Friday, August 12, 2005

TD to Weather Enron Easily

Globe and Mail, Omar El-Akkad, 12 August 2005

Toronto-Dominion Bank will likely not take a significant hit to its book value if it settles in the Enron class action lawsuit, unlike the Canadian Imperial Bank of Commerce.

TD could incur a pre-tax charge of roughly $850-million before it impacts the bank's book value, according to National Bank Financial analyst Robert Wessel.

CIBC erased about 25 per cent of its book value last week after announcing a settlement that requires the bank shell out $2.4-billion (U.S.).

However Mr. Wessel thinks TD is not likely to suffer as much if it settles. Mr. Wessel reiterated his “outperform” rating on the stock.

Although TD had dealings with Enron, unlike CIBC, Citigroup and J.P. Morgan, it was not a so-called “Tier 1 banker” for the company,” Mr. Wessel said in a note to clients. Therefore, its reserve level of $300-million (Canadian) appears more in line with many of the other charges taken by similarly exposed U.S. banks and broker-dealers.

Amplifying the damage to CIBC's balance sheet was the lack of a full tax shield, owing to the bank's weak profitability in the U.S, according to Mr. Wessel.

Although TD suffered in the U.S. during the downturn, he believes it is profitable there now, and therefore, he doesn't expect the impact of the charge to be magnified by a lack of taxable income.

TD also generates 30 per cent more accrual earnings than CIBC, allowing for a larger cushion against the looming charge, Mr. Wessel said.

TD is among a group other banks and brokerages, including Royal Bank of Canada, that have yet to reach an agreement in the lawsuit.