Tanis Toohey / Toronto StarBMO Capital Markets, 25 August 2006
Details & Analysis
TD Bank reported cash EPS of $1.17, compared to $1.12 in the previous quarter and $0.70 in the same quarter of last year. These earnings included two one-time items - the hedging impact of AcG-13 and a tax charge to account for the reduction in net future tax assets from the lower income tax rate. Together, these items shaved $0.04 off earnings. As a result, we believe the appropriate comparison is $1.21 per share in this quarter, ahead of our estimate of $1.18, and the street estimate of $1.16, led by strength in the P&C businesses.
We view this as an excellent quarter. The domestic bank was up 21% and wholesale earnings were strong. Loan losses were a bit higher than expected and trading was a bit weaker. Together, these two items offset elevated merchant banking gains. With much of the restructuring now complete, the bank is starting to show the benefits of changes made over the past few years. TD remains our favourite bank equity.
From a credit perspective, TD continues to see stable results. Specific loan losses of $109 million were up from $76 million in the previous quarter partially due to an increase in provisioning for VFC. Net impaired loans as a percentage of net loans remained stable.
TD's capital position remained stable over the quarter, with Tier 1 unchanged at 12.1%, but up significantly over the year from 10% in the same quarter of last year. TD announced its intention to repurchase up to 4 million shares under a normal course issuer bid in an effort to offset the dilution effects of the exercising of stock options. TD also announced a reduction in the dividend repurchase plan discount and a dividend increase of $0.04 to $0.48.
Projections & Valuation
Despite huge strategic change across the organization (i.e., incremental investments in BNK, the Ameritrade deal, restructuring of TD Securities, purchase of VFC, etc), TD Bank has continued to post strong short-term operating results. Even in the second quarter where there was tremendous focus on the exit of various wholesale businesses, the bank continued to show strong operating trends.
Today, TD Bank is one of the leaders in retail banking in Canada and has an excellent Wealth Management footprint (skewed towards discount brokerage). Its wholesale brokerage, TD Securities, is a medium-sized player in Canada with a relatively stable earnings stream.
It has two solid platforms in the U.S., though it does not own either of them entirely. It controls one of the larger banks in the North East, TD Banknorth, which has a solid base in New England, is competitive in Massachusetts and Connecticut and has a small, growing franchise in the Mid-Atlantic. TD is also the largest shareholder of TD Ameritrade, one of the largest discount brokers in America. Together, the two U.S. businesses will contribute about $600 million in 2006 which is about 15% of overall bank earnings. We estimate that this is more than the combined contribution from BMO and Royal's U.S. retail franchises.
TD has one of the best balance sheets in Canada and its risk profile is low. Specifically, its loan losses, though minimal, are unlikely to rise materially as the bank's corporate loan book is quite small in aggregate. Furthermore, given the cost synergies from the build-out of the U.S. businesses, it will have the best earnings momentum in 2007.
Despite this, TD shares trade at one of the lower P/E among the banks. Clearly, there is still a fair amount of scepticism of the U.S. growth strategy and the bank's preparedness to invest further in BNK. BNK's earnings, though not stellar, are high quality, and quite visible. In addition, it has an excellent track record at buying and integrating smaller, regional banks. In the context of a bank which earns over $3 billion a year, this risk is manageable, and provides some longer-term growth potential.
Details & Analysis
TD Bank reported cash EPS of $1.17, compared to $1.12 in the previous quarter and $0.70 in the same quarter of last year. These earnings included two one-time items - the hedging impact of AcG-13 and a tax charge to account for the reduction in net future tax assets from the lower income tax rate. Together, these items shaved $0.04 off earnings. As a result, we believe the appropriate comparison is $1.21 per share in this quarter, ahead of our estimate of $1.18, and the street estimate of $1.16, led by strength in the P&C businesses.
We view this as an excellent quarter. The domestic bank was up 21% and wholesale earnings were strong. Loan losses were a bit higher than expected and trading was a bit weaker. Together, these two items offset elevated merchant banking gains. With much of the restructuring now complete, the bank is starting to show the benefits of changes made over the past few years. TD remains our favourite bank equity.
From a credit perspective, TD continues to see stable results. Specific loan losses of $109 million were up from $76 million in the previous quarter partially due to an increase in provisioning for VFC. Net impaired loans as a percentage of net loans remained stable.
TD's capital position remained stable over the quarter, with Tier 1 unchanged at 12.1%, but up significantly over the year from 10% in the same quarter of last year. TD announced its intention to repurchase up to 4 million shares under a normal course issuer bid in an effort to offset the dilution effects of the exercising of stock options. TD also announced a reduction in the dividend repurchase plan discount and a dividend increase of $0.04 to $0.48.
Projections & Valuation
Despite huge strategic change across the organization (i.e., incremental investments in BNK, the Ameritrade deal, restructuring of TD Securities, purchase of VFC, etc), TD Bank has continued to post strong short-term operating results. Even in the second quarter where there was tremendous focus on the exit of various wholesale businesses, the bank continued to show strong operating trends.
Today, TD Bank is one of the leaders in retail banking in Canada and has an excellent Wealth Management footprint (skewed towards discount brokerage). Its wholesale brokerage, TD Securities, is a medium-sized player in Canada with a relatively stable earnings stream.
It has two solid platforms in the U.S., though it does not own either of them entirely. It controls one of the larger banks in the North East, TD Banknorth, which has a solid base in New England, is competitive in Massachusetts and Connecticut and has a small, growing franchise in the Mid-Atlantic. TD is also the largest shareholder of TD Ameritrade, one of the largest discount brokers in America. Together, the two U.S. businesses will contribute about $600 million in 2006 which is about 15% of overall bank earnings. We estimate that this is more than the combined contribution from BMO and Royal's U.S. retail franchises.
TD has one of the best balance sheets in Canada and its risk profile is low. Specifically, its loan losses, though minimal, are unlikely to rise materially as the bank's corporate loan book is quite small in aggregate. Furthermore, given the cost synergies from the build-out of the U.S. businesses, it will have the best earnings momentum in 2007.
Despite this, TD shares trade at one of the lower P/E among the banks. Clearly, there is still a fair amount of scepticism of the U.S. growth strategy and the bank's preparedness to invest further in BNK. BNK's earnings, though not stellar, are high quality, and quite visible. In addition, it has an excellent track record at buying and integrating smaller, regional banks. In the context of a bank which earns over $3 billion a year, this risk is manageable, and provides some longer-term growth potential.
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RBC Capital Markets, 25 August 2006
Q3/06 – A High-Quality Quarter - Raising Estimates 3%, Price Target by $5 to $75
TD Comfortably Beat Consensus. TD reported $1.21 adjusted EPS, up 16% YoY from $1.04, and up 11% QoQ from $1.09. We were looking for $1.17 while consensus was $1.16. The loan loss was $109MM (consensus was $104MM), so this was not a factor in the positive EPS variance. Broadly, unusual items were also a non-factor. The large, but undisclosed, merchant bank gain would have been largely offset by a drop in trading revenue relative to our estimate.
Raising Estimates and Price Target. We are moving our 2006 cash EPS estimate up from $4.60 to $4.68, and our 2007 estimate rises from $5.20 to $5.36. The changes reflect: (i) increased base-line earnings at TD Canada Trust (accounts for 80% of the estimate change) and (ii) slightly higher wholesale earnings (20% of the EPS change). We are raising our price target $5 to $75 using an expanded 14x target price/earnings multiple. We believe the high-quality earnings growth at both the domestic retail and wholesale operations warrant the 8% premium to our targeted sector average.
Three Changes to our Modeled EPS. Our segmented work-up of earnings suggested our outlook for TD Canada Trust earnings was 8% too low. We have raised our outlook for product spread, and adjusted the estimated divisional earnings for 2007 from $2.06B to $2.225B. We have also bumped up our estimate for 2007 wholesale net income from $650MM to $700MM. Last, we have accommodated TD’s new share repurchase program and eliminated the impact of the dividend reinvestment plan, which was discontinued.
Positive Investment Thesis Intact
TD surprised investors with a better-than-expected result yesterday – we think this will drive earnings estimates up. We also think the valuation applied to TD is too low for this high-calibre management team, and for its track record for growth. Based on our calculations, shown below, we believe the market is putting a 12.4x multiple on TD’s Canadian Personal & Commercial Banking earnings (including Canadian wealth, which usually garners a higher multiple than retail). Wealth typically garners a 50%-higher P/E multiple than retail bank earnings and our 2007 estimate factors a 20%/80% split.
Excellent Result in Domestic Retail (75% of Earnings)
Domestic P&C (TD Canada Trust) Delivers Again
TD Canada Trust contributed net income of $524MM (60% of total bank) versus our recently-revised-up estimate of $500MM. Divisional profit was up 21% YoY, about 5 points above our estimated growth. Positive features included core spread and volume gains, as well as positive contribution from the recent VFC acquisition. And while we understand the spread may stabilize or even pull back slightly in Q4/06, continued volume growth should drive the net interest margin dollar amount even higher again. For example, we were very encouraged by TD’s 20% YoY growth in credit card receivables.
Retail Product Market Share Moves Were Favourable. Personal loan and deposit market shares were strong in quarter, up to May (latest data available). Most notable, however, was another sharp pick-up in small-business market share, up 165bps YoY (data to March). This has been a clearly and specifically articulated management goal, aimed at leveraging the bank’s already best-in-class in-branch customer satisfaction scores, and is clearly panning out well. We believe these gains may be coming at the expense of both BMO and CIBC.
