Friday, November 21, 2008

TD Bank's $500+ Million Writedown for Q4 2008

Dow Jones Newswires, 21 November 2008

RBC Capital Markets downgrades TD Bank to underperform following disclosure yesterday it'll take 4Q charge of C$503M (U$391M) in losses on its credit and securities trading portfolios. RBC expects TD's exposure to US banking will lead to higher loss provisions in 2009 than in 2008, and several overhangs in TD's Alt-A securities and other areas that could affect TD's valuation multiple. TD's Tier 1 capital ratio of 8.3% was also 0.4% lower than RBC expected, and TD has the lowest capital ratios among Canadian banks, RBC says.
RBC Capital Markets, 21 November 2008

We are downgrading TD's shares to Underperform because:

• Capital ratios are lowest among Canadian banks, and the pro-forma Tier 1 ratio of 8.3% was 0.4% lower than we expected.

• We expect 2009 U.S. loan losses to be higher than they have been in 2008 and have been guided by management. TD has the second-highest exposure to U.S. lending among the Canadian banks.

• Overhangs related to Alt-A securities and the bank's "basis trade" remain, which could have further negative implications for other comprehensive income.

• The stock is cheaper than Canadian bank peers on a P/B basis but that is partly due to a lower expected ROE given the goodwill associated with Banknorth and Commerce. On a P/TB basis, the bank still trades at the highest multiple of the six Canadian banks (although that is partly justified in our view by the goodwill and intangibles related to the Canada Trust acquisition).

We have also lowered our 12-month price target from $53 to $49 to reflect a lower P/B multiple given the lower than expected Tier 1 capital ratio. As is the case for other Canadian banks, our 12-month target is higher than the current trading price but we don't believe a sustained rally in bank shares is likely until economic and credit indicators strengthen.

TD Bank pre-released some segments of its Q4/08 results, ahead of its December 4th reporting date. While GAAP EPS were ahead of our estimate, the underlying results were weaker than we had anticipated and capital ratios were below what we expected.

• The pro-forma Tier 1 ratio of 8.3% was 0.4% lower than we expected.
• GAAP EPS of $1.22 is better than our previous estimate of $1.12, but it had a lot of moving parts and EPS would have been approximately $0.70 lower had the bank not reclassified some securities into its available for sale portfolio.
• Retail businesses earned $1.05 billion, which was 8% short of our estimate.
• The bank's credit trading group incurred mark to market losses of $911 million after tax in Q4/08, of which $561 million did not affect income as $7.4 billion in securities were reclassified as available for sale.
Scotia Capital, 21 November 2008

Pre-Released Earnings Below Expectations

• TD pre-released cash operating earnings of $1.22 per share, below our estimate of $1.43 per share and below consensus estimates of $1.38 per share. Earnings were less than expected due to a larger loss in the corporate segment due to losses on securitization and negative carry on corporate investments as well as weaker results at TD Securities. The bank indicated its retail earnings were relatively strong. Overall, underlying earnings were relatively solid in the context of the market and the expected AFS equity writedowns, BCE, and performance in the corporate segment.

• Reported cash earnings were $1.38 per share including the following items of note: a $350 million after-tax or $0.43 per share credit trading loss, a $323 million or $0.40 per share reversal of Enron litigation charge, $118 million or $0.15 per share gain from changes in fair value of derivatives hedging, $25 million or $0.03 per share in restructuring charges from the Commerce Bancorp transaction, and a gain $59 million or $0.07 per share on credit default swaps. Earnings were $0.79 per share including the credit trading losses.

Restructuring Proprietary Credit Trading

• The $350 million in credit trading losses has caused TD to refocus and reduce the size of its proprietary credit trading business. This business has a product set of Bonds, Credit Default Swaps (CDS), and Standard Credit Indices/Tranches. The trading strategies were Relative Value, Directional Trading, and Special Situations. The three key risks were credit (managed with CDS, internal credit review), other market risks (managed with derivatives) and liquidity risks (widening bond basis, bid/ask spread).

