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Third Party Abcp Restructuring Rbc Feb28[1]

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Third Party Abcp Restructuring Rbc Feb28[1]

  1. 1. RBC Dominion Securities Inc. INDUSTRY | COMMENT Andre-Philippe Hardy, CFA (Analyst) FEBRUARY 27, 2008 (416) 842 4124; ap.hardy@rbccm.com Dave Mun, CFA (Associate) RBC Canadian Financial Services Beacon (416) 842-5638; dave.mun@rbccm.com Third-party ABCP restructuring has progressed, but risks remain Event We have seen significant progress made in the restructuring of the third party Canadian Asset Backed Commercial Paper market, and we continue to believe that a resolution is the most likely outcome, but there is still risk of a delay, or worse, failure. We believe that many players are motivated to support a restructuring but the wider credit spreads get, and the longer they stay wide, the more risk there is to a successful restructuring. • This report focuses on the current restructuring plan and risks associated with it. For a greater understanding of the past growth of the third party Canadian ABCP market and why it ran into serious difficulties in August 2007, we direct readers to our August 20, 2007, report on the topic. • Credit spreads on North American investment grade debt have widened significantly since early February (from about 110 basis points to 142 basis points), when the the Pan-Canadian Investors Committee for Third-Party Structured Asset Backed Commercial Paper (The Committee) last updated the public on its progress. • We continue to believe that a restructuring remains the most likely outcome and that a liquidation of the conduits would likely lead to losses that are greater than the underlying asset quality would suggest given the lack of liquidity in structured products. • We do not believe that ABCP holders will receive securities that trade close to par value initially, even if the restructuring gets completed as planned. The value of the assets should be closer to par at maturity (about seven years). • The continued widening of credit spreads for investment grade debt has negative implications for the initial valuation of the ABCP and it also probably complicates the restructuring process as holders of credit default swaps are probably owed very significant amounts from the ABCP conduits, and may be less inclined to support a restructuring. • Swap counterparties had agreed not to make margin calls under a standstill agreement that expired February 22, 2008. There has been no reported extension of the standstill; if the delay is due to swap counterparties becoming less supportive of the restructuring and they ask for margin to be posted, it could derail the restructuring. We do not know the cause of the delay at this point. • National Bank's $2.3 billion exposure to non-bank sponsored ABCP is highest of the six Canadian banks, and National Bank is the smallest of the six. From a stock price perspective, we believe that most market participants are assuming a successful restructuring of the ABCP conduits. We therefore believe there is little upside to National Bank's ($52/SP/A) shares in the near term if the restructuring progresses, but there is downside risk if a negative announcement comes. Priced as of prior trading day's market close, EST (unless otherwise noted). All values in CAD unless otherwise noted. For Required Disclosures, please see Page 8.
  2. 2. February 27, 2008 RBC Canadian Financial Services Beacon Floating rate notes could begin trading in the spring • There is $33 billion in Canadian third-party asset-backed commercial paper that has been frozen since mid-August 2007 (i.e. holders of that paper have not been able to receive cash as their short term paper matured). • The Committee has been working on a plan to convert the ABCP into floating rate notes (FRNs), thereby eliminating the duration mismatch inherent in commercial paper and eliminating funding risk. • The Committee intends on presenting its plan to ABCP investors in upcoming weeks and have a vote by 3-4 weeks after that. If ABCP investors vote in support of the restructuring, they should receive floating rate notes by April 2008. • The floating rate notes should start trading shortly after, on the assumption that a secondary market develops. Not all ABCP holders will be willing to hold the converted paper as many need the liquidity, and will likely have no interest in holding floating rate notes with a duration of five to eight years. This is likely to initially pressure valuations of floating rate notes when they start trading (beyond the valuation impact of marking to market credit positions). • It is not clear how actively traded the floating rate notes will be. The Committee hopes that by making the underlying assets and risks more transparent, a secondary market will develop. In an effort to improve