The Vancouver Sun from Vancouver, British Columbia, Canada • 39

BUSINESS TRADING DAY TSX retreats as banks sell equity at a discount Commercial banks reluctant to match central bank's rate cuts EUROPE AND CANADA OPEN THEIR SKIES INTEREST RATES I Keeping some of the difference will increase earnings WesUet 11.00 10.50 lO.OOt BY GREGORY THOMAS VANCOUVER SUN 9.50A1 9.ooh -4 I I i i 1 1 r1 1 ft sr' i 4 V' i 7 I v. 1 I aT I 8.50" Nov. Dec. THE U0N GOES HUNTING FOR EQUITY Royal Bank 47.50 1 45.005 I 42.50. 37.50 35.00" Nov.

Dec. CHRIS WATTIEREUTERS FILES Bank of Canada governor Mark Carney announced an interest rate cut Tuesday. CLOUDY OUTLOOK FOR SOLAR STOCKS BY EOIN CALLAN and GARY MARK TORONTO Bay Street's profit margins are starting to come under pressure as official interest rates creep closer to zero, prompting retail banks to change the rules of the game so customers pay more. While the Bank of Canada on Tuesday cut interest rates to the lowest level since the 1950s, the country's five big banks indicated they would no longer march in lock step with the central bank. Instead, Bay Street is keeping the cost of borrowing for consumers more elevated in a bid to protect corporate earnings, passing on only part of the rate cut to customers.

While the decision of Bay Street to pocket part of the Bank of Canada rate cut is seen as good for shareholders but bad for customers, there is less certainty about how it will impact wider demand, partly because there are few historical precedents. "We just don't have much experience with this," said an official at the U.S. Federal Reserve who has studied how financial institutions behave when central banks cut rates close to zero. The central banker said data was limited but suggests retail banks remain willing to lend even when official rates fall near zero, as they tend to find ways to protect profit margins on loans. In normal times, financial institutions do better when the central bank lowers the cost of funds, happily passing on cheaper loan rates to consumers to encourage them to borrow more.

But when the official rate starts getting closer to zero, the dynamics start to change as the prime rate that banks charge customers is pushed nearer to their own cost of funds. This was key to Tuesday's decisions by Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal and Canadian Imperial Bank of Commerce to cut their prime rate by 50 basis points instead of the full Bank of Canada cut of 75 basis points, according to people in the industry. Joan Dal Bianco, vice-president of real estate-secured lending with TD Bank, said it would have left the bank without a profit if the full rate cut had been passed on to customers with variable products tied to prime. Timminco 8.00 Lowest in 50 years Canada's benchmark Interest rate hits a long-term low of 1.5 per cent. 25" 6.00" I 5.00 1 4.oo i 3.001" 20 jl 0 6 "We are still trying to earn something on this stuff.

This has been quite the roller-coaster ride and it has not been too hot on the mortgage front. "We just can't take on the whole 75-point cut," said Dal Bianco. John Aiken, an analyst at Dundee Securities, said banks were "starting to see margin compression" as the central bank cut rates to 1.5 per cent from 2.25 per cent, while banks reduced their prime lending rate to 3.5 per cent from four per cent. "The new loans that are being put in the books are arguably at a less profitable rate," he said. Vince Gaetano, a vice-president with Monster Mortgage, said he expects pressure will start to mount on the banks in the coming weeks to reduce prime further.

"That's what happened the last time they tried to resist rate cuts," he said. This willingness to pass on rate cuts is critical to determining the ability of the Bank of Canada to stimulate the economy in the midst of a downturn. Canwest News Service Nov. Dec. Canadian stock markets retreated Tuesday, snapping short a two-day rally that pushed Canada's senior equity benchmark up six per cent, even as the Bank of Canada slashed its key lending rate three-quarters of a percentage point to 1.5 per cent, its lowest level since 1958.

Financial stocks dropped five per cent, pushing the Composite index down 169.56 points, or two per cent, to 8,397.56. Shares of the Royal Bank dropped $2.21, or six per cent, to $35.29 after the biggest Canadian lender went to the markets for as much $2.3 billion in new equity, issuing common shares at a discount of six per cent to Monday's closing price. CIBC fell $2.96, or 5.5 per cent, to $50.31, TD Bank slid $3.40, or 7.5 per cent, to $42.10, Scotiabank gave back $2.42, or seven per cent, to $32.34, and Bank of Montreal dipped $1.47, or four per cent, to $34.65. Shares of Great West Life lost $1.29, or 5.5 per cent, to $22.30. After markets, the Winnipeg insurer said it will issue $1 billion in new equity at $20.75 a share: controlling shareholder Power Financial will take up $400 million of the new offering its shares sank 72 cents, or 2.9 per cent, to $23.84 during the session.