We were also favourably surprised by the $1 billion of credit card receivables growth – achieved in the past 12 months, quite the “eye-popper” after it had taken TD CT three years to generate the previous $1 billion. We understand TD picked up an estimated 57 bps of market share in credit card receivables – it will be interesting to note if CIBC gave up their ‘share’.
Recalibrating TD Canada Trust’s Growth, UP. Our TD Canada Trust (TD CT) base-line earnings now look ~8% too low. TD CT grew revenue 14% this quarter, and held expense growth to 8.7% for in excess of 5 points of operating leverage. Cost-to-revenue improved to 53.9% from 56.1% in Q2/06 and 56.4% in Q3/05.
We are lifting our revenue estimates for net interest margin and adjusting estimated TD CT 2007 net income from $2.06B to $2.225B. The three specific drivers are the stronger-than-previously factored: (i) credit card balances; (ii) small business volumes, and (iii) the VFC acquisition.
Product Spreads Stronger. TD reported a strong improvement in product spreads, up 10 bps QoQ, and up 16bps YoY, to 3.08%. This could be considered the equivalent of a 3% price increase in quarter, although about half the QoQ gain reflected the VFC acquisition, which added higher-margin loans to the TD mix.
VFC Backgrounder. Per management discussion on the conference call, VFC added about 1% to each of revenue and expense growth in Q3/06. TD paid $326MM to acquire sub-prime vehicle finance company, VFC, in April, which was expected to add ~$380MM in receivables (~11% to TD’s auto loan portfolio) and 2¢ to EPS in 2006. TD intends to gear the VFC base-line earnings up 25% using TD’s lower cost of funds. The bulk of the VFC portfolio is securitized. TD plans to reverse the securitizations and bring the loans onto their own books. We estimate this could shave 1 point off the existing funding cost – the majority of the intended 25% earnings lift.
Domestic Wealth Earnings Hold Up Well (11% of Earnings)
Net income of $97MM was off last quarter’s peak of $113MM, but was still up 33% YoY. Revenue of $492MM in quarter drove the earnings cyclicality, with revenue down 6% QoQ, but still up 15% YoY. The YoY revenue gain compared to an 8% lift in expenses to drive a very healthy 7% lift in operating leverage. Long-term mutual fund market share continued to climb within the industry.
U.S. Subsidiaries Did Better, Contributing ~14% of Earnings
TD’s earnings from Banknorth and the equity pick-up from Ameritrade were known ahead of the quarter as both publicly traded entities reported their June 30 quarter end results last month. The combined contribution of C$123MM represented 14% of TD’s overall earnings. TD owns 56.5% of Banknorth and 39.5% of Ameritrade. We heard some prudent commentary from the CEO on U.S. acquisitions around management having turned down deals that did not make sense – this was comforting.
TD Banknorth contributed 7.6% or C$68MM to TD Bank earnings, about level with the prior year. The contribution would have been up 9% YoY if not for the weak USD. The USD-based contribution pick-up reflected the benefit of the Hudson United (HU) acquisition partly offset by broadly weak U.S. banking margin fundamentals. However, TD Banknorth managed a turn for the better on its margin, as the bank’s de-leveraging exercise appears to have taken root (margin was up 24bps in quarter). Also, a dose of heavy brand advertising expenditure is to come down next quarter – we think this should drive improved operating leverage as volumes respond favourably but expenses level off and then fall.
The backdrop on the HU integration is improving and we think the market is underestimating potential. Management noted increases in average deposits/branch, in account openings and in commercial loan originations. Branch turnover is also declining under the new Banknorth management team.
TD Ameritrade contributed C$55MM or 6.2% of earnings this quarter, well up from C$39MM in Q2/06 and the prior Waterhouse USA earnings of C$26MM in Q3/05. Ameritrade had an excellent quarter, best exemplified by the record 53% operating margin. Most underlying measures were up, including customer balances, margins and assets under management. The rather aggressive expense savings expected to flow from the Waterhouse integration now look conservative and perhaps beat-able. Only transaction volume was a bit disappointing, but that dynamic has more than been in the stock and investor expectations for months now.
Wholesale Contributed “High-Quality” Earnings (20% of Total)
Wholesale profit rebounded to $179MM from $140MM last quarter, and was indicated up 38% YoY from $130MM.
As we noted in our Q3/06 preview, TD’s sharply rising M&A and equity underwriting market share, a key management objective, had a high-quality impact. Equally, management confirmed the Global structured derivatives risk is now contained and behind them, Accordingly, we have raised our divisional earnings outlook from $650MM to $700MM.
Revenue was impressive, up 9% in quarter and 19% YoY. This included a significant yet undisclosed merchant bank gain, the benefit of which we believe was largely offset by lower-than-expected trading revenue. Underlying revenue was probably about level with the prior year, in our estimation, though with the sharply improved quality.
TD reported big securities gains, but on the other hand trading was below our expected level. Together these cyclical lines combined to generate a net positive variance of only 1-2¢. Loan loss provision and protection costs were in line with prior periods and not a feature in the core earning, nor a factor in the growth.
Capital & Credit Very Strong
Tier 1 capital remained a copious 12.1% as risk-weighted asset growth was well contained and internal generation of capital was high. TD hiked the common dividend 4¢ to 48¢ (up 9%), as we had estimated.
The credit picture was equally robust. The domestic retail provision for credit losses at $104MM contributed the bulk of the bank’s $109 million provision which was in line with the consensus expectation of $104 million. The balance of impaired loans, at $357MM, remained lowest of the majors, down 21% YoY. And while impaired loans rose 2% or $8MM QoQ, we think it was more than entirely owing to the VFC acquisition, although that specific amount was not disclosed. We do know that VFC contributed a manageable $9 million to the $104 million loan loss in quarter.
Reserve coverage was an ample 358% relative to 372% last quarter, and well above peers at about 200%.
Valuation
Our price target of $75 is set at ~14x our 2007 cash EPS estimate of $5.36. Our premium target P/E reflects TD’s leading domestic franchise, retail-oriented business mix, unique U.S. assets and excellent management. Our target P/E is set at an 8% premium to our target P/E for the Canadian peers group - TD has traded at an average 6% forward P/E premium to its Canadian bank peers since 1998. We view positive execution on BNK-Hudson United integration as the next catalyst for revaluation, but the real underpinning is the TD Canada Trust juggernaut. Our price target is indicated at ~2.5x our projected book value of $30.01 (as at Oct 31/07).
Q3/06 – A High-Quality Quarter - Raising Estimates 3%, Price Target by $5 to $75
TD Comfortably Beat Consensus. TD reported $1.21 adjusted EPS, up 16% YoY from $1.04, and up 11% QoQ from $1.09. We were looking for $1.17 while consensus was $1.16. The loan loss was $109MM (consensus was $104MM), so this was not a factor in the positive EPS variance. Broadly, unusual items were also a non-factor. The large, but undisclosed, merchant bank gain would have been largely offset by a drop in trading revenue relative to our estimate.
Raising Estimates and Price Target. We are moving our 2006 cash EPS estimate up from $4.60 to $4.68, and our 2007 estimate rises from $5.20 to $5.36. The changes reflect: (i) increased base-line earnings at TD Canada Trust (accounts for 80% of the estimate change) and (ii) slightly higher wholesale earnings (20% of the EPS change). We are raising our price target $5 to $75 using an expanded 14x target price/earnings multiple. We believe the high-quality earnings growth at both the domestic retail and wholesale operations warrant the 8% premium to our targeted sector average.
Three Changes to our Modeled EPS. Our segmented work-up of earnings suggested our outlook for TD Canada Trust earnings was 8% too low. We have raised our outlook for product spread, and adjusted the estimated divisional earnings for 2007 from $2.06B to $2.225B. We have also bumped up our estimate for 2007 wholesale net income from $650MM to $700MM. Last, we have accommodated TD’s new share repurchase program and eliminated the impact of the dividend reinvestment plan, which was discontinued.
Positive Investment Thesis Intact
TD surprised investors with a better-than-expected result yesterday – we think this will drive earnings estimates up. We also think the valuation applied to TD is too low for this high-calibre management team, and for its track record for growth. Based on our calculations, shown below, we believe the market is putting a 12.4x multiple on TD’s Canadian Personal & Commercial Banking earnings (including Canadian wealth, which usually garners a higher multiple than retail). Wealth typically garners a 50%-higher P/E multiple than retail bank earnings and our 2007 estimate factors a 20%/80% split.
Excellent Result in Domestic Retail (75% of Earnings)
Domestic P&C (TD Canada Trust) Delivers Again
TD Canada Trust contributed net income of $524MM (60% of total bank) versus our recently-revised-up estimate of $500MM. Divisional profit was up 21% YoY, about 5 points above our estimated growth. Positive features included core spread and volume gains, as well as positive contribution from the recent VFC acquisition. And while we understand the spread may stabilize or even pull back slightly in Q4/06, continued volume growth should drive the net interest margin dollar amount even higher again. For example, we were very encouraged by TD’s 20% YoY growth in credit card receivables.