• The restructuring of this business has caused the bank to move $7.4 billion in trading financial assets as at August 1, 2008 from Trading to Available-for-Sale (AFS). In accordance with amendments to AcSB section 3855 the bank was allowed to move these assets with mark-to-market changes now being applied to Other Comprehensive Income (OCI) and not the income statement. The change in fair value of this portfolio was $561 million after-tax which will flow through OCI in Q4/08. The $7.4 billion in Bonds is largely CDS protected with 70% investment grade and 70% with term less than 5 years.

• The bank retains $2.5 billion in credit trading assets (bonds) in its trading book including $1.3 billion (non-North American) which is in a wind down mode. The trading book is 75% investment grade with 60% of the portfolio having a term of less than five years.

Tier 1 of 8.3% Expected in Q1/09

• TD management provided an update on pro forma Tier 1 ratio based on the quarter's result and the Innovative Tier 1 issue of $1.3 billion the bank completed in the quarter. The Tier 1 ratio is expected to be 9.8% at the end of the fourth quarter and 8.3% in Q1/09 after deducting 50% of the bank's investment in TD Ameritrade (November 1, 2008) from Tier 1 capital as required under Basel II.

• OSFI recently increased the limit for Qualified Preferred Shares and Innovative Tier 1 to 40% of Tier 1 capital from 30% to bring Canadian banks' capital composition closer to the U.S., U.K., and Europe, which allow 45% to 50% in Preferred Shares and other leverage type financing (as indicated by TD management). TD Qualified Preferred Shares and Innovative Tier 1 represent 30% of total Tier 1, with capacity to increase capital other than from equity.


• We are reducing our 2008 earnings estimate to $5.42 per share from $5.63 per share based on the bank's pre-release of fourth quarter earnings. Our 2009 and 2010 earnings estimates remain unchanged at $6.00 per share and $6.50 per share, respectively.

• We are reducing our 12-month share price target to $72 per share from $88 per share representing 12.0x our 2009 earnings estimate and 11.1x our 2010 earnings estimate. Our target price reduction reflects investors' fears and not underlying value or earnings or dividend sustainability.

• TD - 2-Sector Perform.
Financial Post, David Pett, 21 November 2008

Shock and disappointment is the mood on the Street one day after Toronto-Dominion Bank announced it will report weaker-than-expected fourth quarter earnings next month.

TD said adjusted earnings per share will be 79¢ in the quarter compared with $1.44 this time last year, due largely to a $350-million writedown on credit trading losses. TD said its corporate segment will also record a $153-million loss due to securitization and funding hits.

"While we had expected several banks to incur year-end charges, it is surprising that TD had problems of this scale," said BMO Capital analyst Ian de Verteuil in note to clients, leaving his "market perform" rating and $70 price target unchanged until the end of earnings season.

UBS analyst Peter Rozenberg reduced his fiscal 2009 earnings per share estimate by 2% from $5.78 to $5.67 and cut his price target on the stock from $69 to $67. He maintained his "buy" rating.

"While we expected trading losses, the announcement was disappointing and underlined broader systematic risks for all banks, concern regarding the economic outlook, and for TD, a lack of diversification in Wholesale," Mr. Rozenberg wrote in a research note.

He added that TD's retail division remains solid, but growth "is expected to moderate due to the recession.

Blackmont Capital analyst Brad Smith, said TD's credit losses could have been worse if not for some recent accounting amendments that allowed TD to reclassify retroactively $7.5-billion in credit related trading assets from "trading" to "available for sale" on the books.

"Through this action, $561-million (70¢ per share) of net unrealized valuation losses were effectively diverted directly to shareholders equity without being reported in the quarterly profit and loss statement," Mr. Smith told clients.

