Friday, February 23, 2007

TD Bank Q1 2007 Earnings

Scotia Capital, 23 February 2007

• Toronto-Dominion Bank (TD) reported cash operating earnings of $1.38 per share, an increase of 20% from $1.15 per share a year earlier. Wealth Management led earnings growth at 35% aided by TD Ameritrade, with Canadian P&C earnings up 14%, Wholesale Banking earnings declined 1% from a year earlier which was a near record quarter and TD Banknorth earnings declined 2%.

• The Corporate Segment aided by a favourable tax adjustment added $0.05 to $0.07 per share to earnings.

• Cash ROE in the quarter was 19.9% unchanged from a year earlier.

• Reported earnings were $1.26 per share which included the following after-tax items: the amortization of intangibles of $83 million or $0.11 per share and a loss of $5 million or $0.01 due to the change in fair value of credit default swaps hedging the corporate loan book.

Dividend Increased 10%

• TD announced a dividend increase of 10% to $2.12 per share from $1.92 per share. The current payout ratio is 40% based on 2007E earnings.

High Operating Leverage; Revenue Growth Solid

• TD’s operating leverage in Q1 was strong at 6%, with revenue growth of 5% and expenses declining 1%.

Canadian P&C Earnings Up 14%

• Canadian P&C earnings in Q1 increased 14% to $544 million driven by strong insurance results and strong retail loan volume.

• Retail market share remained stable, with the largest improvement in total small business loans, up 80 bp year over year and 10 bp sequentially.

• Loan securitization revenue increased to $134 million versus $97 million in the previous quarter and $92 million a year earlier.

• Insurance revenue increased to $254 million from $214 million in the previous quarter, and from $224 million a year earlier.

• Card service revenue was $110 million versus $113 million in the previous quarter and $81 million a year earlier.

• Total revenue in Q1/07 increased 11%, with expenses increasing 8% resulting in strong positive operating leverage of 3%.

• The efficiency ratio improved 190 bp to 52.7%.

Canadian Retail NIM at 3.03%

• Canadian retail net interest margin (NIM) was 3.03% in the quarter, down 4 bp sequentially, but up 2 bp from a year earlier.

Total Wealth Management Earnings Up 35%

• Wealth Management earnings, including the bank’s equity share of TD Ameritrade, increased 35% to $186 million.

Canadian Wealth Management

• Domestic Wealth Management earnings increased 16% to $122 million from $105 million a year earlier, due to higher transaction volume and higher mutual fund fees from asset growth.

• Revenue increased 12% with expenses increasing 10% to $551 million and $364 million, respectively.

• Mutual fund revenue increased 7% to $175 million from $164 million a year earlier.

• Mutual fund assets under management (IFIC, includes PIC assets) increased 17% to $55.9 billion.

TD Ameritrade

• TD Ameritrade contributed $64 million or $0.09 per share to earnings in the quarter versus $53 million or $0.07 per share in the previous quarter and $33 million a year earlier. TD Ameritrade’s contribution represented 7% of total bank earnings.

TD Banknorth Earnings Continue Drag on Profitability

• TD Banknorth earnings contribution to TD Bank declined 2% to $64 million from $65 million a year earlier. Earnings were negatively impacted by higher loan loss provisions and higher advertising and marketing expenses. TD Banknorth contributed $0.09 per share to earnings in the quarter.

• TD Banknorh earnings have been under pressure for the past 7 quarters.

• Net interest margin at TD Banknorth declined 6 bp from the previous quarter to 3.97% due to intense competition for both loans and deposits, and margin compression. NIM was down 1 bp from a year earlier.

Wholesale Banking Earnings Flat from Record High Quarter

• TD Securities earnings in Q1 declined 1% to $197 million from $199 million a year earlier, which was a near record quarter.

• Operating leverage was flat with revenue and expenses both declining 4% (Q1/06 expenses adjusted to exclude $50 million restructuring charge).

Capital Markets Revenue

• Capital markets revenue increased 9% to $373 million on a comparative basis.

Trading Revenue Rebounds

• Trading revenue rebounded to $330 million from a weak $174 million in the previous quarter and $375 million a year earlier.