Retail Product Market Share Moves Were Favourable. Personal loan and deposit market shares were strong in quarter, up to May (latest data available). Most notable, however, was another sharp pick-up in small-business market share, up 165bps YoY (data to March). This has been a clearly and specifically articulated management goal, aimed at leveraging the bank’s already best-in-class in-branch customer satisfaction scores, and is clearly panning out well. We believe these gains may be coming at the expense of both BMO and CIBC.
We were also favourably surprised by the $1 billion of credit card receivables growth – achieved in the past 12 months, quite the “eye-popper” after it had taken TD CT three years to generate the previous $1 billion. We understand TD picked up an estimated 57 bps of market share in credit card receivables – it will be interesting to note if CIBC gave up their ‘share’.
Recalibrating TD Canada Trust’s Growth, UP. Our TD Canada Trust (TD CT) base-line earnings now look ~8% too low. TD CT grew revenue 14% this quarter, and held expense growth to 8.7% for in excess of 5 points of operating leverage. Cost-to-revenue improved to 53.9% from 56.1% in Q2/06 and 56.4% in Q3/05.
We are lifting our revenue estimates for net interest margin and adjusting estimated TD CT 2007 net income from $2.06B to $2.225B. The three specific drivers are the stronger-than-previously factored: (i) credit card balances; (ii) small business volumes, and (iii) the VFC acquisition.
Product Spreads Stronger. TD reported a strong improvement in product spreads, up 10 bps QoQ, and up 16bps YoY, to 3.08%. This could be considered the equivalent of a 3% price increase in quarter, although about half the QoQ gain reflected the VFC acquisition, which added higher-margin loans to the TD mix.
VFC Backgrounder. Per management discussion on the conference call, VFC added about 1% to each of revenue and expense growth in Q3/06. TD paid $326MM to acquire sub-prime vehicle finance company, VFC, in April, which was expected to add ~$380MM in receivables (~11% to TD’s auto loan portfolio) and 2¢ to EPS in 2006. TD intends to gear the VFC base-line earnings up 25% using TD’s lower cost of funds. The bulk of the VFC portfolio is securitized. TD plans to reverse the securitizations and bring the loans onto their own books. We estimate this could shave 1 point off the existing funding cost – the majority of the intended 25% earnings lift.
Domestic Wealth Earnings Hold Up Well (11% of Earnings)
Net income of $97MM was off last quarter’s peak of $113MM, but was still up 33% YoY. Revenue of $492MM in quarter drove the earnings cyclicality, with revenue down 6% QoQ, but still up 15% YoY. The YoY revenue gain compared to an 8% lift in expenses to drive a very healthy 7% lift in operating leverage. Long-term mutual fund market share continued to climb within the industry.
U.S. Subsidiaries Did Better, Contributing ~14% of Earnings
TD’s earnings from Banknorth and the equity pick-up from Ameritrade were known ahead of the quarter as both publicly traded entities reported their June 30 quarter end results last month. The combined contribution of C$123MM represented 14% of TD’s overall earnings. TD owns 56.5% of Banknorth and 39.5% of Ameritrade. We heard some prudent commentary from the CEO on U.S. acquisitions around management having turned down deals that did not make sense – this was comforting.
TD Banknorth contributed 7.6% or C$68MM to TD Bank earnings, about level with the prior year. The contribution would have been up 9% YoY if not for the weak USD. The USD-based contribution pick-up reflected the benefit of the Hudson United (HU) acquisition partly offset by broadly weak U.S. banking margin fundamentals. However, TD Banknorth managed a turn for the better on its margin, as the bank’s de-leveraging exercise appears to have taken root (margin was up 24bps in quarter). Also, a dose of heavy brand advertising expenditure is to come down next quarter – we think this should drive improved operating leverage as volumes respond favourably but expenses level off and then fall.
The backdrop on the HU integration is improving and we think the market is underestimating potential. Management noted increases in average deposits/branch, in account openings and in commercial loan originations. Branch turnover is also declining under the new Banknorth management team.
TD Ameritrade contributed C$55MM or 6.2% of earnings this quarter, well up from C$39MM in Q2/06 and the prior Waterhouse USA earnings of C$26MM in Q3/05. Ameritrade had an excellent quarter, best exemplified by the record 53% operating margin. Most underlying measures were up, including customer balances, margins and assets under management. The rather aggressive expense savings expected to flow from the Waterhouse integration now look conservative and perhaps beat-able. Only transaction volume was a bit disappointing, but that dynamic has more than been in the stock and investor expectations for months now.
Wholesale Contributed “High-Quality” Earnings (20% of Total)
Wholesale profit rebounded to $179MM from $140MM last quarter, and was indicated up 38% YoY from $130MM.
As we noted in our Q3/06 preview, TD’s sharply rising M&A and equity underwriting market share, a key management objective, had a high-quality impact. Equally, management confirmed the Global structured derivatives risk is now contained and behind them, Accordingly, we have raised our divisional earnings outlook from $650MM to $700MM.
Revenue was impressive, up 9% in quarter and 19% YoY. This included a significant yet undisclosed merchant bank gain, the benefit of which we believe was largely offset by lower-than-expected trading revenue. Underlying revenue was probably about level with the prior year, in our estimation, though with the sharply improved quality.
TD reported big securities gains, but on the other hand trading was below our expected level. Together these cyclical lines combined to generate a net positive variance of only 1-2¢. Loan loss provision and protection costs were in line with prior periods and not a feature in the core earning, nor a factor in the growth.
Capital & Credit Very Strong
Tier 1 capital remained a copious 12.1% as risk-weighted asset growth was well contained and internal generation of capital was high. TD hiked the common dividend 4¢ to 48¢ (up 9%), as we had estimated.
The credit picture was equally robust. The domestic retail provision for credit losses at $104MM contributed the bulk of the bank’s $109 million provision which was in line with the consensus expectation of $104 million. The balance of impaired loans, at $357MM, remained lowest of the majors, down 21% YoY. And while impaired loans rose 2% or $8MM QoQ, we think it was more than entirely owing to the VFC acquisition, although that specific amount was not disclosed. We do know that VFC contributed a manageable $9 million to the $104 million loan loss in quarter.
Reserve coverage was an ample 358% relative to 372% last quarter, and well above peers at about 200%.
Valuation
Our price target of $75 is set at ~14x our 2007 cash EPS estimate of $5.36. Our premium target P/E reflects TD’s leading domestic franchise, retail-oriented business mix, unique U.S. assets and excellent management. Our target P/E is set at an 8% premium to our target P/E for the Canadian peers group - TD has traded at an average 6% forward P/E premium to its Canadian bank peers since 1998. We view positive execution on BNK-Hudson United integration as the next catalyst for revaluation, but the real underpinning is the TD Canada Trust juggernaut. Our price target is indicated at ~2.5x our projected book value of $30.01 (as at Oct 31/07).
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Scotia Capital, 25 August 2006
Strong Third Quarter Earnings
• TD Bank reported a 17% increase in operating earnings to $1.21 per share, better than expected. Earnings strength was driven by high security gains of $113 million or $0.10 per share, and a 5 basis point improvement in the underlying retail net interest margin (excluding the 5 basis point improvement due to VFC). Bank operating leverage was very strong at 6% with revenue growth of 4.6% and expenses down 1.6%.
• ROE was 18.6% versus 18.7% a year earlier with return on risk-weighted assets improving to 2.54% from 2.27% a year earlier.
• Reported net income was $1.09 per share including items of note highlighted in Exhibit 2.
• Wealth Management led earnings growth at 54%, with TDSI (Wholesale) earnings up 38% and TDCT earnings up 21% YOY.
• TD Banknorth earnings were the only weak spot, down 3% YOY due to the difficult U.S. operating environment, including the relatively flat to inverted yield curve and stiff price competition for retail deposits.
• The bank increased its common dividends 9% to $1.92 per share with a payout ratio of 41% based on 2006E EPS.
TDCT Earnings Increase 21%
• Canadian Personal and Business (TDCT) earnings increased 21% YOY to $524 million driven by strong volume growth across all products, margin improvements and the addition of VFC.
• Operating leverage at TDCT was strong at 5% with revenues increasing 14% YOY while non-interest expenses increased 9%.
• Average loan growth was very strong at 10% YOY with average deposits increasing 7%.
• Insurance revenue growth continues to slow to a moderate 6% YOY to $230 million.
• Card service revenues were very strong, increasing 27% YOY to $103 million due to increased volume and fee increases.
• Loan securitization revenue declined 16% YOY to $85 million, however increased 18% from a relatively weak second quarter.
Canadian Retail NIM Improves
• Canadian retail net interest margin (NIM) improved 10 bp QOQ or 5 bp excluding the 5 bp improvement due to VFC.
• The 5 bp improvement was due to higher personal deposit spreads as some pricing discipline surfaced in the banking industry during the quarter.
• Management indicated during the conference call that it expects the net interest margin to be slightly lower in the next several quarters due to overall market pressure on pricing.
• Retail NIM improved 16 bp YOY.
TDCT - Market Share Results
• In the past year TD has gained a modest 6 bp in total personal deposit market share to 21.48% and lost 19 bp in total personal loans to 20.15%. However, in small business loans (less than $250K) TD has gained an impressive 165 bp in market share to 17.59%.
TD Banknorth Earnings Weak
• U.S. Personal and Business (TD Banknorth) earnings were $68 million, a decline of 3% YOY due to margin compression, and the strengthening of the Canadian dollar.
• Net interest margin at TD Banknorth improved 24 basis points sequentially to 4.07%, but declined 5 bp from a year earlier. The increase in NIM from the previous quarter reflected the impact of TD Banknorth's balance sheet restructuring program.