In addition to TD's credit trading losses, the Blackmont analyst was also concerned with unrealized losses at TD's U.S. affiliate, TD Bank N.A. that rose $868-million ($1.08 per share) in the quarter "due to price erosion in its mortgage-backed security portfolio,"

He maintained his "hold" rating and left his $63 price target unchanged.
The Globe and Mail, Tara Perkins, 20 November 2008

Ed Clark has spent months boasting about Toronto-Dominion Bank's ability to steer clear of the financial missteps that have caused his peers around the world to write down nearly $1-trillion (U.S.).

Yesterday, the chief executive officer acknowledged TD is no longer immune, suggesting that he spent so much time avoiding the individual threats that he lost sight of the bigger picture, allowing TD to be hit with $350-million (Canadian), after tax, in credit losses this quarter.

Steering a bank through a credit crunch is no easy task, Mr. Clark suggested in an interview.

“It's like running down, and people are shooting at you, and you miss this bullet and miss that bullet, and you say, ‘How do I make sure where the next bullet's coming from?'

TD's executives focused almost exclusively on eliminating credit risk, he told analysts on a conference call. They ensured that the bank had plenty of cash on hand, but didn't focus on the possibility that the rest of the world would run out of cash, he said. “I think that turned out to be a mistake.”

Mr. Clark's mea culpa came two days after Bank of Nova Scotia revealed that it will take a $595-million after-tax charge in the fourth quarter, which ended Oct. 31.

Of the Big Five banks, TD and Scotiabank have been viewed as the least exposed to the turmoil in credit markets. Investors are now watching for more pain on Bay Street when the remaining institutions show their hands.

Canadian financial stocks plunged yesterday. TD's shares ended down 12.74 per cent, or $6.36, at $43.57. Each of the Big Five saw their shares drop more than 12 per cent.

TD's pain is the result of a total lack of liquidity in the financial system during September and October, Mr. Clark said. The $350-million hit comes from the bank's credit product group, a proprietary trading business that was profitable the past seven years.

“Despite holding what we consider quality assets – not subprime mortgages, not structured products, not toxic assets, but rather assets that continue to perform – we find ourselves in a position of having to take some mark-to-market losses,” Mr. Clark said.

“Even though we tried, it was just not possible to build a wholesale bank that could withstand a world with no buyers, only sellers.”

The bank will wind down part of the portfolio that caused its headaches, and Genuity Capital Markets analyst Mario Mendonca expects it to incur several hundred million dollars in additional losses.

TD is also taking advantage of new flexibility in accounting rules by shifting $7.4-billion of bonds from its trading business into an accounting basket where writedowns to market value are recorded on the balance sheet rather than in earnings. The move is retroactive to Aug. 1. The fair value of the bonds has dropped by $561-million (after tax), but thanks to the recent accounting changes, that mark-to-market loss will not hit the bank's bottom line.

Bonuses for TD's investment banking employees and executives will be affected this year, with the investment banking division posting a fourth-quarter loss of $228-million, Mr. Clark said. Twenty to 30 jobs will be cut.

The bank's corporate segment will report a loss of $153-million, which is higher than its normal loss of about $40-million, partly because of losses on securitization.

Some of TD's financial pain will be offset by its decision to release a pot of money ($477-million before tax) that it had put aside to cover potential legal claims related to Enron.

Over all, fourth-quarter profit was $1.22 a share, while analysts had expected more than $1.30 a share. Adjusted profit is $642-million, compared with $1.021-billion a year ago.

Mr. Clark said he's counting on TD's core lending business to pull it through this environment. Contrary to public perception, TD and other Canadian banks have not curtailed their loans, he said.

TD's personal lending volumes have been growing by about 10 or 11 per cent, year over year, each month for the past couple of years and there has been no change to that pattern so far, Mr. Clark said. “The commercial and small-business area, it used to grow at 10 to 11 per cent, and has now stepped up and is growing closer to 15, 16 per cent.”

The Canadian Bankers Association said yesterday that business credit from the six largest banks was up 11.3 per cent in October from a year ago.

“What's happening, to some extent, is the banks are replacing other lenders,” Mr. Clark said. “Foreign lenders are withdrawing, securitization as a way of borrowing money has disappeared, and really the world is becoming actually more dependent on banks lending.