transparency, The Committee expects to make available to investors all information that rating agencies currently have. Even with those efforts, it is not clear how much or where dealer support would come from to create liquidity in the FRNs. Restructuring plan would convert ABCP into longer-term notes • The Committee plans to split the $33 billion of ABCP into three categories: o Conduits that are made up of non-synthetic assets (i.e. traditional ABCP) will be separately restructured and are likely, in our mind, to be highly rated and trade close to par (or at the very least provide investors with a security that will likely be worth par if held to maturity). There is about $3 billion in assets that are likely to fit in this bucket. o Conduits with ineligible assets (primarily investments backed by U.S. sub-prime mortgages) will see the ineligible assets separately restructured. There is about $3 billion in ineligible assets, with seven of the twenty trusts participating in the restructuring process holding such securities (the percentage of ineligible assets ranges from 10% to 100%, depending on the trust). We expect significant pricing risk on this asset category given the current trading values of assets backed by U.S. sub-prime mortgages. o The remaining $26 billion in assets will be pooled into two master asset partnerships (MAPs). The MAP1 will issue term notes and will self-fund potential margin calls if the value of the assets held by the partnership deteriorates. MAP1 will include La Caisse de Dépôt et Placement du Québec, and Desjardins Financial Group among others. Investors that will be invested in MAP1 would self-fund a margin facility (in return for a commitment fee from the MAP), with $8 billion in committed margin funding already approved. ABCP investors who wish to join MAP1 and have the credit capacity to do so may join MAP1 and, as a result, would not “lose” the annual commitment fee payable for a third party margin facility (which is being provided in MAP2). • The Committee expects $15 billion of the $26 billion of assets to be included in MAP1, with the rest in MAP2, based on interest expressed so far. The MAP2 will issue senior notes, which JP Morgan believes will be AAA-rated, and subordinated notes, which are unlikely to carry a rating. We believe that 80-85/20-15% is a reasonable estimate of the breakdown between senior and subordinated notes. The MAP2 will have a third party funded margin facility to protect against potential margin calls, which would cost about 160 basis points annually to maintain. The cost would reduce the net yield on assets held in the MAP2. • A senior/subordinated note structure is being created to ensure that the majority of the assets are AAA-rated as the underlying ABCP assets are likely not AAA-rated on their own. • The Committee has secured a margin facility of $14 billion, and we believe that most of it has come from global banks, which were the primary counterparties on written credit default swaps, in our view. Canadian banks would also be participants, except for TD Bank. • Any advance to the margin facility becomes senior to the obligations of the MAPs. 2
  3. 3. February 27, 2008 RBC Canadian Financial Services Beacon • A key component to a successful restructuring of the ABCP is the restructuring of trigger clauses in derivatives agreements. The Committee hopes to make the margin requirement trigger points more remote1 and failure to do so could derail the restructuring process, in our view. o The third party ABCP conduits synthetically created credit exposures by writing credit default swaps since they were not natural originators of assets. Most credit default swaps have provisions that require the counterparty that is out-of-the-money (in this case, the ABCP conduits) to post margin based on the replacement value of the derivatives, which can vary dramatically based on credit spreads. o Since credit risk is arguably low, the key risk is funding potential calls for margin that are related to negative marks to market. A negative mark-to-market on leveraged assets can quickly affect an equity holder, no matter what the ultimate asset value may or may not be. Failure to post margin would lead to a conduit selling its assets to meet that margin call, in our view, as swap counterparties have first claim on assets and have the right to unwind transactions and liquidate assets to recover their mark to market gains. o We believe that the ABCP conduits would have to post significant collateral today if the counterparties demanded it2, but the amount has not been disclosed. Since the conduits probably do not have much cash, if any, they would likely have to sell assets and crystallize potentially large losses. o The level at which a price movement triggers margin posting is important in determining how much liquidity the MAPs may need to access – the farther the trigger