Wednesday, May 30, 2007

Credit Ratings of TD Banknorth & TD Ameritrade Affirmed

Investment Executive, James Langton, 31 May 2007

Rating agency DBRS has confirmed the ratings of TD Banknorth Inc., following a detailed review of the company’s operating results and financial fundamentals. The trend on all ratings remains stable.

“TD Banknorth’s ratings are based on the ownership by the financially strong TD Bank Financial Group, a sound banking franchise with a healthy core deposit base, and solid asset quality,” DBRS says.

It notes, however, that the ratings also take into account, “the company’s need to rationalize its operating platform, less robust organic growth of loans and deposits, and below-peer capitalization”.

On April 20, Banknorth became a wholly owned subsidiary of TD. DBRS says its ratings factor in the expectation that TD has the resources and motivation to support Banknorth, in the unlikely event that it required financial support. Without the support of its parent, Banknorth would likely be rated at a lower level, it notes.

As for the bank’s business, DBRS characterizes the company’s deposit franchise as significant. It notes that asset quality continues to remain strong and credit costs continue to compare favorably to its peer banks for the past five years.

In the first quarter of 2007, however, DBRS says, “the company reported elevated levels of [non-performing assets] from its residential construction portfolio, primarily in the Mid-Atlantic region, due to a slowdown in the housing market.” TD Banknorth continues to have an elevated exposure to the commercial real estate sector, it adds.

DBRS notes, however, that the company’s disciplined underwriting standards including conservative loan-to-value ratios, well secured positions, strict capital-based product loan limits and ample debt coverage somewhat mitigate this concentration.

TD Banknorth’s profitability improved in 2006 and Q1 2007 compared to 2005 levels, it says. “This improved profitability along with strong loan and deposit growth was primarily driven by the Hudson United Bancorp and Interchange Financial acquisitions. The company, however, was challenged by the difficult operating environment that negatively impacted its net interest margins,” it says.

“In addition, TD Banknorth’s financial statements continue to have a material amount of charges related to acquisitions and discontinued operations. DBRS believes that TD Banknorth needs to rationalize its existing operating network, which has been built via acquisition and whose profitability has been below peer levels for the past few years as management fully integrates the newly acquired institutions and promotes the TD Banknorth brand,” DBRS adds.

TD Banknorth’s management is currently focusing on leveraging TD’s expertise in products and services while reducing expense levels, the rating agency observes. “Although TD Banknorth’s loans and deposits have expanded by approximately 40% annually over the past two years, growth excluding acquisitions has been in the low to mid single-digit range. Management is focused on enhancing organic growth; however, DRBS believes that this will be a significant challenge given the difficult operating environment, its highly competitive newer markets and its legacy acquisition-based culture,” it says.
Investment Executive, James Langton, 30 May 2007

Fitch Ratings has affirmed its ratings on TD Ameritrade Holding Corp., and revised the outlook to stable from positive.

The rating affirmation follows TD Ameritrade’s announcement to acquire a portion of Fiserv’s Investment Support Services business. “To date, the integration between TD Waterhouse and Ameritrade has gone smoothly with debt service ahead of schedule,” it says. “Long-term ratings recognize TD Ameritrade’s position as a leading online discount brokerage firm that is also focused on generating more asset-based revenues. Cash flow has been strong and leverage ratios have also improved.”

The ratings outlook has been revised, Fitch explains, “recognizing the increase in goodwill, reversal of positive trends in tangible equity and an expectation that smaller acquisitions may continue further pressuring a return to positive equity.”

Fitch says it believes that the Fiserv deal presents additional scale in fee-based businesses. “The purchase comprises $28 billion in client assets, broken down between assets held by Registered Investment Advisers of $17 billion and assets held in third-party administered retirement plans of $10 billion. The transaction results in 500 new independent RIA relationships and is expected to be immediately accretive,” it notes.

The price for these assets is $225 million with the potential for an additional $100 million outlay if revenue targets are met, increasing goodwill, Fitch reports. Current debt outstanding was approximately $1.7 billion at March 31, and equity was $1.8 billion. Fitch continues to monitor the success of the company’s ability to meet synergies and debt reduction targets.