“So far, I would say the Canadian banking system has stepped up and said ‘we will absorb this.' But it does mean that you'll have increasing capital needs and funding needs as you grow that.”

Mr. Clark plans to keep TD's Tier 1 capital ratio, which will be 8.3 per cent on Nov. 1, above 8 per cent. That will likely be done by making use of new leeway that regulators have granted the banks when it comes to measuring their core capital, such as the ability to include a greater proportion of preferred shares.

TD does not plan to boost its capital levels right now by issuing common equity, Mr. Clark suggested. “At today's availability and price tag, raising common equity would be extremely difficult.”
Bloomberg, Doug Alexander, 20 November 2008

Toronto-Dominion Bank Chief Executive Officer Edmund Clark said he doesn't plan to follow the lead of executives at Goldman Sachs Group Inc. and forgo his annual bonus after a C$350 million ($273 million) trading loss.

"To be frank, no," Clark said, when asked in an interview about giving up his bonus. "Obviously I feel badly about it, but you don't exaggerate the situation."

The Toronto-based bank today reported fourth-quarter profit that missed analysts' estimates after taking a loss in its credit trading business. Toronto-Dominion, which has avoided significant debt writedowns until now, posted a C$228 million loss for its TD Securities investment bank, and a C$153 million loss in its corporate unit. The bank reports complete results on Dec. 4.

"We run a very performance-driven culture here. When something bad happens, it falls on the areas affected and the higher you are the more you're going to get affected," Clark, 61, said.

Barclays Plc CEO John Varley, investment banking head Robert Diamond, 57, and others will forgo their 2008 bonuses, the London-based bank said Nov. 18. Goldman Sachs CEO Lloyd Blankfein, 54, said this week he'd forgo his bonus, while UBS AG scrapped bonuses for CEO Marcel Rohner and 11 other top executives.

"When you run a big financial institution -- a C$500 billion balance sheet -- I think it's unrealistic to assume you'll never have a bump in the road," Clark said.

Toronto-Dominion's credit trading business was "probably too large a bet" and the bank didn't contemplate a crisis that extended 15 months, Clark said. The bank also failed to shed its investments quickly enough as the markets seized up, he said.

"We just never though the world would go from bad to terrible," Clark said, adding that other lenders may face similar problems. "When you look around the world, anybody that's sitting on inventories today is going to be marking those inventories down dramatically, because there are no bids out there."
Reuters, Lynne Olver, 20 November 2008

Toronto-Dominion Bank is cutting a small number of staff in its wholesale banking unit, which has been shrinking in proportion to the bank's bustling retail operations, TD Bank President and Chief Executive Ed Clark said on Thursday.

The bank warned earlier in the day that charges of C$350 million ($273 million) for credit-trading losses will produce a C$228 million quarterly loss in TD Securities, its corporate and investment banking unit.

The losses came in its credit products group, which trades bonds, credit default swaps and credit indexes. Bond values plunged in recent months as market liquidity dried up.

The bank is trimming staff at TD Securities by between 20 and 40 jobs as it seeks to ensure that all business areas make the most money with the least risk, Clark said in an interview.

"There are definitely job losses going on there as we speak," he said. "They're not huge numbers. Twenty, thirty, maybe 40 people," he said.

The wholesale banking unit had about 3,000 employees at the end of July.

On a conference call, TD executives said they will wind down C$1.3 billion in non-North American bonds in the credit trading book, and will also reduce a C$7.4 billion bond portfolio that is now classified as available for sale.

There will be no effect on bank operations outside of TD Securities from the trading losses, Clark said.

In fiscal 2008, which ended October 31, almost all of TD Bank's profits came from its TD Canada Trust retail bank in Canada and its TD Bank retail operations in the United States, comprising the old TD Banknorth name and the recently acquired Commerce Bank network.

"In the end, TD Securities will earn just under C$70 million and our retail business will earn C$4 billion," Clark said of full-year results.