points, the lower the probability of the MAPs requiring to post margin and the higher the rating of the securities, in our view. Triggers could also be changed to reflect underlying credit ratings as opposed to market value, but we suspect the swap holders may not be inclined to support such a change. o We believe that an agreement in principle had been reached to restructure trigger agreements with swap counterparties, but credit spreads have been rapidly widening (Exhibit 1). The continued widening of credit spreads for investment grade debt probably complicates the restructuring process as holders of credit default swaps are probably owed very significant amounts from the ABCP conduits, and may be less inclined to support a restructuring that significantly reduces their potential gain. o A lack of support from swap counterparties would have significant negative implications for the restructuring, in our view. The standstill agreement under which they agreed not to ask ABCP conduits for margin expired on February 22, 2008, and there has been no public release from The Committee since then. o The Committee is also encouraging better disclosure on the nature of the loss triggers and hopes to make them dependent on both credit spreads and actual loss experience rather than just mark to market. • The duration of the assets will be extended. The ABCP held by investors had short duration (30-90 days), but the duration of the floating rate notes will be in line with the duration of the underlying assets (about seven years on average). The Committee could not realistically salvage both value and liquidity at the same time, in our view. • The approval process to restructure the ABCP into FRNs will require two thirds approval in each ABCP trust (and in some cases, series of trusts). Approval will be based on value of holdings (not the number of holders). A trust or series of trusts will not be eligible to participate in the restructuring if less than two thirds of holdings vote in favour of the restructuring. We believe that at least four players, which collectively own over 60% of the assets, are likely to be positively predisposed in favour of the restructuring. • The Committee expects that “upon completion of the restructuring, participating parties will receive comprehensive releases and all outstanding market disruption liquidity facilities will be canceled.” o We believe that this feature is probably the Committee’s biggest “asset” in negotiating with swap counterparties. We believe that many of the swap holders were also the providers of liquidity facilities, which, as we all recall, refused to provide liquidity to conduits when the market froze in August, arguing that there was no general market disruption3. 1 According to DBRS, 92% of triggers in the trusts being restructured were mark-to-market triggers, which are based on the market price of protection on the referenced CDO tranche. 2% were loss only triggers based only on accumulated default losses experienced by the referenced portfolio, and 7% were spread and loss triggers based on both credit risk and market value. To make margin requirements more remote, the triggers are being restructured to become more remote spread loss triggers. 2 The swap counterparties had agreed not to make margin calls while the restructuring process evolves under a standstill agreement that expired on February 22, 2008. 3
  4. 4. February 27, 2008 RBC Canadian Financial Services Beacon The issue of market disruption was never vetted by a court (i.e. there was not enough time in August for the ABCP administrators and the liquidity providers to go to court to determine whether there indeed was market disruption or not). We therefore believe that the presumed threat of legal action by ABCP holders, which if successful could lead to the liquidity providers owning all of the assets, could be enough to motivate the swap buyers to restructure their collateral agreements (i.e. they may be willing to accept lower collateral but avoid the possibility of owning all these assets outright). o We also believe that the presumed releases from potential legal actions is also why some players that were involved in the third party ABCP market in some capacity (as distributors for example) are interested in supporting the restructuring, partly by providing a margin facility to the trusts. Restructured assets unlikely to trade at par initially We believe that the aggregate assets are likely to trade at a discount to par value. We believe the discount could be 10-25% initially, including the ineligible assets. Some of that discount to par should come back in over time based on the information we have (The Committee and DBRS have been adamant that the trusts ran into funding difficulties, not credit issues). However, CDO transactions make up about three quarters of the assets of third party ABCP and structured