Second Quarter Earnings
• TD Q2/06 operating earnings were $1.09 per share, an increase of 9% versus $1.00 per share a year earlier, below expectations, due to disappointing results from Wholesale Banking with weak trading revenue, particularly in interest rate and credit portfolio products.
• Retail and Wealth Management earnings continue to be strong, increasing 16% and 54%, respectively, year over year (YOY). Wholesale Banking (TDSI) earnings declined 15% YOY.
Weak Wholesale Banking Earnings
• TDSI earnings declined 30% QOQ and 15% YOY to $140 million due to relatively weak trading revenue. Operating earnings from Wholesale, on a comparable basis with Q1/06, were down almost 40 percent if the impact of higher security gains was excluded.
Trading Revenue Weak
• Trading revenue was $251 million, versus $375 million in the previous quarter and $319 million a year earlier with weakness in interest rate and credit portfolio products.
• Interest rate and credit portfolios trading revenue declined significantly in the quarter to $55 million from $199 million in the previous quarter and $127 million a year earlier. The Bank continues to record trading losses on global structured products as it continues to exit this business. The Bank indicated that it is 50% complete in exiting this business.
Capital Market Revenue
• Capital Market revenue of $376 million is not comparable to previous quarters due to the sale of TD Waterhouse U.S.A. and the fact that TD Ameritrade earnings are accounted for on an equity basis (i.e. one line).
• Full service brokerage and other securities services revenues of $242 million increased 5% YOY but were down 5% QOQ due to a decline in M&A and underwriting revenues.
Unrealized Security Surplus at $706 Million
• Security gains were $82 million or $0.07 per share compared with $58 million or $0.05 per share in the previous quarter (excluding a $52 million balance sheet restructuring charge at TD Banknorth and including $17 million loss on merchant banking portfolio) and $47 million or $0.04 a year earlier.
• Unrealized security gains remain high at $706 million but were down from $806 million in the previous quarter.
TDCT Earnings Increase 16%
• Canadian Personal and Business (TDCT) earnings increased 16% YOY to $465 million driven by strong loan growth.
• Revenues at TDCT increased 10% YOY while non-interest expenses increased 7%.
• Average loan growth was very strong at 10% YOY while average deposits growth was 7%.
• Insurance revenue growth was modest at 6% YOY in comparison to YOY growth rates in the 20% range in the past two quarters.
• Loan securitization revenue declined $28 YOY ($0.03 per share) and $20 million ($0.02 per share) sequentially to $72 million with lower securitization activity and lower securitization gains due to the spike in interest rates.
Canadian Retail NIM Declines 3 Basis Points QOQ
• Canadian retail net interest margin (NIM) declined 3 bp QOQ but increased 3 bp YOY to 2.98% due to mix shift in volume growth toward lower margin real estate secured lending products.
TD Banknorth Earnings Under Pressure
• U.S. Personal and Business (TD Banknorth) earnings were $59 million, a decline of 9% QOQ due to margin compression and higher expenses for merger related and restructuring charges and the Hudson acquisition.
• Net interest margin at TD Banknorth declined 13 basis points QOQ to 3.83%.
Significant Growth in Wealth Management Earnings
• Wealth management earnings, including the Bank's equity share of TD Ameritrade increased 54% YOY and 10% QOQ to $152 million.
Canadian Wealth Management
• Canadian Wealth Management earnings increased 28% YOY to $133 million.
• Mutual fund revenue was $156 million in the quarter with mutual fund assets under management (as reported by IFIC) increasing 22% YOY to $49.8 billion.
TD Ameritrade
• U.S. Wealth Management earnings of $39 million reflect TD's equity share in TD Ameritrade's earnings. Adjusting for the one month timing lag, earnings were $14 million or $0.02 per share higher. TD Waterhouse U.S.A. earnings were $33 million in Q1/06 and $11 million in Q2/05.
Operating Leverage High at 4%
• Operating leverage was high at 4% with total revenue increasing 8% YOY to $3.2 billion while non-interest expenses (excluding amortization) were relatively controlled, increasing 4% YOY to $2.0 billion.
LLPs Low at 19 Bp
• Specific loan loss provisions (LLPs) were $76 million (excluding a $60 million general allowance reversal) or 0.19% of loans compared with $97 million or 0.24% of loans in the previous quarter.
• We are reducing our 2006 LLP estimate to $375 million or 0.23% of loans from $450 million or 0.28% of loans.
Gross Impaired Loans Remain Low
• Gross impaired loans declined to $349 million from $365 million in the previous quarter. Net impaired loans were negative $942 million versus negative $993 million in the previous quarter.
TD – Ownership of TD Ameritrade at 39.4% from 32.5% at Deal Close – Board Seat Retained
• TD Bank continued to invest in its two main U.S. businesses, TD Ameritrade (AMTD) and TD Banknorth (BNK), in the second quarter.
• TD invested a further US$263 million in AMTD, purchasing 12.9 million shares at an average price of US$20.42 per share, increasing its ownership to 34.3% as at April 30, 2006 from 32.5% as at January 31, 2006. Subsequent to the end of the second quarter, TD has purchased 28.4 million shares at an average price of US$18.09 per share for US$514 million, increasing its ownership in AMTD to 39.4%.