Mathematically, it would be hard for the corporate bank's contribution to shrink further, he noted.

"It will be in the 5 to 10 percent of our earnings (range) for a while."

That proportion is down from 2006 and 2007, when wholesale bank profits made up 19 percent and 20 percent of TD Bank earnings, respectively.

Despite TD Securities' C$228 million loss in the fourth quarter, the unit has been profitable since the financial crisis began, Clark noted.

"There aren't a whole lot of corporate banks who made money all the way through."

On the Toronto Stock Exchange, TD Bank shares were down 11.5 percent on Thursday afternoon at C$44.20, while the S&P/TSX financial index was down 9.6 percent.

Analysts expect that slumping financial markets in September and October will bring similar market-related write-downs at other Canadian banks, which report fourth-quarter results over the next two weeks.
Dow Jones Newswires, 20 November 2008

Canadian bank valuations are now at "unprecedented" levels, UBS says, at a 37% discount to normalized values. That appears to discount a severe global economic downturn, firm suggests. Using 1991 recession as an acid test, firm says bank-share prices now factor in 29% decline in EPS, higher than 1991 numbers would suggest. Also notes bank loan mix better, so provisions unlikely to rise to 1991 levels. Overall, UBS says, valuations attractive at 8.4 times FY09 estimated EPS, compared to 10-year average of 11.8.
Dow Jones Newswires, Monica Gutschi, 20 November 2008

While the U.S. economy is likely to go into a "fairly sharp downturn," the lower Canadian dollar is likely to provide an upside for Toronto-Dominion Bank's operations in the U.S., Ed Clark said Thursday.

"I do think that the risk of having a greater-than-normal downturn are higher rather than lower," the bank's chief executive said in an interview, noting that consumers and investors have been "terrified" by recent events.

But even though that is likely to lead to higher loan-loss provisions at its U.S. retail bank, Clark said the weaker currency would provide a strong positive offset.

He noted the Canadian dollar is now 25% weaker today than it was a year ago, giving a 25% "lift" to the bank's U.S. earnings. And given the bank's conservative lending practices, Clark said it isn't likely to report a 25% increase in loan losses.

Toronto-based TD has a nearly 45% stake in online broker TD Ameritrade Holding Corp., and operates a 575-branch retail bank built from its acquisitions of the former Commerce and BankNorth banks.

With more than 90% of TD's overall earnings derived from retail businesses, the bank has largely sidestepped the credit-related problems that have plagued its peers over the past 18 months.

However, earlier Thursday TD announced it would take C$350 million in write-downs on its credit trading book, and would also report higher-than-normal losses of C$153 million on other investments. Some of the impact was offset by a gain of C$323 million as it reversed a litigation reserve related to Enron.

Clark said he was "disappointed" at the losses, but noted its wholesale bank would still report positive earnings, while its retail-banking operations were strong. The bank said it would report adjusted earnings of C$642 million or 79 Canadian cents a share in the fiscal fourth quarter. On a GAAP basis, net income is expected to be C$1.22 a share.

That compares with the Thomson Reuters mean analyst estimate of C$1.39 a share for the quarter, which ended Oct. 31, and the C$1.40 a share earned a year earlier.

While the bank's emphasis on retail banking has been a boon during the difficult times, the flip side of being retail-oriented is that TD is more vulnerable to a slowdown in consumer spending. Clark said that in the U.S. the bank is more vulnerable to slowing U.S. commercial lending, while in Canada it is more exposed to unsecured lending.

However, he said the bank has good earnings momentum and the ability to absorb any potential losses. It's also bracing for a significant economic slowdown.

"We're entering into a downturn with consumer confidence at the lowest level it's ever been before we have the downturn," Clark said.

In the earlier call, he said there would likely be a "buyer's strike" in the U.S. as the average American has seen both his or her home equity and its investment equity disappear.
Financial Post, Jonathan Ratner, 20 November 2008

Toronto-Dominion Bank may be taking a $500-million charge in the fourth quarter but it remains the safest bet among Canadian banks heading into the credit storm, Dundee Securities analyst John Aiken said.