finance assets have seen meaningful pricing pressure no matter how good their credit ratings have been. As a result, the current market value of the assets held in ABCP is almost certainly less than par. o The $3 billion of conduits that are made up of non-synthetic assets (i.e. traditional ABCP) are likely, in our mind, to be highly rated and trade close to par. o The $3 billion in conduits that are primarily backed by U.S. sub-prime mortgages could trade at a 20-80% discount to par, depending on the rating of the underlying securities and year of vintage. o The $26 billion in conduits that is made up of synthetic assets is likely to trade at a discount to par, which we believe could be 10-20%. o There has been significant spread widening for debt securities in general, and this has been particularly true for structured finance assets. We believe that the credit default swaps in the ABCP would have primarily referenced super senior tranches of collateralized debt obligations and synthetic assets such as CDOs, which are in theory high quality assets but their spreads have not been spared by the current market malaise. The CDX.NA.IG index4 has seen spreads almost double in the last two months alone, widening to 142 bps from 78 bps at the end of December, or from 30 bps a year ago. (Exhibit 1) Approximately $18 billion of the $26 billion refer to levered super senior swaps 5. The swaps would refer to senior tranches of debt structures so the spread movements would be less than for the index as a whole. o The high leverage in certain structures (mostly those backed by super senior tranches of investment grade debt) magnifies the impact of wider credit spreads and is likely to create mark to market losses for the ABCP conduits even though credit problems on the underlying assets are not an issue at this time. We believe that leverage was probably around 5 times equity as an average, with variation on both the upside and downside depending on the individual conduit. We quote DBRS on how rising debt spreads may lead to losses for ABCP holders: “Consider an LSS transaction referencing the ten-year CDX IG9 Index, with a 30% to 60% tranche, levered ten times. Assume that the funded amount is $100 million and the MTM trigger is set at 50% of the funded amount, or 5% of the total swap notional of $1 billion. If the trigger is breached, assume that the size of the collateral call would be a predetermined amount known as the variation margin, set in this example at 2% of the notional amount. For this hypothetical transaction, assume that when the index spread went over 110 3 Backup liquidity providers were only required to post liquidity in the event of “general market disruption” but the exact definition of such disruption was not clear, although the circumstances under which liquidity could be drawn were widely viewed to be sufficiently remote by the banks and regulators that banks structuring and selling CDOs to ABCP conduits were willing to provide GMD-style liquidity backstop facilities to the conduits. 4 A tradable credit derivative index – North American Investment Grade Index is composed of 125 entities distributed among six sub-indices. 5 A levered super senior swap transaction occurs when credit protection is provided on a partially collateralized tranche that loses money only when a trigger or attachment point that is AAA rated (or higher) is reached. The collateral held is smaller than the exposure under the swap, so a margin call may rapidly increase the collateral the credit protection seller is required to post. 4
  5. 5. February 27, 2008 RBC Canadian Financial Services Beacon basis points in mid-January, 2008, the tranche experienced a mark-to-market of negative 5.2%. The MTM trigger is therefore breached by 0.2% of the total notional amount. If this were to occur, the credit protection seller (i.e., the Conduit) would therefore be required to post $20 million of eligible collateral within three to ten business days. Failure to do so would result in the transaction unwinding.” DBRS wrote this note when investment grade spreads were 110 basis points; they are currently 142 basis points. o The Committee and DBRS claim that the assets, while opaque and leveraged, ultimately refer to high quality assets (for eligible assets). If true, this would lead to most of the securities being worth par value as the notes matured if the trusts have the capacity to hold assets to maturity. Exhibit 1: North American Investment Grade CDS index spreads have widened significantly in 2008 Source: Markit. Risks remain until the restructuring is done Risks to the restructuring process will remain in place until a deal is done. Progress has been made, but issues could arise that would derail the process. The following quote is from The Committee “The implementation of the restructuring… will be subject to a number of conditions, including