• TD announced on February 22 that it intended to purchase up to 15 million shares or 2.5% of AMTD stock by August 15, 2006, and that it aimed to own 37.5% of AMTD by January 2007. TD has already increased its ownership to 39.4%, well ahead of January 2007, allowing TD to keep the one board seat.
TD – Modest Additional Investment in TD Banknorth
• TD’s additional investment in BNK was modest in the second quarter at US$27 million or 0.8 million shares purchased in the open market. TD also acquired an additional 0.9 million BNK shares through BNK's dividend reinvestment program. These transactions results in TD increasing its ownership in BNK to 56.2% at the end of the second quarter from 53.5%, aided by BNK net repurchases of 8.5 million shares of its own stock.
• On April 13, BNK announced the acquisition of Interchange Financial Services Corp. of New Jersey for US$480.6 million cash. The deal is to be financed mainly through the sale of 13 million BNK common shares to TD Bank.
VFC Inc. Acquisition
• As at May 15, TD had acquired 99.99% of the outstanding common shares of VFC Inc, a provider of automotive purchase financing and consumer instalment loans, for a total consideration of $328 million.
Earnings Estimates Unchanged
• Our 2006 and 2007 cash earnings estimates are unchanged at $4.60 per share, and $5.10 per share, respectively.
• Our 12-month share price target is $75, representing 16.3x our 2006 earnings estimate and 14.7x our 2007 earnings estimate.
Recommendation
• Maintain 1-Sector Outperform rating on shares of TD based on dominant retail and wealth management platforms, high earnings growth vehicle through TD Ameritrade, higher than bank group profitability and capital, and the absence of any meaningful P/E multiple premium.
The Globe and Mail, Richard Blackwell & Sinclair Stewart, 26 May 2006
Toronto-Dominion Bank's strong Canadian wealth management and retail banking operations drove a 22-per-cent profit increase in its second quarter, but investors were apparently not satisfied as the company's shares lost ground yesterday.
With share profit coming in a few cents below what analysts had predicted, TD stock fell almost 2 per cent just after the earnings release, closing the day down 1.3 per cent or 83 cents to $61.
TD Bank chief executive officer Ed Clark acknowledged the results were slightly short of expectations, but he described the numbers as "strong and consistent with our view that we are positioned to outperform. Particularly, we see our results in 2006 at the upper end of our 7- to 10-per-cent [growth] range, and we see a very strong 2007," he said on an analyst conference call.
TD's profit was $732-million in its second quarter, compared with the previous year's $599-million. TD made $1.01 a share, compared with 86 cents a year ago.
On a cash basis, a measure that analysts use to forecast results, TD delivered profit of $1.09 a share, about 4 cents less than what Bay Street had been expecting.
It was no surprise that there was a negative reaction from the market, analyst James Keating of RBC Dominion Securities Inc. said, partly because the bank has been the top performer in the sector in the past month
He said TD's core businesses still seems healthy, "just not as robust as we had been predicting."
Jason Bilodeau of UBS Securities Canada Inc. described the results as "a bit light" but he, too, remains optimistic about the bank, characterizing it as "one of the better growth outlooks in the group."
TD's wealth management business, buoyed by the inclusion of its stake in brokerage TD Ameritrade, showed the greatest growth in the quarter, with profit rising 54 per cent to $152-million. Revenue was boosted by "strong markets, which generated higher transaction revenue and higher mutual fund fees," the company said.
The Canadian personal and commercial banking business had a profit jump of 16 per cent to $465-million. The two revenue streams in this business -- interest income and fees -- appear to be growing strongly, the bank said.
Profit from personal and commercial banking in United States was $59-million -- dramatically higher than the $19-million earned the year earlier. However, last year's numbers included only one month's results from TD's acquisition of Portland, Me.-based TD Banknorth, which closed in that quarter.
Mr. Clark suggested that one of the reasons that analysts' estimates were slightly above the actual numbers is that it is complex to determine the impact of the U.S. operations, where the company has made a number of acquisitions. "There's a lot of moving parts in us right now," he said. "So we maybe have to give a little more hint here as to what's going on."
Still, the company is particularly pleased with TD Ameritrade's results, he said. With the expanding Banknorth operations south of the border, "you'll see growing U.S. earnings from us."
TD has just finished its purchase of shares of the TD Ameritrade operation, and now has an ownership stake of 39.5 per cent.
Investment banking was one of the weakest parts of TD's business, with profit of $140-million in the first quarter, down about 7 per cent from a year earlier. One reason for this, Mr. Clark said, is that the company is getting out of the derivatives business more quickly than it expected, taking more wind-down expenses and trading losses than expected.
The bank's provision for credit losses was down to $16-million in the second quarter from $20-million in the year-earlier period. The bank reduced its general allowance for losses by $60-million.
Loan losses are now at "historically low levels," chief financial officer Colleen Johnston told the analysts on the conference call.
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The Toronto-Dominion Bank Thursday posted a 22 percent jump in profit for its latest quarter, but the results fell short of Wall Street's expectations.
