Tuesday, February 28, 2006

S&P Revises Outlook for RBC & TD

Investment Executive, James Langton, 28 February 2006

Standard & Poor’s Ratings Services has revised its outlook on TD Bank to positive from stable, and from negative to stable of Royal Bank.

The rating agency said now that TD Bank has successfully repositioned its platform to reflect its desire to build a retail powerhouse and streamlined and exited underperforming businesses consistent with its risk appetite, it is poised for more stable and stronger profitability in the future.

“The successful expansion into the U.S. retail and commercial banking industry through TD Banknorth Inc. and the opportunistic discount brokerage position, coupled with domestic operations that will continue to provide a substantial base of stable earnings, could give TD Bank the edge over some of its large Canadian peers in the foreseeable future,” S&P added.

"The outlook revision acknowledges the strength of TD Bank’s formidable domestic retail franchise and the significant restructuring of the bank and its lowered risk profile in the past few years," said S&P credit analyst Lidia Parfeniuk.

S&P said that TD Bank is exceptionally well positioned in the domestic retail banking market. This situation is further enhanced by promising prospects for TD Ameritrade (which resulted from the merger of TD Waterhouse USA with Ameritrade), as partnering up with a strong player will eliminate some of the fierce competition in the U.S. discount brokerage arena and improve profitability and market share.

“The success of the U.S. expansion through TD Banknorth hinges on the success of this incremental growth strategy that would allow TD Bank to achieve a stronger foothold in the larger, more diverse U.S. Market,” it said. “The challenges associated with this strategy remain, including managing a large minority shareholder position in Banknorth and, in particular, the difficulty of generating a decent return on invested capital; however, early indicators are positive and will depend on TD Banknorth’s strong local management to manage the risks of integrating the large acquisition made recently.”

S&P said it believes that the magnitude of the eventual Enron Corp. settlement (particularly the Newby class action suit) and the possibility of additional reserves would not be material enough to significantly affect the bank’s strong capital position. If the bank maintains capital discipline with regard to acquisitions and demonstrates the smooth integration of the recent acquisitions, the ratings could be raised, it concluded.

At the same time, the rating agency also revised its outlook on Royal Bank. "The outlook revision acknowledges the improved operating results of the retail segment in the U.S. and Royal Bank’s commitment to its U.S. operations," said Parfeniuk.

S&P said that Royal Bank has been moving in the right direction to boost the performance of its U.S. retail operations with encouraging results. The bank has also demonstrated its continued commitment to the U.S. through its support of RBC Centura Bank, despite the problems the business unit faced in 2004. As a result, Standard & Poor’s has taken more comfort with Royal Bank’s direction in the U.S. and sees good progress with the objectives set out. Standard & Poor’s expects the operating results of RBC Centura to continue on a positive trajectory.

In addition, Standard & Poor’s is now more comfortable that any additional legal reserves, if necessary, will not be material enough to significantly affect the bank’s strong capital position.

The stable outlook is predicated on the continued improvement of the U.S. operations and strength of the solid domestic retail franchise, it said. However, it noted that should the final Enron legal cost significantly exceed its expectations, the outlook on Royal Bank and its subsidiaries could be revised to negative, as capital would decline to levels below that of its Canadian peers and financial flexibility would be diminished with respect to future strategic initiatives.