execution of definitive legal documentation, satisfactory due diligence, receipt of internal approvals by dealer bank asset providers and participating Schedule I banks and receipt of the requisite approvals of holders of ABCP. A variety of consents and other approvals will be necessary or desirable in connection with the restructuring, including certain governmental, regulatory and court approvals.” We believe that an agreement in principle had been reached to restructure trigger agreements with swap counterparties, but credit spreads have been rapidly widening, which could lead to problems. The continued widening of credit spreads for investment grade debt probably complicates the restructuring process as holders of credit default swaps are probably owed very significant amounts from the ABCP conduits, and may be less inclined to support a restructuring. The standstill agreement under which they agreed not to ask ABCP conduits for margin expired on February 22, 2008, and there has been no public release from The Committee since then. We continue to believe that a liquidation of the conduits would likely lead to losses that are greater than the underlying asset quality would suggest given the lack of liquidity in structured products. As such, we believe that a restructuring remains the most likely outcome. 5
  6. 6. February 27, 2008 RBC Canadian Financial Services Beacon National Bank is most affected by the restructuring National Bank’s $2.3 billion exposure to non-bank sponsored ABCP is highest of the six Canadian banks, and National Bank is the smallest of the six. The bank’s management remains optimistic that the bank's 25% writedown in Q4/07 was sufficient and the restructuring of the ABCP under the Montreal Accord will be successful. Management recently reiterated its view that, for its provision to be inadequate, a severe US recession or a disorderly liquidation of the ABCP assets would be needed. We are more cautious on the near term adequacy of the provision as the rapid widening of credit spreads could cause an increase in provisions in our view (i.e. the credit markets are increasingly pricing in a severe US recession in our view, which is one of the 2 risks identified by management to its provision). • The bank's Q4/07 provision of $575 million related to the holdings of non-bank sponsored asset backed commercial paper represented 25% of ABCP holdings, a high figure compared to the writedowns taken by others. Other writedowns were as follows: Scotiabank (we believe 20%), CIBC (17%), Bank of Montreal (15%), Caisse de Depot (15%), Industrial Alliance (15%), HSBC Bank Canada (14%), ATB Financial (10%) and Desjardins (8%). (Exhibit 3) The underlying asset mix of the conduits that National Bank is invested in appears consistent with the asset mix for the broad non-bank sponsored ABCP market, so the discrepancies in valuations should not ultimately be that large. • If the provisions taken by National Bank prove to be conservative, the bank will benefit from recoveries in upcoming years. Given the asset mix underlying the ABCP, we think that there is a good chance that the bank will recover some of that charge over time but there could be pressure on the provision in early days if investment grade spreads continue to widen. • If National Bank were to have to increase its provision, we believe that it could increase its provision by a similar amount as in Q4/07 (i.e. $575 million) and still have a Tier 1 capital ratio of over 8.5%. • From a stock price perspective, we believe that most market participants are assuming a successful restructuring of the ABCP conduits. We therefore believe there is little upside to National Bank’s shares in the near term if the restructuring progresses, but there downside risk if a negative announcement comes. 6
  7. 7. February 27, 2008 RBC Canadian Financial Services Beacon Exhibit 2: Disclosed Canadian financial institutions holdings of ABCP subject to restructuring under the Montreal Accord Caisse de Dépôt $ millions As at December 31, 2007 Gross or par value of holdings 12,600 Fair value is net of $1,900mm writedown (15%), of which $469mm relates to US subprime Fair value of holdings 10,700 mortgages with face value of $782mm. Remaining provision for assets on which it expects to recover full value over time. Spreads widened since December, risk of worsening if recession. National Bank Gross or par value of holdings 2,294 As at October 31, 2007 Fair value of holdings 1,719 Net of $575mm writedown (25%) Total liquidity facilities - NA provided $56mm of $554mm authorized loans to clients holding ABCP Desjardins As at September 30, 2007 Gross or par value of holdings 1,939 Excludes $809mm held in certain guaranteed-capital savings products. Fair value of holdings 1,779 Net of $160mm writedown (8.3%). Comprised of $181mm investment, $541mm collateral assumed from