He does not think TD’s announcement on Thursday will be the last capital market-related charges we see in the quarter. Bank of Nova Scotia also pre-announced similar charges this week.

“While additional losses for TD cannot be discounted at this stage (although accounting changes help on that front), we believe that the core earnings at the bank, particularly the success in its retail banking operations, will hold its earnings and valuations in good stead relative to its competitors,” he told clients.

Mr. Aiken expects core cash earnings for TD will be slightly above $1.30 per share, which is below the consensus. This could be a result of company-specific issues, which should be revealed when its full financials come out on December 4, or could signal weaker-than-expected earnings for the sector as a whole.

Banks typically clean up their balance sheets at the end of the year. So while charges are never good news, Mr. Aiken said they could moderate going forward if banks are conservative enough and capital markets show some signs of stabilization.
Financial Post, Eoin Callan, 20 November 2008

Ed Clark is battening down the hatches at TD Bank Financial Group, chucking business units overboard and cutting bonuses after being caught out by a storm in credit markets that continued to wreak havoc on the financial system on Thursday.

The chief executive said the bank expected to pull back from key overseas markets and top up its capital reserves after suffering a blow of more than $500-million in the fourth quarter amid choppy trading conditions that saw the Toronto stock market fall on Thursday by the most in 21 years.

The losses disclosed by TD will certainly not be the last for Bay Street, which is still counting the cost of the crisis in the banking system and has yet to feel the full effects of an economic downturn.

Financial stocks led a plunge in the TSX index, which dropped 9% to 7,724.76, the lowest in five years, with Manulife Financial sliding 15% after drawing down a $3-billion credit line. The challenges facing the financial sector also prompted a fresh flight by investors on Thursday from Citigroup, which saw its stock fall 26% in an alarming rout that prompted calls for authorities to bring back emergency measures to halt runs on shares.

While forecasters are already looking ahead to a prolonged period of rising defaults on bad loans and falling revenues, the head of Canada's second-largest bank warned on Thursday that the market institutions rely on for medium-term financing was only barely functioning.

"Is there any bank in the world that can actually do a significant amount of term financing in today's market? No," said Mr. Clark, adding: "Nobody is buying assets, they are only selling assets."

Mr. Clark said the toll on Canadian banks would have been much worse if Ottawa had not stepped in to ease accounting rules and provide affordable financing by agreeing to buy up to $75-billion worth of mortgages.

The losses revealed on Thursday by TD were concentrated in an obscure unit of the bank known as the Credit Products Group, which invested in two large portfolios that became distressed following a string of bank failures.

TD booked a $350-million loss on a $2.5-billion portfolio that included complex instruments such as credit default swaps. But it took advantage of new looser accounting rules to duck a charge of $561-million on a bigger portfolio of about $7.4-billion in bonds, such as mortgage-backed securities.

Executives said they were using the looser rules to re-classify this larger portfolio and avoid taking a hit that would have further weakened TD's base of required capital, which has fallen to a level of 8.3% from a previous peak of closer to 10%.

Mr. Clark indicated the bank would also take advantage of new flexible rules from Canada's top banking regulator that allow financial institutions to top up their reserves by issuing more "preferred shares," a hybrid of debt and equity once frowned upon.

TD has already raised $1.25-billion in capital this way, with analysts predicting imminent moves to raise fresh cash after the fall in its required reserves to what appeared to be the lowest level of any of the country's big five banks.

The disclosures by TD challenge the view Canada's top banks would sidestep the worst financial crisis since the Great Depression, suggesting instead that government relief has played a decisive role in mitigating the impact.

TD said it would wind down its credit products operation outside of North America and indicated bonuses would be cut at TD Securities and among top management. But in an internal video broadcast to TD staff, the chief executive signalled confidence the bank would outperform its peers thanks to government flexibility and cash flows from its successful retail operation.