Commodities gave back some of Monday's gains: The January crude oil contract dipped $1.64, or 3.8 per cent, to $42.07 US a barrel. Copper for March delivery fell 5.45 cents, or 3.6 per cent, to $1.4435 US a pound. February gold rose $4.90, or 0.6 per cent, to $774.20 US an ounce. The Canadian dollar fell two-thirds of a cent to 79.08 cents US. On Wall Street, the Dow Jones Industrial Average slumped 242.85, or 2.7 per cent, to 8,691.33, giving back most of Monday's gains, as a bailout proposal for U.S.

auto makers appeared stalled in Washington. The 500 lost 21.03, or 2.3 per cent, to 888.67, and the Nasdaq composite slipped 24.40, or 1.6 per cent, to 1,547.34. Shares of Westjet added 84 cents, or eight per cent, to $10.85 after Canada and the European Union signed a deal allowing airlines to operate direct flights between 'J 0 Source: Bank of Canada Canwest News Service iMli 'I'illl'i l.n.j)i yii, iMiJI 9 any of 28 countries, removing restrictions on routes, prices, and the number of flights allowed. Shares of Air Canada lost altitude, descending 15 cents, or 7.5 per cent, to $1.84. The deal paves the way for Calgary-based Westjet to pursue code sharing and marketing agreements with European airlines.

Air Canada is currently the only domestic full-service airline with flights to Europe. Solar-grade silicon maker Timminco dropped 34 cents, or 7.7 per cent, to $4.06 after German customer slashed 2008 and 2009 earnings guidance, citing slowing orders from solar cell customers and and tighter credit conditions. Arise Technologies, another Canadian solar player, shed seven cents, or 11 per cent, to 53 cents. Lululemon Athletica dropped $1.86, or 13 per cent, to $12.40 on forecasts that the plunging Canadian dollar will crimp its earnings power. The Vancouver-based yoga wear maker gets most of its revenue in Canadian dollars, while most of its expenses are denominated in greenbacks.

f-v iT Canadian companies seen as least corrupt in world, study finds Canada ties with Belgium for first place; Russia, China rank last BY PETER O'NEIL Gregory Thomas is an investment adviser and Certified Financial Planner with the Cassady Group at Canaccord Capital member CIPF. Listen to his market commentary on all-news radio, Newsll30. Views expressed are the author's alone, and not necessarily those of his employer. www.gregorythomas.ca; Tel: 604-601-5886; gregorythomascanaccord.com Hiring second accounting firm may signal BCE's quest a break-up fee yitvi' unfit KIJC Doiifiniofi We chose Surrey Memorial Hospital's Emergency Centre Campaign. You can PARIS Companies from Canada and Belgium are viewed as the least likely to engage in corrupt practices in their overseas business dealings, according to a new report issued Tuesday.

The two countries were tied for first in a survey by Berlin-based Transparency International of the perceived business activities of companies from the world's top 22 countries in terms of international trade and investment. Russia ranked last, just behind China, Mexico, India and Brazil. The U.S. was tied for ninth place with France and Singapore. The index "provides evidence that a number of companies from major exporting countries still use bribery to win business abroad, despite awareness of its damaging impact on corporate reputations and ordinary communities," said TI international chair Huguette Labelle, the former president of the Canadian International Development Agency and current chancellor of the University of Ottawa.

"The inequity and injustice that corruption causes makes it vital for governments to redouble their efforts to enforce existing laws and regulations on foreign bribery and for companies to adopt effective anti-bribery programs," she said in a statement. Canada ranked fifth in each of the three previous corruption indexes, released in 2006, 2002 and 1999. However, TI cautioned against making comparisons because previous surveys used different methodology. TI based the 2008 index on responses from 2,742 senior corporate executives in 26 countries that are both major importers and significant recipients of foreign direct investment. "To assess the international supply side of bribery, senior business executives were asked about the likelihood of foreign firms, from countries they have business dealings with, to engage in bribery when doing business in their country," TI explained in a news release.

Canwest News Europe Correspondent BY JONATHAN KEEHNER and JASON KELLY NEW YORK BCE Inc. hired a second accounting firm in an effort to salvage its $52 billion takeover by a group led by Ontario Teachers' Pension Plan. The firm's positive assessment of the deal may give Canada's largest phone company ammunition in a legal fight if the transaction collapses. PricewaterhouseCoopers will help persuade auditor KPMG to reverse its view that the company would be insolvent after the buyout, Montreal-based BCE said Monday in a statement. PwC's findings, which contradict KPMG's, may also help BCE argue it's entitled to a termination fee of $1.2 billion if the deal isn't completed as scheduled on Dec.

11. "BCE is doing what it can to get something out of this deal," said, Steven Kaplan, a professor at the University of Chicago Booth School of Business. "The second opinion may help them get something like a break-up fee if they can't salvage the takeover." The leveraged buyout was put in jeopardy last month when KPMG auditors told the company the deal, funded with $34 billion of debt. would push it into insolvency. If KPMG holds its ground, the transaction probably will collapse, leaving shareholders with a deficit of $16 billion from where the deal valued shares.

With a financing commitment from banks led by Citigroup Inc. and Deutsche Bank AG expiring in three days, "one could infer that BCE andor the purchaser may be trying to extract from the lenders some contribution to BCE's lost value," UBS analysts said Tuesday in a research note. A condition to completing the transaction is a solvency opinion "from KPMG LLP, or another nationally recognized valuation firm engaged by the purchaser and agreed to by the company," according to a merger agreement filed with regulators. "The insolvency opinion came from BCE's own experts, so it's going to be an uphill battle," said Jonathan Macey, a law professor at Yale University. "BCE was positioning itself for the breakup-fee by getting that second opinion." The purchase by Ontario Teachers' and several private-equity firms values BCE at almost twice its current stock price.

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