• Trading revenue was driven by interest rate and credit portfolios trading revenue increasing to $105 million from $45 million in the previous quarter and from $199 million a year earlier. Equity and other portfolios were weak in the quarter at $6 million. Trading revenue in foreign exchange products was $73 million versus $54 million in the previous quarter and from $79 million a year earlier.

Security Surplus Increases to $990 Million

• Security gains were $70 million or $0.06 per share, compared with $87 million or $0.08 per share in the previous quarter and $58 million or $0.05 per share a year earlier.

• Unrealized surplus increased to $990 million with an estimated three quarters of the surplus derived from the Merchant Banking portfolio versus $774 million in the previous quarter and $806 million a year earlier.

Loan Loss Provisions

• Specific loan loss provisions (LLPs) increased to $163 million or 0.38% of loans versus $142 million or 0.33% of loans in the previous quarter. The increase in LLPs was due to higher VISA provisions due to operational issues with the bank's new VISA platform as well as higher provisions on personal loans related to volume, higher write-offs, and lower SB&C recoveries.

• Our 2007 LLP estimate is unchanged at $600 million or 0.35% of loans up from 2006 LLP levels of $424 million or 0.25% of loans, driven mainly by volume and lower recoveries in small business, in addition to higher loan losses at TD Banknorth (due in part to the Hudson United acquisition) and lower corporate loan recoveries.

• Our 2008 LLP forecast is unchanged at $675 million or 0.39% of loans.

Loan Formations

• New gross impaired loan formations were $332 million versus $299 million in the previous quarter and $263 million a year earlier. The increase in gross impaired loan formations was mainly at TD Banknorth and P&C Canada. The higher formations at TD Banknorth are expected to lead to higher loan losses especially if the weakness in housing continues to spread to the general economy.

• Net impaired loan formations were $216 million versus $218 million in the previous quarter and $168 million a year earlier.

Tier 1 Capital 11.9%

• Tier 1 capital ratio was 11.9%, down slightly from 12.0% in the previous quarter, and unchanged from a year earlier.

Recent Events

• On November 21, TD announced that it will acquire the remaining 41% stake in TD Banknorth for US$32.33 per BNK share or US$3.2 billion (C$3.6 billion) in an all-cash offer. The transaction will be financed by $3.0 billion primarily of subordinated debt. The transaction is expected to be accretive to TD by $0.05 per share in 2007 and $0.16 per share in 2008. Closing is expected for March or April 2007.

Maintain 2-Sector Perform

• We are increasing our 2007 earnings estimate to $5.30 per share from $5.15 per share and our 2008 earnings estimate to $5.90 per share from $5.65 per share. The higher earnings estimates reflect continued earnings growth at TD Canada Trust and Wealth Management and accretion from the buy in of TD Banknorth.

• Our 12-month share price target is $81, representing 15.3x our 2007 earnings estimate and 13.7x our 2008 earnings estimate.

• We maintain our 2-Sector Perform on TD with earnings strength at TDCT and Wealth Management expected to be muted by continued weakness at TD Banknorth.
Financial Post, Jonathan Ratner, 23 Febraury 2007

While the first billion dollar quarterly profit in Toronto-Dominion Bank history helped overshadow the company’s cautious growth outlook, the first quarter results did come in ahead of analyst expectations.

As a result, several of them have hiked their price targets for TD shares substantially.

While maintaining his “top pick” rating on the stock, Desjardins Securities analyst Michael Goldberg raised his target to $78.50 from $75, representing upside of nearly 11%.

He also noted that the bank’s decision to hike its quarterly dividend by 5¢, or more than 10%, to 53¢ per share, exceeded expectations.

In a research note, Mr. Goldberg highlighted how TD had grown through acquisitions – Canada Trust in 2000, TD Banknorth in 2005 and an almost 40% stake in TD Ameritrade in 2006.

While he thinks the bank is well capitalized as it prepares to privatize Banknorth, Mr. Goldberg sees the growth and diversification of its business platforms as key to earnings and dividend growth going forward.

Merrill Lynch analyst Andre-Phillippe Hardy also hiked his target price to $77 from $74 to reflect higher estimated earnings per share (EPS) and book value.

“The quarterly results give us comfort that TD should grow 2007 and 2008 EPS at a rate that exceeds the industry,” he said in a research note, adding that TD’s valuation will be somewhat protect by its business risk if capital markets and credit conditions deteriorate.