Executives also said the bank had hit its target of generating more than $4-billion in annual retail profits, helping to support earnings per share of $1.22 for the quarter ended Oct. 31, which will work out to 79 cents after "adjustments."

Mr. Clark acknowledged earnings from U.S. operations were likely to be less than expected, but expressed hope the Canadian dollar would remain low enough to offset this shortfall by making the American profits worth more when they were transferred back to Bay Street. The executive added in an interview that TD would continue increasing its overall total of new loans to personal and business customers of its U.S. branch network.

The executive said it would be possible to emerge from the downturn with a significantly larger market share in the U.S. by concentrating on its core franchise in the northeast and targeting more affluent customers and businesses. TD shares fell 13%.
Dow Jones Newswires, Monica Gutschi, 20 November 2008

Toronto-Dominion Bank, which had avoided many of the problems that have battered its peers, shocked the market Thursday with the news that it would take a series of fourth-quarter charges on credit and securities losses.

The bank said it would take an after-tax loss of C$350 million on its credit trading book, and another C$153 million loss on securities trading, because of the illiquid and volatile markets.

The news follows hard on the heels of Bank of Nova Scotia's announcement that it would take C$595 million in after-tax write-downs in the fourth quarter, and foreshadows similar announcements from the other Canadian lenders.

"On the theory that you should be trying to dump everything into the quarter, you have nothing to lose," said Bruce Campbell, a principal at Campbell-Lee Investment Management, who counts TD as his largest bank holding.

And Sumit Malhotra, Canadian bank analyst at Merrill Lynch, suggested earlier Thursday that he expects fourth-quarter write-downs from all the banks to total C$5.3 billion.

Canadian Imperial Bank of Commerce, the bank most exposed to U.S. subprime housing and structured credit, is expected to report a charge of up to C$2 billion.

The growing realization that no bank is immune from the impact of volatile equity markets and the wide credit spreads, hit bank shares like a hammer.

In Toronto Thursday, TD is down C$4.45 to C$45.48 and Bank of Nova Scotia is off C$1.90 to C$33.34.

Leading the decline is CIBC, off C$4.94 to C$43.35. Royal Bank of Canada is down C$3.96 to C$37.23 and Bank of Montreal is off C$2.13 to C$35.87.

"At this juncture, everybody is kind of sitting here and really wondering what other shoes are there in the bank portfolios to drop," said Ross Healy, portfolio manager at Strategic Analysis. "You can't kind of help but feel that with the economic contraction (now), there are probably more kinds of bad news to come from banks, and you just don't know where."

Now, he noted, the bad news is coming from the banks that most observers had thought "had kept their noses clean," indicating that the global credit problems are widespread.

Healy, who owns no Canadian banks in his portfolio, said he began shying away from financial services once the credit problems in the U.S. began. "When the problem is debt, you better avoid the banks," he said. "That's always been the case, as long as I've been in the business."

Still, investors said they were comforted by the strong capital positions of Canadian banks. Even with the write-downs, TD is expected to have a Tier 1 capital ratio of 9.8% at the end of the fourth quarter.

DBRS reaffirmed its ratings on the bank, and said trends were stable.

As well, the bank said Thursday that its strategic positioning in wholesale banking and its strong retail-banking platform would stand it in good stead.

It expects to report adjusted earnings of C$642 million or 79 Canadian cents a share in the fiscal fourth quarter.

That compares with the Thomson Reuters mean analyst estimate of C$1.39 a share for the quarter, which ended Oct. 31.

In the year-earlier fourth quarter, the Canadian chartered bank earned C$1.40 a share on an adjusted basis.

Toronto Dominion expects to report GAAP net income of C$1.22 a share in the quarter.

Helping offset the impact of the write-downs, the bank reported a gain from the reversal of a litigation reserve it held related to failed energy trader Enron. As a result, it has recorded a positive adjustment of C$323 million on an after-tax basis.

