Visa Inc.

CANADIAN IMPERIAL BANK OF COMMERCE $69 (Toronto symbol CM; Conservative Growth Portfolio, Finance sector; Shares outstanding: 335.0 million; Market cap: $23.1 billion; SI Rating: Above average) is Canada’s fifth-largest bank, with assets of $342.2 billion. CIBC has the most exposure to the U.S. subprime mortgage market among the top five Canadian banks. It has already written down its holdings by about $1 billion. CIBC now faces a further $2 billion charge due to growing uncertainty over hedges it purchased from troubled U.S. bond insurer ACA Financial Guaranty Corp. to protect it from subprime losses. In 2005, CIBC paid $2.5 billion (after-tax) to settle Enron-related claims. If you exclude writedowns and a gain on the restructuring of the Visa credit card system, CIBC’s earnings in the year ended October 31, 2007 rose 27.3%, to $9.24 a share (total $3.1 billion) from $7.26 a share ($2.5 billion) in 2006. Revenue grew 6.6%, to $12.1 billion from $11.35 billion, due to strong growth at its retail banking division plus an acquisition....

Bank stocks have moved down in the past few months, mainly because of concerns over a general lack of liquidity for securities backed by risky assets, such as subprime mortgages in the United States. This lack of liquidity makes it difficult to assess the market value of these securities, and has led to significant writedowns. Canada’s big five banks remain well capitalized, so these charges shouldn’t hurt their strong profit and dividend outlook. They’re still cheap in relation to earnings, and provide above-average yields. Investors should own at least one of these five banks in the Finance segment of their portfolio. CANADIAN IMPERIAL BANK OF COMMERCE $69 (Toronto symbol CM; Conservative Growth Portfolio, Finance sector; Shares outstanding: 335.0 million; Market cap: $23.1 billion; SI Rating: Above average) is Canada’s fifth-largest bank, with assets of $342.2 billion....

HOME CAPITAL GROUP INC. $38 (Toronto symbol HCG; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 34.5 million; Market cap: $1.3 billion; SI Rating: Extra risk) is the parent company of Home Trust Company, a federally regulated trust company that specializes in residential first mortgages to small business owners, the self-employed and others who don’t meet the stricter criteria of larger, traditional lenders. Home Trust’s mortgage lending is primarily funded by retail deposits. Home Trust takes deposits in the form of short-term deposits, guaranteed investment certificates, registered retirement savings plans and registered retirement income funds. The trust earns money on the spread between the interest it receives from homeowners, and the interest it pays out to the buyers of these securities. The company operates just six branches in Ontario, Quebec, Nova Scotia, Alberta and British Columbia, so it gets most of its business through independent deposit and mortgage brokers....

Home Capital is a leader in its field of first mortgage lending to Canadian borrowers who do not meet the lending requirements of major banks. However, Home Capital’s conservative lending practices have let it avoid the subprime mortgage problems that have hurt similar lenders in the United States. For example, as part of the company’s assessment process, its employees personally interview applicants to obtain relevant information that may be missed by credit bureau scores and conventional loan application forms. We still feel that conservative investors should maintain the bulk of their Finance sector holdings in major companies we recommend, including the big-five banks. However, investors willing to take on a little more risk should consider shares of Home Capital. The stock is attractively priced in relation to its prospects. It also has no exposure to the asset-backed credit problems of many other financial services stocks. HOME CAPITAL GROUP INC. $38 (Toronto symbol HCG; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 34.5 million; Market cap: $1.3 billion; SI Rating: Extra risk) is the parent company of Home Trust Company, a federally regulated trust company that specializes in residential first mortgages to small business owners, the self-employed and others who don’t meet the stricter criteria of larger, traditional lenders....

BANK OF NOVA SCOTIA $52.15 (Toronto symbol BNS: SI Rating: Above average) ranks second among Canada’s five big banks, with assets of $408.1 billion. It has over 1,000 branches in Canada. In the three months ended July 31, 2007, Bank of Nova Scotia earned $1.02 billion or $1.03 a share, up 9.5% from $928 million or $0.94 a share a year earlier. Net interest income rose 5.6%, to $1.8 billion from $1.7 billion. Other income (which includes wealth management) rose 18.4%, to $1.4 billion from $1.2 billion. The bank’s shares currently yield 3.5%. The bank expects to write down some of its asset-backed securities in its fiscal fourth quarter ended October 31, and take an after-tax charge of around $135 million. However, a $160 million after-tax gain from the Visa restructuring will offset the writedown....

