13 September 2006

TD Banknorth Cuts Q3 2006 Forecast

Financial Post, Duncan Mavin, 13 September 2006

Toronto-Dominion Bank's retail growth story in the United States hit a snag yesterday when its TD Banknorth subsidiary warned that rising costs and increased competition for customers will stifle third-quarter profits.

TD has poured funds into a marketing and acquisition-driven expansion plan for Portland, Me.-based TD Banknorth.

But current earnings estimates are too high "in light of current interest rates and [the] competitive environment," said Stephen Boyle, Banknorth's chief financial officer.

He cited factors including marketing costs and a shift among consumers toward higher-priced deposits for the downturn. The bank has aggressively pursued market share with a $25-million advertising blitz and a no-fees ATM card for customers in some areas. TD owns 56% of TD Banknorth.

Consensus among analysts had indicated the bank would turn in earnings per share of about U$58 cents for the third quarter. However, U$51 cents to U$54 cents is a more appropriate expectation, Mr. Boyle said in a presentation to a banking conference in Toronto that was also filed with U.S. regulators.

The U.S. bank's executives have warned on several occasions of the danger to earnings posed by margin pressures resulting from the combination of increasing interest rates and the intense pressure to gain market share in the highly competitive U.S. northeast.

Nevertheless, yesterday's announcement surprised many observers, including Sky Capital LLC analyst Theodore Kovaleff.

There was "no inkling" of a possible earnings warning even as recently as July when the bank held a meeting to discuss results and strategy with analysts, said Mr. Kovaleff, who holds both TD and TD Banknorth shares.

But one result of the dip in performance could be that further expansion plans at TD Banknorth will be put on hold for now, Mr. Kovaleff said.

So far in 2006, TD has funded Banknorth's acquisition of Hudson United Bancorp and Interchange Financial Services Corp. for a total of US$2.5-billion.

Mark Fitzgibbons, an analyst with Sandler O'Neill & Partners LP, downgraded TD Banknorth stock from "hold" to "sell" yesterday, although he said the warning on profits was only one reason for changing his recommendation.

In addition to the generally tough conditions for banks in the U.S. northeast, "there are concerns about [Banknorth's] acquisition strategy," Mr. Fitzgibbons said.

In particular, the Hudson United purchase was probably too pricey and it will likely cost more to integrate the "fairly dilapidated" franchise than the US$25-million initially forecast by Banknorth, Mr. O'Neill said.

"We think Banknorth will have to spend a lot more money to upgrade the branch system than they originally thought."

However, the profit warning does not necessarily mean acquisitions are over for TD Banknorth, said Morgan Stanley analyst Chris Chouinard. The dent in performance is a reflection of tough conditions in the wider banking environment in the United States, he said.

Indeed, TD chief executive Ed Clark has always been keen to allay short-termism and impress on stakeholders that the Banknorth story involves a long-term commitment. In June, TD announced Bharat Masrani, a 19-year veteran of the Canadian bank, will become president of Banknorth, with the intention that Mr. Masrani's appointment will free up Banknorth chief executive Bill Ryan to concentrate on further acquisitions.
The Globe and Mail, Sinclair Stewart, 13 September 2006

Canadian banks just can't seem to catch a break in the U.S. market. They're either plagued by operational foul-ups (Royal Bank of Canada's mortgage woes), hamstrung by regulatory and strategic problems (Canadian Imperial Bank of Commerce's New York investment bank) or sideswiped, as in the recent case of Toronto-Dominion Bank, by unfortunate timing.

TD, the latest Canadian bank to try its luck south of the border, said yesterday it is putting the brakes on any large acquisitions because of a miserable banking environment in the northeastern United States.

Creeping interest rates have cooled off the housing market, while intense competition has taken a bite out of profit margins on consumer loans, deposits and fee-based businesses. TD Banknorth, TD's retail banking subsidiary based in Portland, Me., warned yesterday that its profit will be lower than analysts were predicting for the third quarter because of the "extremely difficult" operating climate. TD president Ed Clark didn't give investors much hope that the situation will get better soon.

"I don't see [earnings-per-share] growth for Banknorth for some time in this environment," he told investors at a financial services conference in Toronto yesterday. "It could be worse yet than that."

Mr. Clark said he was "not unhappy" with his $5-billion acquisition of Banknorth, but conceded that conditions in the U.S. banking market are "undoubtedly rougher" than TD had anticipated when it struck the deal two summers ago.

"You've got to roll up your sleeves. You've got to get in and figure out, 'how can you operate better in this environment?' " he said.

On average, analysts had been expecting TD Banknorth to earn 58 cents a share in profit for the third quarter, but the bank tempered that outlook, suggesting that 51 to 54 cents would be a more realistic target. Higher marketing costs -- TD Banknorth just launched the most ambitious ad campaign in the history of the franchise -- are partly to blame for the disappointing profit figures, but that is much less of a concern than the lacklustre dynamics of the banking sector.