Due to global liquidity issues, the widening in the pricing relationship between asset and credit protection markets, or basis, hurt credit trading-related revenue for the first three quarters of 2008. The "dramatic" absence of liquidity in credit markets in September and October produced an unprecedented widening of the basis, causing larger losses in Wholesale Banking in the fourth quarter, TD said.

To address the continuing deterioration, the bank has refocused its credit-trading business, including continuing to reduce this book of business, and reclassified certain trading financial assets into the available-for-sale category during the quarter. It said after-tax credit-trading losses of about C$350 million in the Wholesale Banking segment will result in an adjusted loss of C$228 million in this segment in the fourth quarter.

The bank also said its Corporate segment will record an adjusted loss of C$153 million for the quarter, compared to its usual loss of about C$40 million. The higher loss reflects illiquid markets.

However, it said its retail business remains strong, and it projects adjusted earnings of C$1.046 billion from its Retail segment in the fourth quarter.
Bloomberg, Doug Alexander and Sean B. Pasternak, November 2008

Toronto-Dominion Bank, Canada's second-largest lender by assets, reported fourth-quarter profit that was below analysts' estimates after posting about C$350 million ($274 million) in trading losses. The stock had its biggest drop in 25 years, and dragged other bank shares lower.

Profit was C$1.22 a share for the quarter ended Oct. 31, the bank said in preliminary results released today in a statement. The bank was expected to earn C$1.30 a share, the average estimate of seven analysts polled by Bloomberg. The bank said ``adjusted'' profit, before some one-time gains, will be C$642 million, or 79 cents a share.

``We're not surprised by any of this, and we think there's more to come from TD,'' said Blackmont Capital analyst Brad Smith, who expected C$1.45 a share excluding one-time items.

The Toronto-based bank is the second Canadian lender this week to report partial results ahead of schedule to reflect writedowns and other losses from the global credit crisis. Bank of Nova Scotia said on Nov. 18 it will record pretax charges of C$890 million tied to the bankruptcy of Lehman Brothers Holdings Inc. and eroding values for securities and debt investments.

Toronto-Dominion, which has avoided significant debt writedowns until now, said it expects to report C$350 million in credit trading losses, leading to a C$228 million loss for its investment-banking unit. The bank will also have a C$153 million loss in its corporate unit from eroding investments.

Toronto-Dominion's mistake was failing to anticipate a financial system ``meltdown'' and not getting out of some debt- related investments quickly enough, Chief Executive Officer Edmund Clark said in a conference call.

``I am struck by how dramatically and rapidly the global financial markets have changed, and how difficult it is to anticipate every risk,'' Clark said.

Toronto-Dominion fell C$6.36, or 13 percent, to C$43.57 at 4:10 p.m. trading on the Toronto Stock Exchange, its lowest since Aug. 12, 2004. All Canadian banks and insurers plunged, led by National Bank of Canada and Manulife Financial Corp.

``It was a bit optimistic to think TD would escape the problems completely,'' said Laura Wallace, who helps oversee about $300 million as managing director at Coleford Investment Management Ltd. in Toronto, including Toronto-Dominion.

Toronto-Dominion recorded a reversal, or gain, of C$323 million from money originally set aside for claims related to failed energy trader Enron Corp., and a C$177 million gain on hedging of derivatives and credit-default swaps. Other gains added C$151 million to earnings.

The costs from what Clark calls ``a bump in the road'' will have ``consequences'' for the annual bonuses at the TD Securities investment bank, he said.

Prior to the quarter that ended Oct. 31, Canadian banks had recorded C$11.6 billion in losses related to debt investments since 2007. Clark said as recently as this month that the bank avoided risky investments by focusing on consumer banking and unloading a structured products business in 2005.

``What this underscores is how deep this current crisis really is,'' Clark said in an interview. ``The fact that TD is hurt tells you how deep it is.''

Toronto-Dominion will exit its credit trading business outside of North America, winding down C$1.3 billion in bonds, the bank said in a presentation on its Web site. The lender has earmarked another C$7.4 billion in bonds for sale.

Toronto-Dominion is scheduled to release complete results Dec. 4.