Bank of Nova Scotia moved down in November along with most financial services stocks, mainly because of concerns over a general lack of liquidity for asset-based securities. However, its shares have already recovered, and the upcoming writedown of its own asset-based securities shouldn’t hurt its strong profit and dividend outlook. BANK OF NOVA SCOTIA $52.15 (Toronto symbol BNS: SI Rating: Above average) ranks second among Canada’s five big banks, with assets of $408.1 billion. It has over 1,000 branches in Canada. In the three months ended July 31, 2007, Bank of Nova Scotia earned $1.02 billion or $1.03 a share, up 9.5% from $928 million or $0.94 a share a year earlier. Net interest income rose 5.6%, to $1.8 billion from $1.7 billion. Other income (which includes wealth management) rose 18.4%, to $1.4 billion from $1.2 billion. The bank’s shares currently yield 3.5%....

CANADIAN IMPERIAL BANK OF COMMERCE $92 (Toronto symbol CM) now plans to take a $302 million (after-tax) charge to write down various securities tied to the U.S. mortgage market. When added to an earlier writedown, CIBC will have written off half of its $1.7 billion portfolio of these securities. However, a $381 million (after-tax) gain from the restructuring of the Visa credit card system will help offset these writedowns. Buy. TORONTO-DOMINION BANK $68 (Toronto symbol TD) estimates that the restructuring of the Visa credit card business will add $135 million to its after-tax earnings in the fourth quarter ended October 31, 2007. That’s equal to 12% of the $1.2 billion or $1.60 a share it earned before one-time items in its third fiscal quarter. Buy. ANDREW PELLER LTD. $10 (Toronto symbol ADW.A) earned $2.7 million in its second fiscal quarter ended September 30, 2007, up 3.9% from $2.6 million a year earlier. Earnings per share were unchanged at $0.18. Sales rose 3.0%, to $61.2 million from $59.4 million. The company is also benefiting from the rising Canadian dollar, which has cut the cost of grapes and wine it buys in international markets. Buy.

WASHINGTON MUTUAL INC. $20.51, New York symbol WM, fell $5 after it said its credit losses for 2007 would be roughly double its earlier prediction. An investigation into the mortgage industry by New York State’s Attorney General also weighed on the stock. The probe is looking for evidence that Washington Mutual pressured an insurance company to inflate home values in appraisals, making it possible for borrowers to obtain mortgages they couldn’t otherwise afford. When it appears a company has acted criminally, we always consider whether we should apply the cockroach theory – one criminal act, like one cockroach, may be a sign that the place is full of them. However, it’s far from clear that Washington Mutual acted unethically, much less criminally. Real estate appraisal involves a lot of judgment and appraisers tend to be conservative. Even if the allegations turn out to be true, they may only appear improper in hindsight, because home values later dropped....

AMERICAN EXPRESS CO. $58 (New York symbol AXP; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.2 billion; Market cap: $69.6 billion; WSSF Rating: Average) is one of the world’s biggest financial services companies, with offices in over 130 countries. Warren Buffett’s Berkshire Hathaway owns about 13% of the company. Best known for its American Express charge and credit cards, the company gets most of its revenue from fees it charges merchants when cardholders purchase goods and services. Its other major business is its 2,200 travel agencies and travelers checks. Despite the wave of new customers in the past few years, most American Express cardholders tend to have above-average incomes and good credit histories. They also spend, on average, over $11,000 a year....

Like all lenders, American Express is vulnerable to a slowdown in business due to the subprime mortgage and credit liquidity problem. However, the company’s traditional focus on cardholders with above-average incomes and credit histories will keep loan losses to a minimum. Meanwhile, the company continues to prosper as credit card use expands not only in the United States, but also in increasingly prosperous developing nations like China and Russia. AMERICAN EXPRESS CO. $58 (New York symbol AXP; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.2 billion; Market cap: $69.6 billion; WSSF Rating: Average) is one of the world’s biggest financial services companies, with offices in over 130 countries. Warren Buffett’s Berkshire Hathaway owns about 13% of the company....