John Aiken at Dundee Securities also boosted his price target on TD shares to $78 from $76, but kept his “market neutral” rating unchanged.

Blackmont Capital’s Brad Smith upped his target to $73 from $68, while maintaining a “hold” rating on TD shares.

Jason Bilodeau at UBS is the most bullish of the bunch with an $80 price target, up from $77.
Financial Post, Duncan Mavin, 23 February 2007

Toronto-Dominion Bank delivered its first billion-dollar quarter yesterday, but tempered the positive results with rising bad-debt provisions and a cautious outlook for revenue growth.

TD kicked off bank-earnings season with adjusted net income of $1-billion, up 21% from $835- million a year ago. It was the first time the bank's adjusted earnings have beaten the billion-dollar mark in a quarter.

TD also announced an increase in its quarterly dividend of 5?, or 10%, to 53? a share.

However, there were warnings for investors too, as chief executive Ed Clark said the results will be "a hard act to follow" in the rest of 2007.

The bank's performance was driven by strength in domestic retail banking in particular. TD's Canadian bank franchise --among the strongest of the Canadian banks -- reported revenue grew by 11%, or $206-million, compared with last year. Mr. Clark said that sort of growth could be hard to come by in future periods.

"We're saying start to prepare that you're not going to have 11% revenue growth forever," he said.

Brenda Lum, managing director of Canadian financial institutions at Dominion Bond Rating Service, viewed the bank's results positively, but also asked, "How long can outstanding [domestic retail banking] growth last?"

The rate of growth in TD's topline "has to go down unless they can find ways to grow in businesses where they are under-represented," like insurance or small business banking, Ms. Lum said.

In anticipation of declining revenue growth, TD's management is hoping to keep a lid on costs.

The bank reported non-interest expenses of $2.2-billion in the quarter, essentially flat from the previous quarter and down 4.6% from the first quarter of 2006.

However, one area where costs could be set to rise is in relation to loan losses.

A downturn in the credit cycle has long been forecast as banks have recorded historically low levels of loan defaults for several quarters. Several financial institutions in the United Kingdom and the United States have recently reported higher levels of loan losses, and Canadian banks are expected to follow at some stage.

TD's results had some observers speculating that downturn could come soon, as the bank set aside a larger share of its earnings for loan defaults than in previous quarters.

The bank's provision for loan losses rose 43% to $163-million, compared with $114-million a year earlier.

UBS Investment Research analyst Jason Bilodeau said higher loan-loss provisions at TD "clearly reflect the reality of less favourable credit trends relative to the credit environment a year earlier."

However, Mr. Bilodeau was generally upbeat about TD's performance. He acknowledged the overall level of TD's loan loss provisions remains low, and that the increase in the quarter was largely driven by growth in loan volumes.

As a proportion of the bank's overall loan book, the provision for loan losses actually declined and is still significantly below the historical average.

Indeed, DBRS's Ms. Lum said there are few indications that Canada's banks will see a big swing on credit just yet.

"Unemployment rates are very, very low and I use that as a leading indicator [for credit losses], at least on the personal and commercial side," Ms. Lum said.
The Globe and Mail, 23 February 2007

Analysts will be keeping a close eye on growing loan-loss provisions as the big Canadian banks roll out their earnings.

Yesterday, Citigroup analyst Shannon Cowherd said she expects the provisions for Canada's six largest banks to rise 32 per cent from year-earlier levels, and said this will be a major contributor to her projected drop of nearly 20 per cent in the banks' profit for the fiscal first quarter ended Jan. 31. Her views are echoed by others on the Street: Analysts' consensus estimates for loan-loss provisions this quarter total $638-million for the six big banks, up 35 per cent from a year earlier and up 27 per cent from the fourth quarter -- symptomatic of a weakening economy, higher interest rates and a slowing housing market.

And those numbers could be worse. Toronto-Dominion Bank, which yesterday was the first bank out of the gate with its fiscal first-quarter numbers, raised its loan-loss provision to $163-million in the quarter -- up 43 per cent from a year earlier and above analysts' consensus call of $141-million.
The Globe and Mail, Andrew Willis & Tavia Grant, 23 Febraury 2007

As Canadian banks look hungrily for U.S. takeover targets, Toronto-Dominion Bank yesterday unveiled a stellar 21-per-cent jump in profit fuelled partly by its ability to crack the hypercompetitive American financial services market.