• TD Banknorth contributed $0.09 per share to earnings in the quarter, representing 8% of total bank earnings versus $0.10 per share a year earlier. ROIC declined to 4.6% from 5.5% a year earlier.
Wealth Management Earnings - 17% of Total Bank
• Wealth management earnings, which include TD Ameritrade, increased 54% YOY to $152 million. TD Ameritrade earnings were $55 million, representing 36% of the bank's total wealth management earnings.
Canadian Wealth Management
• Canadian Wealth Management earnings increased 33% YOY to $97 million but declined from the $113 million level in the previous quarter.
• Operating leverage was very high at 8% with revenues up 15.4% YOY while expenses increased 7.8% YOY.
• Mutual fund revenue was $157 million in the quarter, essentially flat with the previous quarter with mutual fund assets under management (as reported by IFIC) increasing 14% YOY to $49.6 billion.
TD Ameritrade
• TD Ameritrade contributed $55 million to earnings in the quarter versus $39 million in the previous quarter. TD Ameritrade contribution represented $0.08 per share or 6% of earnings.
Wholesale Banking Earnings Rebound
• TDSI earnings increased 38% YOY to $179 million from $130 million a year earlier (excluding the $10 million after-tax restructuring charge related to the downsizing of the European & Japanese operations and the $30 million after-tax loss on the structured derivatives portfolio in Q3/05) with solid trading revenues. The financial impact from the global structured products area was not material in the quarter. Management indicated that the repositioning of the global structured products business was substantially complete as at July 31, 2006.
• Revenue growth was broad based with particular strength in equity derivatives and strong merchant banking gains.
Trading Revenue Solid
• Trading revenue was stable at $242 million, versus $251 million in the previous quarter and $248 million a year earlier (excluding the loss on the sale of the structured products portfolio in Q3/05). However, trading revenue was down substantially from the record $375 million in the first quarter.
Capital Market Revenue
• Capital Market revenue was $343 million versus $376 million in the previous quarter. Capital market revenue is not comparable prior to Q2/06 due to the sale of TD Waterhouse U.S.A. and the fact that TD Ameritrade (AMTD) earnings are accounted for on an equity basis.
• Full service brokerage and other securities services revenues were $241 million, an increase of 15% YOY and flat sequentially.
Security Gains High at $0.10 per Share
• Security gains were high at $113 million, or $0.10 per share compared with $82 million or $0.07 per share in the previous quarter and $67 million or $0.06 a year earlier.
• Security gains this quarter were boosted by merchant banking gains, particularly the sale of its holdings in Mountain Union.
Unrealized Security Gains Remain Healthy at $707 Million
• Unrealized security gains remain high at $707 million versus $706 million in the previous quarter and $733 million a year earlier. TD has over 6 quarters of securities gains remaining based on this quarter's run rate.
Overall Bank - NIM - Interest Rate Sensitivity
• The overall net interest margin was 2.17% versus 1.94% in the previous quarter and 2.15% a year earlier.
• TD reduced its interest rate risk this quarter, as a 1% increase in interest rates along the entire yield curve would have no impact on the bank's net income versus a positive impact of $12 million in the previous quarter and a positive impact of $15 million in Q1/06.
• TD continues to have the lowest interest rate risk profile of the major banks.
Total Bank Operating Leverage High at 6%
• Operating leverage was high at 6% with total revenue increasing 4.6% YOY to $3.4 billion with non-interest expenses (excluding amortization) declining 1.6% YOY to $2.0 billion.
• The productivity ratio (excluding amortization) improved to 59.7% from 63.5% a year earlier.
Loan Loss Provisions Remain Low
• Specific loan loss provisions (LLPs) increased to $109 million or 0.26% of loans compared to $82 million or 0.20% of loans a year earlier and $76 million or 0.19% of loans in the previous quarter. VFC added $9 million to LLPs this quarter.
• Our 2006 and 2007 LLP estimates are unchanged at $375 million or 0.23% of loans and $500 million or 0.29% of loans, respectively.
Gross Impaired Loans Remain Low
• Gross impaired loans were $357 million compared to $452 a year earlier and $349 million in the previous quarter. Net impaired loans were negative $922 million versus negative $928 million a year earlier and negative $942 million in the previous quarter.
VFC Inc. Acquisition
• TD acquired 90.2% of VFC Inc. on April 19, 2006 and a further 9.8% on May 15, 2006 for total purchase of $328 million. VFC Inc is a provider of automotive purchase financing and consumer instalment loans.
Share Repurchases
• TD announced on August 18, 2006 that it intends to launch a normal course issuer bid to repurchase up to 4 millions shares or approximately 0.6% of outstanding shares.
Earnings Estimates
• We are increasing our 2006 and 2007 earnings estimates to $4.67 per share and $5.15 per share from $4.50 per share and $5.00 per share, respectively, based on improved NIM, higher security gains recognized and better performance from Wholesale banking.
• Our 12-month share price target is $70, representing 15.0x our 2006 earnings estimate and 13.6x our 2007 earnings estimate.
Recommendation
• Maintain 2-Sector Perform rating on shares of TD as we expect the shares to perform in line with the bank group.
Strong Third Quarter Earnings
• TD Bank reported a 17% increase in operating earnings to $1.21 per share, better than expected. Earnings strength was driven by high security gains of $113 million or $0.10 per share, and a 5 basis point improvement in the underlying retail net interest margin (excluding the 5 basis point improvement due to VFC). Bank operating leverage was very strong at 6% with revenue growth of 4.6% and expenses down 1.6%.
• ROE was 18.6% versus 18.7% a year earlier with return on risk-weighted assets improving to 2.54% from 2.27% a year earlier.
• Reported net income was $1.09 per share including items of note highlighted in Exhibit 2.
• Wealth Management led earnings growth at 54%, with TDSI (Wholesale) earnings up 38% and TDCT earnings up 21% YOY.
• TD Banknorth earnings were the only weak spot, down 3% YOY due to the difficult U.S. operating environment, including the relatively flat to inverted yield curve and stiff price competition for retail deposits.
• The bank increased its common dividends 9% to $1.92 per share with a payout ratio of 41% based on 2006E EPS.
TDCT Earnings Increase 21%
• Canadian Personal and Business (TDCT) earnings increased 21% YOY to $524 million driven by strong volume growth across all products, margin improvements and the addition of VFC.
• Operating leverage at TDCT was strong at 5% with revenues increasing 14% YOY while non-interest expenses increased 9%.
• Average loan growth was very strong at 10% YOY with average deposits increasing 7%.
• Insurance revenue growth continues to slow to a moderate 6% YOY to $230 million.
• Card service revenues were very strong, increasing 27% YOY to $103 million due to increased volume and fee increases.
• Loan securitization revenue declined 16% YOY to $85 million, however increased 18% from a relatively weak second quarter.
Canadian Retail NIM Improves
• Canadian retail net interest margin (NIM) improved 10 bp QOQ or 5 bp excluding the 5 bp improvement due to VFC.
• The 5 bp improvement was due to higher personal deposit spreads as some pricing discipline surfaced in the banking industry during the quarter.
• Management indicated during the conference call that it expects the net interest margin to be slightly lower in the next several quarters due to overall market pressure on pricing.
• Retail NIM improved 16 bp YOY.
TDCT - Market Share Results
• In the past year TD has gained a modest 6 bp in total personal deposit market share to 21.48% and lost 19 bp in total personal loans to 20.15%. However, in small business loans (less than $250K) TD has gained an impressive 165 bp in market share to 17.59%.
TD Banknorth Earnings Weak
• U.S. Personal and Business (TD Banknorth) earnings were $68 million, a decline of 3% YOY due to margin compression, and the strengthening of the Canadian dollar.
• Net interest margin at TD Banknorth improved 24 basis points sequentially to 4.07%, but declined 5 bp from a year earlier. The increase in NIM from the previous quarter reflected the impact of TD Banknorth's balance sheet restructuring program.
• TD Banknorth contributed $0.09 per share to earnings in the quarter, representing 8% of total bank earnings versus $0.10 per share a year earlier. ROIC declined to 4.6% from 5.5% a year earlier.
Wealth Management Earnings - 17% of Total Bank
• Wealth management earnings, which include TD Ameritrade, increased 54% YOY to $152 million. TD Ameritrade earnings were $55 million, representing 36% of the bank's total wealth management earnings.
Canadian Wealth Management
• Canadian Wealth Management earnings increased 33% YOY to $97 million but declined from the $113 million level in the previous quarter.
• Operating leverage was very high at 8% with revenues up 15.4% YOY while expenses increased 7.8% YOY.
• Mutual fund revenue was $157 million in the quarter, essentially flat with the previous quarter with mutual fund assets under management (as reported by IFIC) increasing 14% YOY to $49.6 billion.
TD Ameritrade
• TD Ameritrade contributed $55 million to earnings in the quarter versus $39 million in the previous quarter. TD Ameritrade contribution represented $0.08 per share or 6% of earnings.
Wholesale Banking Earnings Rebound
• TDSI earnings increased 38% YOY to $179 million from $130 million a year earlier (excluding the $10 million after-tax restructuring charge related to the downsizing of the European & Japanese operations and the $30 million after-tax loss on the structured derivatives portfolio in Q3/05) with solid trading revenues. The financial impact from the global structured products area was not material in the quarter. Management indicated that the repositioning of the global structured products business was substantially complete as at July 31, 2006.
