices slipped in the first week of reporting; however, all have since recovered, with the ‘Big 6’ index up 4% between the start and end of earnings season. Coming out of the quarter, consensus estimates were adjusted downward to reflect the somewhat lackluster Q3 results, with 2011 forecasts reduced by an average 3%. While third-quarter earnings were largely mixed, we believe that some of the underlying themes of the quarter, and its variants, should lead to a stronger fourth quarter and continued positive outlook heading into 2011. „ Another Dramatic Decline in Provisions, But Expecting a Retracement – All of the Canadian banks generated sequential declines in provisions, averaging an 18% drop, providing a much needed lift to earnings. While credit conditions have improved remarkably over the past few quarters, we expect credit quality improvement will moderate in the coming quarters. „ Continued Loan Growth Partially Offset Lower Margin Pressures – Net interest income for the ‘Big 6’ rose sequentially in the third quarter, as loan portfolios in the domestic market remained resilient, although net interest margins continued to be under pressure. We anticipate this spread compression should ease, as the recent interest rate hikes have widened the Prime-BA spread. Although both the U.S. and International markets have shown modest loan growth, margins in the U.S. have been challenged, with International margins being more robust. „ Trading Revenues to Rise Again, Albeit at Lower Levels – The dramatic drop in trading revenues can largely be attributed to weakness in fixed income trading, with the bulk of the declines stemming from widening credit spreads, especially in the month of May, the height of the European sovereign debt crisis. Consequently, we anticipate that trading revenues will reverse some of these declines. „ Strong Risk Profiles and Sound Capital Levels – With solid absolute and relative capital levels, the ‘Big 6’ continues to represent a compelling risk-reward profile, in our view. And with quite sustainable payout ratios, the drumbeats of a dividend hike, possibly in the first half of 2011, are growing louder. Barclays Capital does and seeks to do business with companies covered in its research reports. As aresult, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 42.SECTOR UPDATE Canadian Financial Services 1-POSITIVE Unchanged For a full list of our ratings, price target and earnings in this report, please see table on page 2. Canadian Financial Services John Aiken, CA, CFA 1.416.863.8961 john.aiken@barcap.com BCC, Toronto Joseph Ng, CFA 1.416.863.8965 joseph.ng@barcap.com BCC, Toronto Sara Mackasey 1.416.863.8964 sara.mackasey@barcap.com BCC, Toronto Barclays Capital | Canadian Financial Services 9 September 2010 2 Summary of our Rating, Price Target and Earnings in this Report Company Rating Price Price Target EPS FY1 (E) EPS FY2 (E) Old New 08-Sep-10Old New%Chg Old New %ChgOldNew%ChgCanadian Financial Services 1-Pos1-Pos Bank of Montreal (BMO CT / BMO.TO) 1-OW 1-OW60.13 68.00 68.00- 4.85 4.85 - 5.76 5.76- Bank of Nova Scotia (BNS CT / BNS.TO) 3-UW3-UW52.16 53.00 53.00- 3.90 3.90 - 4.19 4.19- Canadian Imperial Bank of Commerce (CM CT / CM.TO) 2-EW 2-EW74.19 76.00 76.00- 6.38 6.38 - 7.30 7.30- Manulife Financial (MFC CN / MFC.TO) 2-EW2-EW12.79 15.00 15.00- 1.65 1.65 - 1.91 1.91- National Bank of Canada (NA CT / NA.TO) 2-EW 2-EW64.25 66.00 66.00- 6.22 6.22 - 6.87 6.87- Royal Bank of Canada (RY CT / RY.TO) 2-EW2-EW52.51 56.00 56.00- 3.79 3.79 - 4.52 4.52- Sun Life Financial (SLF CN / SLF.TO) 1-OW1-OW27.30 31.00 31.00- 2.