TD kicked off the sector's quarterly financial reports by turning in a better-than-expected $1.01-billion profit for the three months ended Jan. 31, along with a 10-per-cent boost to its dividend. The results came on the back of strong domestic retail banking and turbocharged performance from discount brokerage TD Ameritrade Inc.

"This extremely strong first quarter will be a hard act to follow," chief executive officer Ed Clark said.

TD's profit was $1.38 a share, compared with $835-million or $1.15 a share in the year-earlier period. Analysts polled by Bloomberg had expected $1.30 a share.

Mr. Clark said the bank expects the North American economy to slow through the rest of this year.

But he still forecast that profit growth will "well exceed" the bank's 7- to 10-per-cent target.

While TD is moving to cut costs and rekindle growth at its struggling U.S. retail branch network -- TD Banknorth is expected to become a wholly owned unit of the parent bank by April -- Mr. Clark has found a winning expansion strategy in the cutthroat American discount brokerage sector.

Last January, Mr. Clark opted for a merger that traded his bank's 100-per-cent ownership of TD Waterhouse USA, a middle-of-the-pack franchise, for a 40-per-cent holding in what's now the sector's No. 3 player. Driving more traffic through a single platform meant TD's profit from the unit jumped to $64-million in this quarter, compared with $33-million last year, prior to the merger.

Credit Suisse analyst James Bantis pointed to TD Ameritrade as an example of the bank's "operating leverage." He said it was one of several business units at the bank that are increasing revenue far faster than costs are rising.

Domestic growth opportunities are limited for Canadian banks, so every CEO is engaged in some form of foreign expansion. In the past five years, domestic banks have spent $11.1-billion (U.S.) on American retail banking acquisitions.

But none have built U.S. branch networks that come close to matching the profitability of their local franchises -- TD's quarterly Canadian retail banking profit was up 15 per cent to $666-million (Canadian), while TD Banknorth made $128-million.

To achieve scale -- or operating leverage -- U.S. takeovers remain in the cards and UBS Securities Canada Inc. analyst Jason Bilodeau predicted yesterday that Bank of Montreal and Royal Bank of Canada are likely suitors for two of the four big American banks that he views as up for grabs.

BMO, which has consistently said it wants to make a $2-billion-plus (U.S.) acquisition in the U.S. Midwest, is seen by the UBS analyst as a potential buyer of TCF Financial Corp. The Minnesota-based bank has 453 branches in seven states, all surrounding BMO's Chicago-area retail network, and it currently has a $3.5-billion market capitalization. BMO sold its U.S. discount brokerage to E*Trade Financial Corp. in 2005.

In the southeastern United States, where RBC is building RBC Centura branches, Mr. Bilodeau sees First Horizon National Corp. as a likely target. Its five-state branch network has a $5.6-billion market capitalization. The dominant player in the southern United States, SunTrust Banks Inc. is seen as being in play, but with a $30.9-billion price tag, Mr. Bilodeau says it's likely too expensive for RBC.

He also named Sovereign Bancorp Inc. as a target, with 20-per-cent shareholder Grupo Santander of Spain likely to step up. Last week, Banco Bilbao Vizcaya Argentaria SA, Spain's second-biggest bank, agreed to buy Alabama-based Compass Bancshares Inc. for $9.6-billion to add more than 400 branches in six U.S. states.
Bloomberg, Sean B. Pasternak, 22 February 2007

Toronto-Dominion Bank, Canada's second-largest bank, reported first-quarter earnings that topped analysts' estimates, led by higher mutual-fund fees and profit from its U.S. discount brokerage.

Profit before a year-ago gain climbed 21 percent to C$1.01 billion ($870 million), or C$1.38 a share, from C$835 million, or C$1.15, a year earlier, the Toronto-based bank said. Chief Executive Officer Edmund Clark said the quarter will be ``a hard act to follow,'' and that revenue growth will slow.

