Wednesday, January 23, 2008

Downturn has Banks Ready to Cut Costs

The Globe and Mail, Tara Perkins, 23 January 2008

Toronto-Dominion Bank chief executive Ed Clark wants employees to cut back on their “nice to do” expenses, but is assuring his team that he plans to keep investing for future growth despite the increasingly worrisome business environment.

An e-mail he sent to his senior executives on Monday highlights the anxiety that has rippled through the financial services business this week as markets have seesawed.

“The downturn in the market hurts some of our businesses directly – TD Securities and TD Waterhouse,” Mr. Clark wrote in the e-mail.

“The uncertainty in the market has hurt spreads in both Canada and the U.S., and impacts on deposit growth,” he wrote. “If a major slowdown occurs, all of our businesses will be hurt and loan losses will rise.”

Analysts are more pessimistic about the outlook for the big Canadian banks' earnings, especially on the capital markets side of the business.

On Wednesday, BMO Nesbitt Burns analyst Ian de Verteuil reduced his 2008 profit forecast for the banks by 7 per cent, or a total of $1.6-billion after tax, based on his belief that trading revenues and capital markets revenues will suffer as bad loan losses rise. He expects the banks' expenses will be $1-billion lower than his previous estimate.

“There's a higher level of consciousness around it,” an investment banker at one of the big banks said Wednesday of costs and expenses. Bankers suggested the sector is entering a period of belt-tightening.

In his note, Mr. de Verteuil said he expects the Canadian bank sector to have essentially no earnings growth this year, after removing one-time items.

He lowered his trading revenue forecast to $5-billion, from $6-billion, saying it's likely the first half of the year will be disappointing because of market declines and volatility.

In his e-mail, Mr. Clark said the financial services industry remains under a microscope regarding further writedowns because of U.S. subprime mortgages and related issues.

“Even though TD doesn't have any exposure to these issues, the market mood is not yet in a place where major distinctions are being made between positive and negative outliers,” he wrote. “Over time though, the market should start to differentiate between banks on the basis of the quality of their earnings.”

The bank has had an economic view for some time to expect a slowdown in 2008, he said. And while “we have to be tough on ‘nice to do' expenses,” that's something that should be happening regardless of market conditions.

“What we are not going to do is have a fire drill just because the market is down,” he said.

CIBC World Markets analyst Darko Mihelic said, “Ed Clark is a worrier,” and seems to be “the first to admit that there will be difficulties ahead.”