• Revenue growth was broad based with particular strength in equity derivatives and strong merchant banking gains.
Trading Revenue Solid
• Trading revenue was stable at $242 million, versus $251 million in the previous quarter and $248 million a year earlier (excluding the loss on the sale of the structured products portfolio in Q3/05). However, trading revenue was down substantially from the record $375 million in the first quarter.
Capital Market Revenue
• Capital Market revenue was $343 million versus $376 million in the previous quarter. Capital market revenue is not comparable prior to Q2/06 due to the sale of TD Waterhouse U.S.A. and the fact that TD Ameritrade (AMTD) earnings are accounted for on an equity basis.
• Full service brokerage and other securities services revenues were $241 million, an increase of 15% YOY and flat sequentially.
Security Gains High at $0.10 per Share
• Security gains were high at $113 million, or $0.10 per share compared with $82 million or $0.07 per share in the previous quarter and $67 million or $0.06 a year earlier.
• Security gains this quarter were boosted by merchant banking gains, particularly the sale of its holdings in Mountain Union.
Unrealized Security Gains Remain Healthy at $707 Million
• Unrealized security gains remain high at $707 million versus $706 million in the previous quarter and $733 million a year earlier. TD has over 6 quarters of securities gains remaining based on this quarter's run rate.
Overall Bank - NIM - Interest Rate Sensitivity
• The overall net interest margin was 2.17% versus 1.94% in the previous quarter and 2.15% a year earlier.
• TD reduced its interest rate risk this quarter, as a 1% increase in interest rates along the entire yield curve would have no impact on the bank's net income versus a positive impact of $12 million in the previous quarter and a positive impact of $15 million in Q1/06.
• TD continues to have the lowest interest rate risk profile of the major banks.
Total Bank Operating Leverage High at 6%
• Operating leverage was high at 6% with total revenue increasing 4.6% YOY to $3.4 billion with non-interest expenses (excluding amortization) declining 1.6% YOY to $2.0 billion.
• The productivity ratio (excluding amortization) improved to 59.7% from 63.5% a year earlier.
Loan Loss Provisions Remain Low
• Specific loan loss provisions (LLPs) increased to $109 million or 0.26% of loans compared to $82 million or 0.20% of loans a year earlier and $76 million or 0.19% of loans in the previous quarter. VFC added $9 million to LLPs this quarter.
• Our 2006 and 2007 LLP estimates are unchanged at $375 million or 0.23% of loans and $500 million or 0.29% of loans, respectively.
Gross Impaired Loans Remain Low
• Gross impaired loans were $357 million compared to $452 a year earlier and $349 million in the previous quarter. Net impaired loans were negative $922 million versus negative $928 million a year earlier and negative $942 million in the previous quarter.
VFC Inc. Acquisition
• TD acquired 90.2% of VFC Inc. on April 19, 2006 and a further 9.8% on May 15, 2006 for total purchase of $328 million. VFC Inc is a provider of automotive purchase financing and consumer instalment loans.
Share Repurchases
• TD announced on August 18, 2006 that it intends to launch a normal course issuer bid to repurchase up to 4 millions shares or approximately 0.6% of outstanding shares.
Earnings Estimates
• We are increasing our 2006 and 2007 earnings estimates to $4.67 per share and $5.15 per share from $4.50 per share and $5.00 per share, respectively, based on improved NIM, higher security gains recognized and better performance from Wholesale banking.
• Our 12-month share price target is $70, representing 15.0x our 2006 earnings estimate and 13.6x our 2007 earnings estimate.
Recommendation
• Maintain 2-Sector Perform rating on shares of TD as we expect the shares to perform in line with the bank group.
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Report on Business Television, 25 August 2006
Click here for the ROBTv video clip, of Colleen Johnston (CFO, TD Bank) speaking about TD Bank's Q3 2006 Earnings.
Click here for the ROBTv video clip, of Colleen Johnston (CFO, TD Bank) speaking about TD Bank's Q3 2006 Earnings.
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The Globe and Mail, Sinclair Stewart, 25 August 2006
Toronto-Dominion Bank may have hit some speed bumps with its retail expansion into the United States, but its Canadian personal banking franchise is continuing to roll, helping the company nearly double its third-quarter profit.
TD reported a profit yesterday of $790-million or $1.09 per diluted share, up 92 per cent from the $411-million or 58 cents a share it reported a year ago, when its results were hobbled by a major litigation reserve related to an Enron Corp. class-action lawsuit.
High securities gains and improved wealth management contributions from TD Ameritrade added to the bank's bottom line this quarter, but the real story remained its bread-and-butter retail unit, which is feasting on higher borrowing from consumers and businesses.
"This was a fantastic quarter," TD chief executive officer Ed Clark told analysts on a conference call, before singling out the profit growth at TD Canada Trust as a "remarkable achievement."
TD Canada Trust, the branch banking network, made $621-million, up 22 per cent, on broad-based growth.
Personal deposits at TD Canada Trust were up, as were personal loans and small-business lending.
Just as importantly, margins climbed too, auguring well for a sector whose profitability has been crimped by low interest rates and fierce competition for deposits.
The question now, according to analysts, is whether TD is benefiting from a near-perfect operating environment, or whether it is simply outflanking its peers.
A partial answer should come this morning, when Royal Bank of Canada, considered one of the most dominant retail banking operations along with TD, reports its results.
TD said the prospect for continued growth in fee income and lending remains strong, and that the positive credit climate -- one of the key sources of profitability for the industry in the past two years -- should result in only moderate increases in loan-loss provisions going forward.
TD's experience in the northeastern U.S. market, where it has established a beachhead with TD Banknorth, has not been as smooth. The U.S. retail business made $68-million in the quarter, down slightly from the $70-million it made a year ago. Margins have been under pressure there and TD said its interest income will remain under pressure because of competition.
On a cash basis, which excludes amortization and certain one-time items, TD said it made $1.21 a share for the quarter, about 4 cents better than the average estimates of analysts tracking the bank. Some of that difference was chalked up to higher-than-expected securities gains.
Toronto-Dominion Bank may have hit some speed bumps with its retail expansion into the United States, but its Canadian personal banking franchise is continuing to roll, helping the company nearly double its third-quarter profit.
TD reported a profit yesterday of $790-million or $1.09 per diluted share, up 92 per cent from the $411-million or 58 cents a share it reported a year ago, when its results were hobbled by a major litigation reserve related to an Enron Corp. class-action lawsuit.
High securities gains and improved wealth management contributions from TD Ameritrade added to the bank's bottom line this quarter, but the real story remained its bread-and-butter retail unit, which is feasting on higher borrowing from consumers and businesses.
"This was a fantastic quarter," TD chief executive officer Ed Clark told analysts on a conference call, before singling out the profit growth at TD Canada Trust as a "remarkable achievement."
TD Canada Trust, the branch banking network, made $621-million, up 22 per cent, on broad-based growth.
Personal deposits at TD Canada Trust were up, as were personal loans and small-business lending.
Just as importantly, margins climbed too, auguring well for a sector whose profitability has been crimped by low interest rates and fierce competition for deposits.
The question now, according to analysts, is whether TD is benefiting from a near-perfect operating environment, or whether it is simply outflanking its peers.
A partial answer should come this morning, when Royal Bank of Canada, considered one of the most dominant retail banking operations along with TD, reports its results.
TD said the prospect for continued growth in fee income and lending remains strong, and that the positive credit climate -- one of the key sources of profitability for the industry in the past two years -- should result in only moderate increases in loan-loss provisions going forward.
TD's experience in the northeastern U.S. market, where it has established a beachhead with TD Banknorth, has not been as smooth. The U.S. retail business made $68-million in the quarter, down slightly from the $70-million it made a year ago. Margins have been under pressure there and TD said its interest income will remain under pressure because of competition.
On a cash basis, which excludes amortization and certain one-time items, TD said it made $1.21 a share for the quarter, about 4 cents better than the average estimates of analysts tracking the bank. Some of that difference was chalked up to higher-than-expected securities gains.
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Financial Post, Duncan Mavin, 25 August 2006
Toronto-Dominion Bank reported stellar third-quarter earnings yesterday, emphasizing the continued strength of Canada's domestic retail banking sector.
TD turned in adjusted net income for the quarter of $886-million, up from $739-million a year ago. Earnings per share were $1.21, up 16% from $1.04 a year ago, and above the average of most analysts' estimates of $1.16.
Canada's third-largest bank by market capitalization reported revenue of $3.3-billion, up 6% from $3.1-billion in 2005, and hiked the dividend paid to common shareholders 9%, or 4 cents a share, to 48 cents a share.
TD chief executive Ed Clark said the strong performance provides a basis for expansion. He said his "normal worries" about the health of the U.S. economy, its impact on Canada, and a possible downturn in the credit cycle are all mitigated by "fundamental" strength in the bank's retail banking platform.
"Our personal and commercial teams continue to work hard at targeting further growth opportunities where we believe we are under-represented, such as small business banking, insurance and credit card products," he said.
Canadian personal and commercial banking contributed $524-million to earnings, an increase of $90-million or 21%, and accounted for 67% of TD's total net income. The results were helped by the performance of VFC Inc., the sub-prime auto lender TD bought earlier this year, which contributed 1% of domestic retail revenue growth of 14%.
