Friday, June 29, 2007

TD Banknorth Investor Day

  
Scotia Capital, 29 June 2007

Event

• TD Banknorth's new management team presented to investors in Toronto, June 28 highlighting the "Actions" that are being undertaken to grow the franchise and improve financial performance.

• Mr. Clark, CEO of TD emphasized three points: "New Management Team That Can Execute", "Bank is Taking Action Now" and "Confident They Can Deliver in Existing Environment".

What It Means

• The major strategic shift at TDBN is the focus on organic growth rather than M&A. TDBN will only make acquisitions if pricing shifts or an exceptional opportunity presents itself.

• We believe the shareholder dilution from the TDBN purchase is fully priced into TD's stock and that TD is taking "Concrete Action" to reverse the fortunes of this acquisition.

• If TD can use its best in class retail banking expertise at TDBN we would expect the acquisition to create shareholder value for TD in the long term and overcome the shareholder dilution that has occurred in the bank over the last two years.

TD Banknorth Dilutes Shareholder Value to Date

• TD Bank's acquisition of Banknorth has not gone well since it acquired a majority stake (51%) in March 2005. This is due to a number of factors including price, timing, yield curve shift, competition, appreciation in C$ and decline in M&A opportunities which was BNK's key competency and main driver of growth. TD bought in the remaining 41% minority stake of Banknorth/TD Banknorth in April 2007.

• TD's original purchase of Banknorth was at US$40.00 per share (C$/US$ exchange rate at 1.18) with the share price declining 25% to US$30.00 per share by November 2006 prior to the privatization announcement. TD privatized TD Banknorth buying in the 41% minority interest at US$32.33, closing April 2007. We estimate the acquisition of TDBN to date has impaired shareholder value by approximately $2.6 billion or $3.60 per TD share excluding the opportunity cost on the appreciation of TD shares since the original purchase in March 2005. TD issued 44.3 million shares on original purchase at $44.89 per share totalling $2 billion. These shares now have a value of $3.2 billion, appreciating $1.2 billion for net impairment of $3.8 billion or $5.30 per TD share.

• TDBN's financial performance has been extremely disappointing with a lack of earnings growth from the US$300 to US$350 million levels achieved in 2002 - 2003 which is essentially unchanged from recent earnings run rates in the US$300 million range.

• TDBN expects to exceed $500 million in 2008 and to achieve a long term earnings growth rate of 7% - 10% in line with TD objectives. TDBN achieving $500 million would add a $0.15 per share to TD 2008 earnings which would represent an estimated $2.00 to TD's share price. In addition, we expect an overall multiple bump as the operating/earnings risk at TDBN declines.

TD Banknorth Underperformance Fully Priced In

• We believe the shareholder dilution from the TDBN purchase is fully priced into TD stock and that TD is taking "Concrete Action" to reverse the fortunes of this acquisition.

TD Takes Action to Improve TD Banknorth Performance

• The key question is can TD Bank add value to the TD Banknorth franchise. If TD can use its best in class retail banking expertise at TDBN we would expect the acquisition to create shareholder value for TD in the long term and overcome the shareholder dilution that has occurred in the bank over the last two years.

• TDBN's new management team presented to investors in Toronto, June 28 highlighting the "Actions" that are being undertaken to grow the franchise and improve financial performance.

• Mr. Clark, CEO of TD emphasized three points: "New Management Team That Can Execute", "Bank is Taking Action Now" and "Confident They Can Deliver in Existing Environment".

Strategic Shift to Organic Growth

• The major strategic shift at TDBN is the focus on organic growth rather than M&A. TDBN will only make acquisitions if pricing shifts or an exceptional opportunity presents itself.

• TDBN plans to drive earnings and growth by increasing market share in retail, small business and wealth management where the bank doesn't have its natural market share. The bank expects to enhance its retail platform by optimizing its branch network, building its brand and improving pricing, processes and products. The bank intends to maintain its strong commercial banking franchise and further leverage its capabilities in terms of large transactions.

• The bank also plans to increase its small business loan penetration to 9.3% in line with commercial banking market share versus its current underrepresented 3.4% market share. The bank also has four growth businesses; wealth, insurance, credit cards and TD Bank USA.

