Saturday, January 26, 2008

TD Bank's Commerce Buy Remains Unsure Bet

Financial Post, Duncan Mavin, 26 January 2008

Amid all the turmoil in global banking, Ed Clark has looked pretty smart of late.

The Toronto-Dominion Bank chief executive has steered his bank clear of subprime securities and asset-backed commercial paper. Mr. Clark perhaps also stood in the way of a merger between TD subsidiary TD Ameritrade and E*Trade Financial -- a role for which he was vilified by hedge funds last year, but which looks wise now that E*Trade is embroiled in its own subprime mess.

But there is a big outstanding question about Mr. Clark's otherwise glowing reputation: Has the TD chief struck gold or struck out with last year's transformational deal to buy New Jersey-based Commerce Bancorp?

Since TD announced the US$8.5-billion acquisition of Commerce in October, the U.S. bank has not put in a convincing performance.

Yesterday, Commerce reported its fourth-quarter results were only half what they were a year earlier.

Profit in the final quarter was US$33.4-million, compared with US$62.8-million in the same period of 2006.

The year-over-year comparison looks even worse after excluding a US$13.7-million gain this quarter on the sale of the company's insurance-brokerage business and a one-off hit of US$15.8-million related to certain legal settlements.

Take those two one-time items out of the equation and Commerce's results fell by 75%.

Commerce said part of the blame lies with rising loan losses in "residential real estate and related real estate development exposures, and exposures in the leveraged loan portion of the company's commercial loan portfolio."

The bank recorded a provision for credit losses of US$55.0-million, compared with US$26.0-million in the third quarter of 2007 and US$10.2-million in the fourth quarter of 2006.

Under founder Vernon Hill, Commerce was one of the fastest growing banks in the United States, expanding quickly, with a strong emphasis on customer service.

However, Mr. Hill left the bank last year when regulators began investigating dealings between the bank and members of his family, leaving Commerce without its charismatic figurehead.

Despite the pressures on U.S. banks and the problems specific to Commerce, TD did not get a cheap deal. The Canadian bank paid US$42 a share for Commerce, about 6% higher than its closing price of US$39.74 before the deal was announced.

Since then, U.S. bank stocks have been in meltdown mode.

Investors might be tempted to draw a link between Mr. Clark's previous big venture into the United States -- the acquisition of TD Banknorth. The Portland, Me.-based bank had grown quickly -- in contrast to Commerce, Banknorth's growth was via acquisitions -- before TD bought in.

But Banknorth has struggled to deliver in recent quarters, weighed down by yet more acquisitions that have taken more time than expected to bed in, as well as a tough banking environment in the United States.

Still, it is far too early to put the Commerce deal down as a mistake by TD's Mr. Clark.

A spokesman for TD declined to comment on the Commerce results yesterday, but the bank has made it clear the Commerce acquisition is one for the long term.

"I don't think they decided to buy Commerce Bancorp for what it would do to 2008 or 2009 earnings," said Rob Sedran, National Bank analyst.

"Even when they announced the deal, the U.S. economy was softening. When they bought it, it was part of a longer-term strategy to become a North American retail bank."