TD's results -- coupled with those of rival Bank of Montreal, which reported record third-quarter earnings on Tuesday -- show personal and commercial banking is a powerful performance driver for the whole Canadian banking sector, said Brenda Lum, managing director of Canadian financial institutions at Dominion Bond Rating Service.
"The economy continues to do well and the banks continue to find opportunities for growth in a very mature banking sector," Ms. Lum said.
TD's other businesses also performed well. Earnings from wholesale banking increased to $179-million from $140-million. Also, the bank's wealth management and U.S. operations -- TD Ameritrade and TD Banknorth -- reported steady results, "about as expected," said RBC Capital Markets analyst Jamie Keating in a note.
"They are firing on all cylinders at this point," said Tom Kersting, an analyst with Edward Jones, who agreed TD's results show good long- and short-term health for the industry as a whole.
Mr.Kersting, who has a "hold" rating on TD, said the only potential downside for investors is that the strength of the sector may be already priced into the stock of TD and its rivals.
TD's stock, like BMO's earlier, barely flinched after the announcement of earnings above Bay Street estimates.
"These quarterly earnings results are just a short-term check-up in the long-term financial health of [the banks,]" Mr. Kersting said. "Clearly it was a good quarter, but there's only so many times you can say the same thing differently."
Toronto-Dominion Bank reported stellar third-quarter earnings yesterday, emphasizing the continued strength of Canada's domestic retail banking sector.
TD turned in adjusted net income for the quarter of $886-million, up from $739-million a year ago. Earnings per share were $1.21, up 16% from $1.04 a year ago, and above the average of most analysts' estimates of $1.16.
Canada's third-largest bank by market capitalization reported revenue of $3.3-billion, up 6% from $3.1-billion in 2005, and hiked the dividend paid to common shareholders 9%, or 4 cents a share, to 48 cents a share.
TD chief executive Ed Clark said the strong performance provides a basis for expansion. He said his "normal worries" about the health of the U.S. economy, its impact on Canada, and a possible downturn in the credit cycle are all mitigated by "fundamental" strength in the bank's retail banking platform.
"Our personal and commercial teams continue to work hard at targeting further growth opportunities where we believe we are under-represented, such as small business banking, insurance and credit card products," he said.
Canadian personal and commercial banking contributed $524-million to earnings, an increase of $90-million or 21%, and accounted for 67% of TD's total net income. The results were helped by the performance of VFC Inc., the sub-prime auto lender TD bought earlier this year, which contributed 1% of domestic retail revenue growth of 14%.
TD's results -- coupled with those of rival Bank of Montreal, which reported record third-quarter earnings on Tuesday -- show personal and commercial banking is a powerful performance driver for the whole Canadian banking sector, said Brenda Lum, managing director of Canadian financial institutions at Dominion Bond Rating Service.
"The economy continues to do well and the banks continue to find opportunities for growth in a very mature banking sector," Ms. Lum said.
TD's other businesses also performed well. Earnings from wholesale banking increased to $179-million from $140-million. Also, the bank's wealth management and U.S. operations -- TD Ameritrade and TD Banknorth -- reported steady results, "about as expected," said RBC Capital Markets analyst Jamie Keating in a note.
"They are firing on all cylinders at this point," said Tom Kersting, an analyst with Edward Jones, who agreed TD's results show good long- and short-term health for the industry as a whole.
Mr.Kersting, who has a "hold" rating on TD, said the only potential downside for investors is that the strength of the sector may be already priced into the stock of TD and its rivals.
TD's stock, like BMO's earlier, barely flinched after the announcement of earnings above Bay Street estimates.
"These quarterly earnings results are just a short-term check-up in the long-term financial health of [the banks,]" Mr. Kersting said. "Clearly it was a good quarter, but there's only so many times you can say the same thing differently."
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Report on Business Television, 24 August 2006Click here for the ROBTv video clip, of Michael Goldberg's (Bank Analyst, Desjardins Securities) views on TD Bank's Q3 2006 Earnings.
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RBC Capital Markets, 24 August 2006
First Impression
• Comfortably Beat Consensus. TD reported $1.21 adjusted EPS, up 16% YoY from $1.04, and up 11% QoQ from $1.09. We were looking for $1.17 while consensus was $1.16. The loan loss was $109MM (consensus was $104MM), so this was not a factor in the positive EPS variance.
• Excellent Result in Domestic Retail (75% of Earnings). TD Canada Trust reported +21% growth YoY (+15% YoY would have been good enough for a positive reaction, BMO retail earnings were up 5%). Revenue growth of 14% was well ahead of our 10% expectation, and the +8% reported last quarter (BMO generated 8%). TD reported a strong improvement in spread (+10 bps QoQ). We also noted another sharp pickup in small-business market share – we believe this is coming at the expense of both BMO and CIBC.
• Wealth and US Subsidiaries Reported about as expected.
• Wholesale Up, and Likely More Sustainable. Wholesale profit rebounded to $179MM from $140MM last quarter. TD Securities had strong underwriting and M&A market share this quarter. The only 'rub' noted so far - TD did report big securities gains but on the other hand trading was below our expected level – together these cyclical lines combined to generate a net positive variance of 1-2¢ only.
• Dividend Hiked 4¢ to 48cts (up 9%), as expected.
First Impression
• Comfortably Beat Consensus. TD reported $1.21 adjusted EPS, up 16% YoY from $1.04, and up 11% QoQ from $1.09. We were looking for $1.17 while consensus was $1.16. The loan loss was $109MM (consensus was $104MM), so this was not a factor in the positive EPS variance.
• Excellent Result in Domestic Retail (75% of Earnings). TD Canada Trust reported +21% growth YoY (+15% YoY would have been good enough for a positive reaction, BMO retail earnings were up 5%). Revenue growth of 14% was well ahead of our 10% expectation, and the +8% reported last quarter (BMO generated 8%). TD reported a strong improvement in spread (+10 bps QoQ). We also noted another sharp pickup in small-business market share – we believe this is coming at the expense of both BMO and CIBC.
• Wealth and US Subsidiaries Reported about as expected.
• Wholesale Up, and Likely More Sustainable. Wholesale profit rebounded to $179MM from $140MM last quarter. TD Securities had strong underwriting and M&A market share this quarter. The only 'rub' noted so far - TD did report big securities gains but on the other hand trading was below our expected level – together these cyclical lines combined to generate a net positive variance of 1-2¢ only.
• Dividend Hiked 4¢ to 48cts (up 9%), as expected.
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Reuters, Lynne Olver, 24 August 2006
Toronto-Dominion Bank's third-quarter profit beat market expectations as strong gains in Canadian retail banking more than offset a tough banking environment in the United States, TD said on Thursday.
The bank, Canada's second largest by assets, also boosted its dividend by 9 percent and said it plans to buy back shares beginning in September.
On a conference call, TD Chief Executive Ed Clark called the quarter "fantastic" and said the bank will exceed its earnings-per-share growth target of 7-10 percent this year. It is "quite possible" TD could do the same in 2007, Clark said.
He said his remark was an attempt to be "crisper" and clearer with the market. Executives had been talking of 7 to 10 percent EPS growth but TD has been outdoing that, he noted.
"We grew (adjusted) EPS 16 percent this quarter and 13 percent year-to-date," Clark said on the call. "We have tried to shift the business mix to areas where earnings are relatively predictable."
Before markets opened, TD said net income in its third quarter, ended July 31, was C$796 million ($717 million), or C$1.09 a share. That's up from C$411 million, or 58 Canadian cents a share, in the same period a year earlier.
Excluding certain items, TD said it earned C$886 million, or C$1.21 a share in the third quarter, up 20 percent from C$739 million, or C$1.04 a share, a year earlier.
Analysts had expected earnings of C$1.16 a share before items, according to Reuters Estimates.
"They beat everybody's expectations by a wide margin this time," said Mario Mendonca of Genuity Capital Markets. The quarterly dividend increase, to 48 Canadian cents a share from 44 Canadian cents, was more than expected, he said.
TD said it plans to repurchase up to 4 million shares, or about 0.6 percent of its outstanding stock.
TD's results were "at the high end of expectations," with broad strength as Canadian retail results showed stronger margins and modest market-share gains, UBS analyst Jason Bilodeau said in a research note.
TD said Canadian personal and commercial banking profit rose 21 percent to C$524 million from C$434 million a year earlier, mainly due to volume growth.
But fierce competition eroded net income by 3 percent at TD's U.S. personal and commercial banking division, which includes its 56.5-percent stake in TD Banknorth.
Net income in the U.S. banking segment fell to C$68 million, from C$70 million a year earlier, but was up from C$59 million in the fiscal second quarter.
TD said U.S. net interest income "is expected to continue to be under pressure from intense competition."
Wholesale banking profit rose to C$179 million from C$130 million a year earlier, on an adjusted basis.
Clark said TD's fiscal fourth quarter is likely to be flat versus the third quarter, with perhaps lower results from wholesale banking.
Net income in wealth management grew 52 percent to C$152 million. That business includes TD Asset Management, TD Waterhouse in Canada and Britain, and its stake in TD Ameritrade Holding Corp.
TD said provisions for credit losses in the quarter were C$109 million, up from C$40 million a year earlier.
Overall, bank revenue rose to C$3.29 billion from C$3.10 billion a year earlier, while return on equity increased to 16.8 percent from 10.4 percent.