clients, $1,210mm bought from funds/clients. ATB Financial Gross or par value of holdings 1,000 As at December 31, 2007 Fair value of holdings 900 Net of $108mm writedown (10%). CIBC Gross or par value of holdings 358 As at October 31, 2007 Fair value of holdings 297 Net of $61mm writedown (17%) Total liquidity facilities - $1.6 billion liquidity facilities are for conduits that CIBC sponsored but third-parties had structured, or conduits structured and sponsored by third parties. Two-thirds of that $1.6 billion are general market disruption facilities as opposed to global liquidity facilities. Bank of Montreal Gross or par value of holdings 360 As at October 31, 2007 Fair value of holdings 306 Net of $54mm writedown (15%) Total liquidity facilities - HSBC Bank Canada Gross or par value of holdings 327 As at December 31, 2007 Fair value of holdings 280 Net of $47mm writedown (14%). Scotiabank Gross or par value of holdings 207 As at October 31, 2007 Fair value of holdings 187 Net of $20mm writedown (20% on certain holdings). Total liquidity facilities 370 Source: Company reports, RBC Capital Markets Research 7
  8. 8. February 27, 2008 RBC Canadian Financial Services Beacon Required Disclosures Explanation of RBC Capital Markets Rating System An analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned to a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative to the analyst's sector. Ratings Top Pick (TP): Represents best in Outperform category; analyst's best ideas; expected to significantly outperform the sector over 12 months; provides best risk-reward ratio; approximately 10% of analyst's recommendations. Outperform (O): Expected to materially outperform sector average over 12 months. Sector Perform (SP): Returns expected to be in line with sector average over 12 months. Underperform (U): Returns expected to be materially below sector average over 12 months. Risk Qualifiers (any of the following criteria may be present): Average Risk (Avg): Volatility and risk expected to be comparable to sector; average revenue and earnings predictability; no significant cash flow/financing concerns over coming 12-24 months; fairly liquid. Above Average Risk (AA): Volatility and risk expected to be above sector; below average revenue and earnings predictability; may not be suitable for a significant class of individual equity investors; may have negative cash flow; low market cap or float. Speculative (Spec): Risk consistent with venture capital; low public float; potential balance sheet concerns; risk of being delisted. Distribution of Ratings, Firmwide For purposes of disclosing ratings distributions, regulatory rules require member firms to assign all rated stocks to one of three rating categories--Buy, Hold/Neutral, or Sell--regardless of a firm's own rating categories. Although RBC Capital Markets' stock ratings of Top Pick/Outperform, Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis (as described above). Distribution of Ratings/IB Services RBC Capital Markets Investment Banking Serv./Past 12 Mos. Rating Count Percent Count Percent BUY[TP/O] 498 44.79 208 41.77 HOLD[SP] 526 47.30 149 28.33 SELL[U] 88 7.91 15 17.05 Rating and Price Target History for: National Bank of Canada as of 02-26-2008 (in CAD) 03/21/05 05/04/05 07/25/05 08/26/05 12/09/05 02/07/06 03/07/06 05/26/06 09/01/06 11/21/06 01/22/07 SP:56.25 OP:58.25 OP:60.5 OP:64 OP:65 OP:71 SP:66 OP:68 OP:67 OP:72 D:NR:NA 72 64 56 48 40 32 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 2006 2007 2008 04/30/07 08/01/07 08/31/07 11/13/07 12/11/07 01/24/08 I:UP:65 UP:64 UP:60 UP:59 SP:59 SP:55 Legend: TP: Top Pick; O: Outperform; SP: Sector Perform; U: Underperform; I: Initiation of Research Coverage; D: Discontinuation of Research Coverage; NR: Not Rated; NA: Not Available; RL: Recommended List - RL: On: Refers to date a security was placed on a recommended list, while RL Off: Refers to date a security was removed from a recommended list. Created by BlueMatrix References to a Recommended List in the recommendation history chart may include one or more recommended lists or model portfolios maintained by a member company of RBC Capital Markets or one of its affiliates. RBC Dain Rauscher Inc. Recommended 8