Optimizing Branch Network

• TD Banknorth has undertaken certain initiatives to optimize its current branch network such as upgrading branches, relocating branches and adopting longer branch hours. Before branch hours were extended, TD Banknorth's average branch hours of 46.1 lagged the market average of 49.7 hours. Currently, TD Banknorth's average branch hours are 54.0, significantly above the market average.

Bringing Brand to Life - Brand Awareness

• TD Banknorth has also begun advertising and has improved its signage to increase brand awareness. TD Banknorth currently has the #1 brand awareness in New England and in the Mid-Atlantic brand awareness has doubled to 28% from 14% in one year.

Pricing, Process & Product

• TD Banknorth has also made efforts to closely monitor pricing which is generally more varied in the U.S., as well as streamline processes and close product gaps. For example, TD Banknorth introduced a high savings account, is taking steps towards instant issue debit cards and is planning to launch a line of credit cards.

Recommendation

• Our 2007 and 2008 earnings estimates remain unchanged at $5.45 per share and $6.00 per share, respectively, however, TD Banknorth earnings are expected to be much more supportive in achieving or exceeding our 2008 earnings estimates for TD.

• We reiterate our 1-Sector Outperform rating on shares of TD based on strong earnings momentum, expected P/E multiple bump with lower risk from TD Banknorth.
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Financial Post, David Pett, 29 June 2007

TD Bank is cleaning house at it's TD Banknorth operations south of the border in an attempt to increase profitability at the division and improve sentiment regarding the bank's overall U.S. retail strategy.

On Thursday, the bank held an investor day in Toronto to discuss several initiatives it has put in place at Banknorth in order to deliver on its promise to achieve at least $500-million in earnings for 2008.

If successful, that would result in an increase of 43% versus the $349-million in earnings that RBC analyst Andre-Philippe Hardy expects in 2007.

"Part of the growth is due to increased ownership, part due to expense reductions," Mr. Hardy told clients, saying he expects Banknorth to account for 10% of the bank's total earnings in 2008.

Notably, the bank has reduced its workforce by 13% in the last year and closed a number of underperforming branches, which has accounted for $80-million in expense savings, the analyst wrote.

The company has also been opening new branches, refurbishing old ones, extending opening hours and introducing new products, including a new credit card line that is expected in the fall.

Employee compensation has also been revamped to better align individual performance with incentives.

That said, Mr. Hardy said there are still challenges ahead for the Banknorth division including the deterioration of its real estate construction portfolio and tight margins regarding its commercial loans portfolio.

He maintained his outperform rating on the stock and left his $82 price target unchanged.

UBS analyst Jason Bilodeau believes TD's earnings goals for Banknorth are certainly achievable, saying the division will benefit from the bank's commitment to export TD Canada Trust's superior customer service and sales culture stateside.

As well, he said Banknorth is benefiting from TD's capabilities in a number of other areas including marketing, risk management, product design and treasury function.

But despite his increasing optimism, Mr. Bilodeau left his "buy" rating and $85 price target for the stock unchanged.

"Given the challenges to date, and the persistently difficult operating environment, we are holding our conservative view and our model continues to incorporate relatively modest estimates coming out of the US retail operations (i.e. below managment's $500-million target)."
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Bloomberg, Sean B. Pasternak, 28 June 2007

Toronto-Dominion Bank, Canada's third-largest lender, plans to increase deposits at its U.S. consumer bank by about a third, or as much as $10 billion, over five years through extended bank hours and new products.

"We have tremendous opportunities to grow organically in retail, small business and commercial deposits," Bharat Masrani, chief executive officer of the TD Banknorth unit, told investors today in Toronto.

The Toronto-based bank is trying to increase earnings at the U.S. unit by 7 percent to 10 percent a year, after profit declined in six of the last eight quarters because of higher acquisition costs and a decline in lending.

``We are not sitting idly by watching the environment to improve,'' said Masrani, a 20-year Toronto-Dominion veteran who became CEO in March.

In 2006, the Portland, Maine-based bank had $27.4 billion in total average deposits.

Planned changes include increasing average branch hours, adding and renovating new offices, and expanding the number of insurance and asset-management advisers inside the branches.
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