TD was the second big Canadian bank to report robust financial results this week, after Bank of Montreal. Next up is Royal Bank of Canada on Friday.
TD shares closed 28 Canadian cents, or 0.4 percent, higher at C$63.63 on the Toronto Stock Exchange on Thursday on volume of 2.88 million shares.
TD has lagged the Canadian bank group in 2006. Its stock is up 3.6 percent year to date, versus an average increase of 6.8 percent for the sector, and a gain of 11.7 percent for RBC.
Toronto-Dominion Bank's third-quarter profit beat market expectations as strong gains in Canadian retail banking more than offset a tough banking environment in the United States, TD said on Thursday.
The bank, Canada's second largest by assets, also boosted its dividend by 9 percent and said it plans to buy back shares beginning in September.
On a conference call, TD Chief Executive Ed Clark called the quarter "fantastic" and said the bank will exceed its earnings-per-share growth target of 7-10 percent this year. It is "quite possible" TD could do the same in 2007, Clark said.
He said his remark was an attempt to be "crisper" and clearer with the market. Executives had been talking of 7 to 10 percent EPS growth but TD has been outdoing that, he noted.
"We grew (adjusted) EPS 16 percent this quarter and 13 percent year-to-date," Clark said on the call. "We have tried to shift the business mix to areas where earnings are relatively predictable."
Before markets opened, TD said net income in its third quarter, ended July 31, was C$796 million ($717 million), or C$1.09 a share. That's up from C$411 million, or 58 Canadian cents a share, in the same period a year earlier.
Excluding certain items, TD said it earned C$886 million, or C$1.21 a share in the third quarter, up 20 percent from C$739 million, or C$1.04 a share, a year earlier.
Analysts had expected earnings of C$1.16 a share before items, according to Reuters Estimates.
"They beat everybody's expectations by a wide margin this time," said Mario Mendonca of Genuity Capital Markets. The quarterly dividend increase, to 48 Canadian cents a share from 44 Canadian cents, was more than expected, he said.
TD said it plans to repurchase up to 4 million shares, or about 0.6 percent of its outstanding stock.
TD's results were "at the high end of expectations," with broad strength as Canadian retail results showed stronger margins and modest market-share gains, UBS analyst Jason Bilodeau said in a research note.
TD said Canadian personal and commercial banking profit rose 21 percent to C$524 million from C$434 million a year earlier, mainly due to volume growth.
But fierce competition eroded net income by 3 percent at TD's U.S. personal and commercial banking division, which includes its 56.5-percent stake in TD Banknorth.
Net income in the U.S. banking segment fell to C$68 million, from C$70 million a year earlier, but was up from C$59 million in the fiscal second quarter.
TD said U.S. net interest income "is expected to continue to be under pressure from intense competition."
Wholesale banking profit rose to C$179 million from C$130 million a year earlier, on an adjusted basis.
Clark said TD's fiscal fourth quarter is likely to be flat versus the third quarter, with perhaps lower results from wholesale banking.
Net income in wealth management grew 52 percent to C$152 million. That business includes TD Asset Management, TD Waterhouse in Canada and Britain, and its stake in TD Ameritrade Holding Corp.
TD said provisions for credit losses in the quarter were C$109 million, up from C$40 million a year earlier.
Overall, bank revenue rose to C$3.29 billion from C$3.10 billion a year earlier, while return on equity increased to 16.8 percent from 10.4 percent.
TD was the second big Canadian bank to report robust financial results this week, after Bank of Montreal. Next up is Royal Bank of Canada on Friday.
TD shares closed 28 Canadian cents, or 0.4 percent, higher at C$63.63 on the Toronto Stock Exchange on Thursday on volume of 2.88 million shares.
TD has lagged the Canadian bank group in 2006. Its stock is up 3.6 percent year to date, versus an average increase of 6.8 percent for the sector, and a gain of 11.7 percent for RBC.
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Canadian Press, Rita Trichur, 24 August 2006
TD Bank boosted its dividend after nearly doubling its third-quarter profit to $796 million on sturdy gains in its Canadian retail banking and wealth-management divisions.
Canada’s third-largest bank hiked its quarterly dividend by nine per cent to 48 cents for the final quarter of 2006, raising expectations that larger rival Royal Bank will follow suit on Friday.
John Kinsey, a portfolio manager at Caldwell Securities, said TD’s results were “surprisingly good” and provide a telling preview of what’s still to come this earnings season.
“We’re two-for-two now,” he said, noting Bank of Montreal’s record $710-million profit, delivered earlier this week.
TD, which also announced it will buy back four million shares, said Thursday its third-quarter profit amounted to $1.09 per diluted share, compared to $411 million or 58 cents per share for the same quarter last year.
Excluding one-time items, the bank reported adjusted net income of $886 million, or $1.21 per share, compared with $739 million, or $1.04 per share, in the prior-year quarter. That easily surpassed an analyst forecast for earnings per share of $1.16, according to Thomson Financial.
“Q3 was a fantastic quarter — a level of growth that is going to be hard to duplicate,” CEO Ed Clark said in a conference call.
“For most our businesses, Q4 is likely to be relatively flat to Q3, with perhaps the wholesale bank slightly down. But that doesn’t change our positive outlook for 2007, assuming normal market conditions.”
TD has grown its earnings per share 13 per cent year-to-date, above its previous guidance calling for seven to 10 per cent growth for 2006.
“Next year, we believe that exceeding our long-run range of seven to 10 (per cent) again looks quite possible,” Clark said.
Total revenues for the quarter ended July 31 improved to $3.23 billion from a year-earlier $3.1 billion, while its return-on-equity jumped to 16.8 per cent from 10.4 per cent.
Canadian personal and commercial banking, TD’s core retail franchise, booked an earnings increase of 21 per cent on momentum in business banking, real estate secured lending and personal deposits. The division contributed 67 per cent of the bank’s total net income.
“We also noted another sharp pickup in small-business market share — we believe this is coming at the expense of both BMO and CIBC,” said James Keating, an analyst with RBC Capital Markets, who rates TD an “outperform” with “average risk.”
Its wealth-management division, meanwhile, enjoyed a 54 per cent profit increase. Mutual fund sales and discount brokerage trading volumes were the main drivers in Canada, while asset-based revenues and increased interest rates and spreads led to TD Ameritrade achieving a “record quarter.”
Its revamped wholesale banking division, which derives revenue from capital markets, investing and corporate lending activities, posted a 38 per cent improvement as TD exited its global structured products business.
Said Keating: “The only `rub’ noted so far — TD did report big securities gains but on the other hand trading was below our expected level — together these cyclical lines combined to generate a net positive variance of one to two cents only.”
However, its U.S. personal and commercial banking division — which includes TD’s majority interest in TD Banknorth — suffered a slight setback with profits dipping to $68 million from year-ago $70 million. Results were pinched by increased merger and restructuring charges, margin compression and a stronger Canadian dollar.
TD has been on a U.S. expansion streak over the last two years, but executives conceded that Banknorth continues to face “intense competition” in that cutthroat market.
“I recognize there is some worry that we will expand in the United States no matter what the cost — This is not the case,” Clark said.
“We have turned down a number of deals which didn’t meet our criteria ... Clearly, banking is tough today in the American market.”
TD shares gained 35 cents to close at $63.70 on the Toronto Stock Exchange.
TD Bank boosted its dividend after nearly doubling its third-quarter profit to $796 million on sturdy gains in its Canadian retail banking and wealth-management divisions.
Canada’s third-largest bank hiked its quarterly dividend by nine per cent to 48 cents for the final quarter of 2006, raising expectations that larger rival Royal Bank will follow suit on Friday.
John Kinsey, a portfolio manager at Caldwell Securities, said TD’s results were “surprisingly good” and provide a telling preview of what’s still to come this earnings season.
“We’re two-for-two now,” he said, noting Bank of Montreal’s record $710-million profit, delivered earlier this week.
TD, which also announced it will buy back four million shares, said Thursday its third-quarter profit amounted to $1.09 per diluted share, compared to $411 million or 58 cents per share for the same quarter last year.
Excluding one-time items, the bank reported adjusted net income of $886 million, or $1.21 per share, compared with $739 million, or $1.04 per share, in the prior-year quarter. That easily surpassed an analyst forecast for earnings per share of $1.16, according to Thomson Financial.
“Q3 was a fantastic quarter — a level of growth that is going to be hard to duplicate,” CEO Ed Clark said in a conference call.
“For most our businesses, Q4 is likely to be relatively flat to Q3, with perhaps the wholesale bank slightly down. But that doesn’t change our positive outlook for 2007, assuming normal market conditions.”
TD has grown its earnings per share 13 per cent year-to-date, above its previous guidance calling for seven to 10 per cent growth for 2006.
“Next year, we believe that exceeding our long-run range of seven to 10 (per cent) again looks quite possible,” Clark said.
Total revenues for the quarter ended July 31 improved to $3.23 billion from a year-earlier $3.1 billion, while its return-on-equity jumped to 16.8 per cent from 10.4 per cent.
Canadian personal and commercial banking, TD’s core retail franchise, booked an earnings increase of 21 per cent on momentum in business banking, real estate secured lending and personal deposits. The division contributed 67 per cent of the bank’s total net income.
“We also noted another sharp pickup in small-business market share — we believe this is coming at the expense of both BMO and CIBC,” said James Keating, an analyst with RBC Capital Markets, who rates TD an “outperform” with “average risk.”