Shares of Canada's second-largest bank dropped 64 cents, or 1.2 percent, to U$54.73 in afternoon trading on the New York Stock Exchange.
The Toronto-based bank reported earnings of 738 million Canadian dollars (U$658 million) or 1.01 Canadian dollars (U$90 cents) a share from 599 million Canadian dollars, or 86 Canadian cents a share, a year earlier, the bank said.
Adjusted earnings were 780 million Canadian dollars (U$695 million), or 1.09 Canadian dollars (U$97 cents) a share, for the second quarter ended April 30, compared with 672 million Canadian dollars, or 1 Canadian dollar a share, a year earlier.
Analysts polled by Thomson Financial had been expecting second-quarter earnings, excluding items, of 1.13 Canadian dollars (U$1.01) a share.
Revenue grew 10 percent from a year ago, to 3.12 billion Canadian dollars (U$2.8 billion). Expenses rose 7 percent over the year and 1 percent in the quarter.
Genuity Capital analyst Mario Mendonca noted that the bank has long been considered Canada's retail deposit leader, so a drop in its net interest margin in its Canadian retail operations from one quarter to another may have disappointed investors.
Michael Goldberg of Desjardins Securities said investors may be worried about the increase in expenses, as well as the bank's move to release 60 million Canadian dollars (U$53 million) in general loan provisions. That move added 5 Canadian cents (U$4.5 cents) to the bottom line and slightly reduced its surplus allowance.
Income from Canadian personal and commercial banking rose 16 percent from a year earlier to 465 million Canadian dollars (U$414 million), but was down 2 percent from the previous quarter.
The U.S. personal and commercial banking segment, which includes the TD Banknorth Inc. unit, reported revenue gains on the acquisition of Hudson United Bancorp in February, but margins fell by 13 percent from the first quarter and deposits declined after the impact of Hudson is stripped out. Expenses in the U.S. banking unit rose by 17.7 percent from a year ago, mostly reflecting restructuring charges and the Hudson acquisition.
TD Banknorth, which is based in Portland, Maine, had weaker earnings this quarter because of the conditions in the U.S. banking market, Toronto-Dominion said.
Wealth management net income, which includes the bank's investment in TD Ameritrade, soared a record 54 percent to 152 million Canadian dollars (U$136 million).
Toronto-Dominion Bank reported a 22 per cent rise in second-quarter profit driven by domestic consumer banking and wealth management operations, but its shares dropped after results missed analyst expectations.
TD, Canada's second-biggest bank by market capitalization, said Thursday that profit attributable to shareholders climbed to $732-million or $1.01 a share in the three months ended April 30 from $599-million or 86 cents a year ago.
On an adjusted basis, TD earned $1.09 a share in the second quarter. Analysts polled by Thomson First Call were calling for a profit of $1.12 a share.
Shares of TD fell $1.30 or 2.1 per cent to $60.53 in Toronto on Thursday. The stock has edged 1.l per cent higher so far this year.
Profit at the bank's wealth management division jumped 54 per cent to a record $512-million, amid surging trading volumes and solid sales of mutual funds. TD said strong domestic markets generated "higher transaction revenue and higher mutual fund fees."
TD's Canadian consumer banking unit saw its profit rise 16 per cent to $465-million in the quarter.
Profit at the TD's U.S. personal and consumer banking business climbed to $59-million from the $19-million it reported last year, when TD Banknorth results were not fully included. However, the U.S. operation's earnings were lower than in the previous three quarters.
TD's operations south of the border consist of both its U.S. banking arm, TD Banknorth, and its 39.4-per-cent-owned brokerage business, TD Ameritrade Holding Corp. In April TD increased its U.S. presence, buying Interchange Financial Services Corp. of Saddle Brook, N.J., for $481-million (U.S.) in cash.
Profit at the bank's investment banking arm was also weaker, dropping 6.7 per cent to $140-million (Canadian).
”While investors tend to focus on TD's U.S. strategies, it's important not to overlook a solid domestic platform that appears to be performing relatively well in a competitive environment,” Jason Bilodeau, an analyst at UBS Canada, wrote in a note.
He described the overall quarter as ”a touch light” but better than Bank of Montreal's Wednesday morning results. "TD continues to grow and gain share in domestic wealth management, an under-appreciated element of the domestic story in our view,” Mr. Bilodeau said.
BMO' surprised investors by saying it would pay out as much as 55 per cent of its annual profit in dividends and raising its quarterly dividend by 17 per cent yesterday, a move that analysts suggested could put pressure on other Canadian banks to follow suit.
TD's provisions for credit losses in the second-quarter dropped to $16-million from $20-million a year ago and from $114-million in the previous quarter. The second quarter 2006 provisions included a $60-million reduction of the bank's general allowance.
Return on common equity fell to 16.5 per cent from 17.2 per cent a year ago.
Ed Clark, the bank's chief executive officer, said TD's goal was to consistently grow per-share earnings by between 7 and 10 per cent.
”We're doing that this year and we expect to do that next year,” he said in a statement.
TD left its quarterly dividend unchanged at 44 cents a share.