Toronto-Dominion, the first Canadian bank to report earnings, said asset-management profit rose 35 percent to C$186 million on higher fund sales. A 5.6 percent gain for the Canadian benchmark stock index during the quarter helped push fund sales to a decade high in January, according to the Investment Funds Institute of Canada.

``Mutual funds are up - they've really taken off,'' said David Cockfield, who helps manage $1.1 billion, including Toronto-Dominion shares, at Leon Frazer & Associates Inc. in Toronto. ``The banks will continue to gain market share as long as the financial markets keep rolling along.''

Shares of Toronto-Dominion rose 53 cents to C$70.74 in 4:10 p.m. trading on the Toronto Stock Exchange. They rose 10 percent in the last 12 months before today, compared with a 15 percent increase for the 41-member S&P/TSX Financials Index.

Toronto-Dominion and larger rival Royal Bank of Canada have taken market share from some fund companies such as Fidelity Investments and AIC Ltd. by using their branch networks to sell funds. Royal Bank had net sales of C$797 million in January, while Toronto-Dominion added C$549 million. Fidelity, the world's biggest fund company, had net redemptions of C$92 million.

Profit from the bank's stake in TD Ameritrade Holding Corp. almost doubled as stock prices rallied. Toronto-Dominion is the biggest shareholder of the Omaha, Nebraska-based discount broker after it sold its TD Waterhouse unit to Ameritrade last year.

Earnings from consumer banking in the U.S., where the company owns 59 percent of TD Banknorth Inc., fell 2 percent to C$64 million on rising costs and a slowdown in lending. Gross impaired loans from U.S. consumer banking doubled to C$125 million in the quarter.

Toronto-Dominion Chief Executive Officer Edmund Clark plans to cut costs at the Portland, Maine-based lender and appointed Bharat Masrani, a 20-year veteran at Toronto-Dominion, to run TD Banknorth beginning March 1. Masrani will replace William Ryan, who made 27 acquisitions at TD Banknorth in New York and New England over about 12 years. Toronto-Dominion has agreed to buy the rest of TD Banknorth it doesn't already own for $3.2 billion, with the purchase closing in April.

``I think it's a probably good move,'' said Jackee Pratt, who helps manage about $708 million at Mavrix Fund Management Inc. in Toronto, including Toronto-Dominion. ``Ed Clark is going to re-focus the operations, as opposed to just going out and acquiring and acquiring and acquiring.''

Toronto-Dominion said profit before one-time items topped the C$1.30-a-share median estimate of eight analysts surveyed by Bloomberg News. Revenue for the quarter ended Jan. 31 increased 2 percent to C$3.47 billion.

Net income fell 60 percent to C$921 million, or C$1.26 a share, from C$2.31 billion, or C$3.20, a year ago when it had a C$1.67 billion after-tax gain from the TD Waterhouse sale. Toronto-Dominion raised its quarterly dividend 10 percent to 53 cents a share, the fourth increase in two years.

Investment-banking profit climbed 20 percent to C$197 million after the value of mergers in Canada almost doubled from a year ago to $66.5 billion. TD Securities advised on mergers worth $3.94 billion in the quarter, up from $2.87 billion a year ago, according to data compiled by Bloomberg. The bank ranked third for managing new stock sales in the period, compared with eighth spot a year ago, according to Bloomberg.

Canadian consumer banking profit rose 14 percent to C$544 million on higher revenue from mortgages, consumer loans and insurance. Toronto-Dominion plans to open 30 branches in Canada this year to take advantage of demand for investment and banking products.

The bank set aside C$163 million for bad loans, up 43 percent from C$114 million a year ago, mainly from its consumer banking unit and from an auto lender it purchased last year.

Toronto-Dominion expects to exceed its forecast of 7 percent to 10 percent earnings per share growth in fiscal 2007, although revenue growth may slow, Clark said.

``This extremely strong first quarter will be a hard act to follow,'' Clark said on a conference call with analysts.

Average per-share profit before one-time items for Canada's six main banks is expected to rise 13 percent this quarter, according to Brad Smith at Blackmont Capital Inc. Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada, the fourth-, fifth- and sixth-biggest banks by assets, are scheduled to report results on March 1.