Its wealth-management division, meanwhile, enjoyed a 54 per cent profit increase. Mutual fund sales and discount brokerage trading volumes were the main drivers in Canada, while asset-based revenues and increased interest rates and spreads led to TD Ameritrade achieving a “record quarter.”
Its revamped wholesale banking division, which derives revenue from capital markets, investing and corporate lending activities, posted a 38 per cent improvement as TD exited its global structured products business.
Said Keating: “The only `rub’ noted so far — TD did report big securities gains but on the other hand trading was below our expected level — together these cyclical lines combined to generate a net positive variance of one to two cents only.”
However, its U.S. personal and commercial banking division — which includes TD’s majority interest in TD Banknorth — suffered a slight setback with profits dipping to $68 million from year-ago $70 million. Results were pinched by increased merger and restructuring charges, margin compression and a stronger Canadian dollar.
TD has been on a U.S. expansion streak over the last two years, but executives conceded that Banknorth continues to face “intense competition” in that cutthroat market.
“I recognize there is some worry that we will expand in the United States no matter what the cost — This is not the case,” Clark said.
“We have turned down a number of deals which didn’t meet our criteria ... Clearly, banking is tough today in the American market.”
TD shares gained 35 cents to close at $63.70 on the Toronto Stock Exchange.
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Bloomberg, Sean B. Pasternak, 24 August 2006
Toronto-Dominion Bank, Canada's second-largest lender by assets, said third-quarter profit almost doubled on higher trading fees and increased earnings from its U.S. discount brokerage.
Net income for the period ended July 31 climbed to C$796 million ($717 million), or C$1.09 a share, from C$411 million, or 58 cents, a year earlier, the Toronto-based bank said today. Revenue rose 6.1 percent to C$3.23 billion.
Toronto-Dominion's profit growth may top other Canadian banks this quarter after it invested $5 billion to expand its consumer banking and brokerage businesses in the U.S. last year. TD Ameritrade Holding Corp., the third-biggest online brokerage in the U.S., contributed to a 54 percent increase in asset management earnings for Toronto-Dominion.
``The Ameritrade results are fabulous,'' said David Baskin, president of Baskin Financial Services in Toronto, which doesn't own Toronto-Dominion shares among C$350 million in assets. ``The problem is that the growth is coming from a cyclical business.''
Net income rose for the third straight quarter, and topped analysts' estimates on higher than expected revenue from trading and consumer banking. Excluding one-time items, profit was C$1.21 a share. Robert Wessel, an analyst at National Bank Financial in Toronto, expected C$1.16 a share on that basis.
Toronto-Dominion shares rose 28 cents to C$63.63 in 4:10 p.m. trading on the Toronto Stock Exchange. They've risen 4.1 percent this year, trailing the 5.7 percent gain in the 39- member Standard & Poor's/TSX Financials Index.
TD Ameritrade added C$55 million to earnings in the quarter, after the discount brokerage said profit surged 67 percent on higher revenue from commissions and transaction fees. The acquisition of TD Waterhouse USA gave Omaha, Nebraska-based TD Ameritrade an additional 2.25 million accounts. Toronto- Dominion is the largest shareholder in the brokerage.
Clark expanded in the U.S. last year in response to a ban on bank mergers in Canada. The bank bought a controlling stake in Portland, Maine-based TD Banknorth Inc., which operates about 600 branches in states including Connecticut, Massachusetts and New Jersey. Earnings from that unit fell 2.9 percent to C$68 million.
Toronto-Dominion and smaller rival Bank of Montreal benefited from a surge in stock trading in Canada after the value of mergers rose to a seven-year high this year amid record prices for oil and metals such as nickel.
Bank of Montreal, the fourth-biggest bank, said on Aug. 22 that net income rose 30 percent to a record C$710 million, topping analysts' estimates, as trading revenue almost doubled. Bank of Montreal was the first Canadian bank to report third- quarter earnings. Royal Bank of Canada, the biggest bank, reports tomorrow.
Toronto-Dominion said consumer banking profit in Canada climbed 21 percent to C$524 million because of an increase in deposits, real estate loans and business banking accounts. Jamie Keating, an analyst at RBC Capital Markets, said in a research note today that Toronto-Dominion is gaining market share in business lending at the expense of Canadian Imperial Bank of Commerce and Bank of Montreal.
``The retail business is booming,'' said Gavin Graham, director of investments at Guardian Group of Funds in Toronto, which manages about $5.3 billion including shares of Toronto- Dominion. ``The strength of the economy is enough to keep things going on the retail side.''
Investment banking earnings almost doubled to C$179 million because of securities gains and higher trading revenue. The value of trading on the Toronto Stock Exchange rose 42 percent in the first seven months of 2006 from a year earlier, to C$809 billion.
Toronto-Dominion set aside C$109 million for bad loans, more than double the C$40 million it set aside a year ago. Return on equity, a measurement of profitability, climbed to 16.8 percent from a year-earlier 10.4 percent.
The bank increased its dividend 9 percent to 48 cents a share, the second increase in three quarters. Toronto-Dominion also said it will buy back as many as 4 million shares, or about 0.6 percent of its outstanding stock, over the next year.
For the fiscal year that ends in October, Toronto-Dominion expects profit growth to be ``higher'' than 10 percent, Clark told investors today on a conference call. Previously, he said earnings growth would be at the ``upper end'' of a 7 percent to 10 percent forecast.
Toronto-Dominion Bank, Canada's second-largest lender by assets, said third-quarter profit almost doubled on higher trading fees and increased earnings from its U.S. discount brokerage.
Net income for the period ended July 31 climbed to C$796 million ($717 million), or C$1.09 a share, from C$411 million, or 58 cents, a year earlier, the Toronto-based bank said today. Revenue rose 6.1 percent to C$3.23 billion.
Toronto-Dominion's profit growth may top other Canadian banks this quarter after it invested $5 billion to expand its consumer banking and brokerage businesses in the U.S. last year. TD Ameritrade Holding Corp., the third-biggest online brokerage in the U.S., contributed to a 54 percent increase in asset management earnings for Toronto-Dominion.
``The Ameritrade results are fabulous,'' said David Baskin, president of Baskin Financial Services in Toronto, which doesn't own Toronto-Dominion shares among C$350 million in assets. ``The problem is that the growth is coming from a cyclical business.''
Net income rose for the third straight quarter, and topped analysts' estimates on higher than expected revenue from trading and consumer banking. Excluding one-time items, profit was C$1.21 a share. Robert Wessel, an analyst at National Bank Financial in Toronto, expected C$1.16 a share on that basis.
Toronto-Dominion shares rose 28 cents to C$63.63 in 4:10 p.m. trading on the Toronto Stock Exchange. They've risen 4.1 percent this year, trailing the 5.7 percent gain in the 39- member Standard & Poor's/TSX Financials Index.
TD Ameritrade added C$55 million to earnings in the quarter, after the discount brokerage said profit surged 67 percent on higher revenue from commissions and transaction fees. The acquisition of TD Waterhouse USA gave Omaha, Nebraska-based TD Ameritrade an additional 2.25 million accounts. Toronto- Dominion is the largest shareholder in the brokerage.
Clark expanded in the U.S. last year in response to a ban on bank mergers in Canada. The bank bought a controlling stake in Portland, Maine-based TD Banknorth Inc., which operates about 600 branches in states including Connecticut, Massachusetts and New Jersey. Earnings from that unit fell 2.9 percent to C$68 million.
Toronto-Dominion and smaller rival Bank of Montreal benefited from a surge in stock trading in Canada after the value of mergers rose to a seven-year high this year amid record prices for oil and metals such as nickel.
Bank of Montreal, the fourth-biggest bank, said on Aug. 22 that net income rose 30 percent to a record C$710 million, topping analysts' estimates, as trading revenue almost doubled. Bank of Montreal was the first Canadian bank to report third- quarter earnings. Royal Bank of Canada, the biggest bank, reports tomorrow.
Toronto-Dominion said consumer banking profit in Canada climbed 21 percent to C$524 million because of an increase in deposits, real estate loans and business banking accounts. Jamie Keating, an analyst at RBC Capital Markets, said in a research note today that Toronto-Dominion is gaining market share in business lending at the expense of Canadian Imperial Bank of Commerce and Bank of Montreal.
``The retail business is booming,'' said Gavin Graham, director of investments at Guardian Group of Funds in Toronto, which manages about $5.3 billion including shares of Toronto- Dominion. ``The strength of the economy is enough to keep things going on the retail side.''
Investment banking earnings almost doubled to C$179 million because of securities gains and higher trading revenue. The value of trading on the Toronto Stock Exchange rose 42 percent in the first seven months of 2006 from a year earlier, to C$809 billion.
Toronto-Dominion set aside C$109 million for bad loans, more than double the C$40 million it set aside a year ago. Return on equity, a measurement of profitability, climbed to 16.8 percent from a year-earlier 10.4 percent.
The bank increased its dividend 9 percent to 48 cents a share, the second increase in three quarters. Toronto-Dominion also said it will buy back as many as 4 million shares, or about 0.6 percent of its outstanding stock, over the next year.
For the fiscal year that ends in October, Toronto-Dominion expects profit growth to be ``higher'' than 10 percent, Clark told investors today on a conference call. Previously, he said earnings growth would be at the ``upper end'' of a 7 percent to 10 percent forecast.