  9. 9. February 27, 2008 RBC Canadian Financial Services Beacon Lists include a former list called the Western Region Focus List (1), a former list called Model Utility Portfolio (2), and the Prime Opportunity List (3) (formerly called the Private Client Selects), Private Client Prime Portfolio (4), a former list called Private Client Portfolio (5), the Prime Income List (6), the Guided Portfolio: Large Cap (7), and the Guided Portfolio: Dividend Growth (8). The abbreviation 'RL On' means the date a security was placed on a Recommended List. The abbreviation 'RL Off' means the date a security was removed from a Recommended List. Analyst Certification All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report. Dissemination of Research RBC Capital Markets endeavours to make all reasonable efforts to provide research simultaneously to all eligible clients, having regard to local time zones in overseas jurisdictions. RBC Capital Markets' equity research is posted to our proprietary websites to ensure eligible clients receive coverage initiations and changes in rating, targets and opinions in a timely manner. Additional distribution may be done by the sales personnel via email, fax or regular mail. Clients may also receive our research via third party vendors. Please contact your investment advisor or institutional salesperson for more information regarding RBC Capital Markets research. 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Thus, it is possible that a subject company's common equity that is considered a long-term 'sector perform' or even an 'underperform' might be a Short-Term buying opportunity as a result of temporary selling pressure in the market; conversely, a subject company's common equity rated a long-term 'outperform' could be considered susceptible to a Short-Term downward price correction. Conflicts Disclosures RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request. To access our current policy, clients should refer to http://www.rbccm.com/cm/file/0,,63022,00.pdf or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time. Important Disclosures The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated by investment banking activities of the member companies of RBC Capital Markets and its affiliates. A member company of RBC Capital Markets or one of its affiliates received compensation for investment banking services from National Bank of Canada in the past 12 months. RBC Dominion Securities Inc. makes a market in the securities of National Bank of Canada and may act as principal with regard to sales or purchases of this security. Royal Bank of Canada, together with its affiliates, beneficially owns 1 percent or more of a class of common equity securities of National Bank of Canada. A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other than investment banking services from National Bank of Canada during the past 12 months. During this time, a member company of RBC Capital Markets or one of its affiliates provided non-investment banking securities-related services to National Bank of Canada. A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other than investment banking services from National Bank of Canada during the past 12 months. During this time, a member company of RBC Capital Markets or one of its affiliates provided non-securities services to National Bank of Canada. RBC Capital Markets has provided National Bank of Canada with investment banking services in the past 12 months. 9
  10. 10. February 27, 2008 RBC Canadian Financial Services Beacon RBC Capital Markets has provided National Bank of Canada with non-investment banking securities-related services in the past 12 months. RBC Capital Markets has provided National Bank of Canada with non-securities services in the past 12 months. The author is employed by RBC Dominion Securities Inc., a securities broker-dealer with principal offices located in Toronto, Canada. Additional Disclosures RBC Capital Markets is the business name used by certain subsidiaries of Royal Bank of Canada, including RBC Dominion Securities Inc., RBC Capital Markets Corporation, Royal Bank of Canada Europe Limited and Royal Bank of Canada - Sydney Branch. 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If this material relates to the acquisition or possible acquisition of a particular financial product, a recipient in Australia should obtain any relevant disclosure document prepared in respect of that product and consider that document before making any decision about whether to acquire the product. To Hong Kong Residents: This publication is distributed in Hong Kong by RBC Investment Services (Asia) Limited, a licensed corporation under the Securities and Futures Ordinance. This material has been prepared for general circulation and does not take into account the objectives, financial situation, or needs of any recipient. Hong Kong persons wishing to obtain further information on any of the securities mentioned in this publication should contact RBC Investment Services (Asia) Limited at 17/Floor, Cheung Kong Center, 2 Queen's Road Central, Hong Kong (telephone number is 2848-1388). ®Registered trademark of Royal Bank of Canada. RBC Capital Markets is a trademark of Royal Bank of Canada. Used under license. Copyright © RBC Capital Markets Corporation 2008 - Member SIPC Copyright © RBC Dominion Securities Inc. 2008 - Member CIPF Copyright © Royal Bank of Canada Europe Limited 2008 Copyright © Royal Bank of Canada 2008 All rights reserved 10

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