Royal Bank of Canada, the largest bank, releases earnings on March 2. Bank of Nova Scotia, the third-largest, will report March 6.
Bloomberg, Sean B. Pasternak, 21 February 2007

Toronto-Dominion Bank Chief Executive Officer Edmund Clark, who created record growth in consumer-banking profit in Canada, is struggling to revive U.S. earnings.

Canada's second-largest bank probably will say tomorrow that profit at the Portland, Maine-based TD Banknorth Inc. unit fell 1.5 percent during the past three months, based on a company forecast. TD Banknorth's earnings have dropped in five of the past seven quarters.

The bank may report that fiscal first-quarter profit before one-time items climbed 11 percent to C$1.28 a share, according to the average estimate from seven analysts surveyed by Bloomberg.

Clark agreed in November to spend another $3.2 billion to buy the remaining shares of TD Banknorth and appointed a new CEO. Clark, 59, also plans to cut costs, without saying how, and halted acquisitions in the U.S.

``This is Ed Clark's baby and it's for him to show that he can integrate this,'' said Todd Johnson, who helps oversee $640 million at Cardinal Capital Management Inc. in Winnipeg, Manitoba, including Toronto-Dominion stock.

Shares of Toronto-Dominion rose 9.6 percent in the past year, beating all but two of Canada's six main banks.

The U.S. consumer bank will contribute about C$64 million ($55 million) to earnings in the latest fiscal quarter, or about 8 percent of the total, according to an estimate by CIBC World Markets analyst Darko Mihelic. Clark, who has led Toronto-Dominion since December 2002, said last month TD Banknorth has a long way to go to meet the bank's target of increasing overall earnings by 7 percent to 10 percent this fiscal year.

Clark has had more success boosting profit in Canada. Since becoming CEO, domestic consumer bank earnings have climbed by at least 15 percent a year, higher than any of his Canadian peers. The bank added branches across Canada when rivals were curbing expansion, and offered incentives such as portable DVD players to entice new clients.

Toronto-Dominion is the first Canadian bank to report results for the fiscal first quarter ended Jan. 31. Average earnings per share, before one-time items, are forecast to rise 13 percent, led by higher fees from investment banking and mutual funds, estimates Brad Smith, an analyst at Blackmont Capital Inc. in Toronto.

U.S. consumer banking has been the worst of Toronto- Dominion's four main units, trailing Canadian retail banking, asset management and investment banking. TD Banknorth's profit will probably be little changed this year, Chief Operating Officer Peter Verrill told analysts in November.

``A number of investors would say, `We'd just as soon you give us the money back and not do the strategy at all,''' Clark said last month at a conference sponsored by RBC Capital Markets in Toronto. ``I say to them: `Well, go buy someone else then.'''

TD Banknorth's earnings have slumped because of rising costs for deposits and a slowdown in lending as interest rates increase. And non-interest expenses rose 31 percent in 2006 to $1.14 billion because of higher advertising and acquisition- related costs.

``With the benefit of hindsight, market conditions have turned out to be tougher than what we might have expected,'' said Bharat Masrani, a 20-year Toronto-Dominion veteran who's taking over as CEO of TD Banknorth on March 1. ``I would say that I don't see any great signs in '07 to suggest that the environment is going to turn for the positive.''

Royal Bank of Canada, the country's largest lender, had to sell a U.S. mortgage unit and cut about 500 jobs in 2005 before increasing profit. Bank of Montreal, Canada's fourth-largest bank, reported that its U.S. profit dropped 7 percent last year.

``The Canadian experience in buying up U.S. banks has not been the best,'' said Stephen Jarislowsky, chief executive officer of Montreal-based Jarislowsky Fraser Ltd., Toronto- Dominion's fourth-largest investor.

Since 2005, TD Banknorth has contributed $349 million to Toronto-Dominion's earnings, about 10 percent of the initial investment. Toronto-Dominion on Nov. 20 bid $32.33 a share for the remaining stock of TD Banknorth. Toronto-Dominion now owns 57 percent of the U.S. lender, after buying control for $3.5 billion.

Clark said last month at the RBC Capital conference that U.S. acquisitions are on hold for at least this year until he can prove that his ``techniques actually do work.'' Clark declined to comment for this story.

TD Banknorth will trim operating expenses by 5 percent to 8 percent, which may result in a one-time charge, Masrani, 50, said in a Jan. 24 interview.