Unfortunately for Mr. Clark, this deterioration has not produced cheaper takeover targets, and he said the bank will avoid pulling the trigger on any more large acquisitions until the outlook improves. It will, however, continue to dabble in its "Pac-Man" strategy of snapping up smallish banks, like its recent $481-million (U.S.) purchase of Interchange Financial Services Corp. of Saddle Brook, N.J., which is expected to close in early 2007.

"You hate walking away if it fits nicely, but I hate even more overpaying for things," Mr. Clark said.

Without any major deals to eat up its excess capital, which Canadian banks generate at a furious clip, TD indicated it will likely have to review its capital program in the next six months to determine whether it needs to adjust its dividends or share repurchases.

This is the second time TD Banknorth has issued a profit warning this year. In March, before the first quarter ended, it cautioned that analysts' estimates appeared too high because of competitive pressures and costs associated with its $1.9-billion purchase of New Jersey's Hudson United Bancorp.

TD's U.S. retail business was also hampered initially by an overhaul of the balance sheet designed to make its results less sensitive to interest rate moves, an effort analysts say is beginning to pay off with better profit margins.

"I think to us, it's an all-or-nothing strategy," said National Bank Financial Inc. analyst Robert Wessel, who has an "outperform" rating on TD's stock and is a supporter of its U.S. expansion plan.
Analyst Anthony R Davis of Ryan Beck & Co reiterates his "market perform" rating on TD Banknorth Inc, while reducing his estimates for the company. The target price has been reduced from $30 to $29.

In a research note published yesterday, the analyst mentions that the company has pre-announced its 3Q06 EPS significantly short of the consensus. TD Banknorth's loan growth has not recovered quarter-to-date and is incurring higher-than-expected expenses for the turnaround of its Hudson United acquisition, the analyst says. The cash EPS estimates for 2006 and 2007 have been reduced from $2.27 to $2.18 and from $2.54 to $2.33, respectively, to reflect additional margin compression, weakening loan growth and high operating expenses.
TD Banknorth Cut to "Sell" at Sandler O'Neill

Bloomberg, Sybil Chahbandour, 12 September 2006

TD Banknorth Inc. was downgraded to "sell" from "hold" by analyst Mark T Fitzgibbon at Sandler O'Neill & Partners, LP. The 12-month price target is $27.00 per share.
Reuters, Jonathan Stempel, 12 September 2006

TD Banknorth Inc., a fast-growing northeast U.S. bank, said on Tuesday third-quarter profit would be lower than analysts project, hurt by rising interest rates and costs, and increased competition.

In a U.S. regulatory filing, the Portland, Maine-based unit of Toronto-Dominion Bank projected profit of 51 cents to 54 cents per share.

Analysts polled by Reuters Estimates on average had forecast 58 cents per share. TD Banknorth posted a year-earlier profit of $88.7 million, or 51 cents per share.

"It has been a difficult banking environment," said TD Banknorth Chief Executive William Ryan at a Lehman Brothers Inc. conference in New York. "Our deposit costs have really ratcheted up quite substantially, and our loan yields have gone up a little, but not a lot."

He added that if the current environment persists, "we're not going to do double-digit earnings growth next year."

TD Banknorth's forecast marks the second time in six months that the bank said analysts' earnings estimates were too high. Toronto-Dominion owns a 56 percent stake in TD Banknorth.

"A potential 10 percent or greater earnings miss is pretty significant for a bank," said Kevin Timmons, an analyst for C.L. King & Assocs. in Albany, New York. "The fundamental business model is fine, but it's a tough business environment, and they're bearing the brunt of it."

Timmons rates TD Banknorth "accumulate."

TD Banknorth said higher marketing costs, a shift among consumers to higher-rate deposits, a "leveling off" of both commercial and consumer loans, and a "slowdown" in fee income growth will weigh on results.

At a Scotia Capital conference in Toronto, Toronto-Dominion Chief Executive Ed Clark said the forecast will not be material to TD Bank's earnings, but that TD Banknorth might have flat earnings per share growth "for some time."

But Toronto-Dominion is "not unhappy with what we have in Banknorth," Clark said. He praised TD Banknorth management for its skill in integrating acquisitions, but said smaller purchases will predominate until the environment improves.

TD Banknorth shares closed down 39 cents at $28.97 on the New York Stock Exchange. They are little changed this year, while the KBW regional bank index is up 2 percent.

TD Banknorth Chief Financial Officer Stephen Boyle said at the Scotia Capital conference that the bank has slowed loan growth amid "significant" industry overcapacity.

"There are too many banks with too much capital chasing too few good loans," he said.

Marketing expenses are up as TD Banknorth advertises aggressively on television and radio to make its name more familiar among prospective customers.

The bank has also been waiving automated teller machine fees worldwide for New York, New Jersey, Connecticut and Pennsylvania customers.

It is trying to win market share from larger rivals Citigroup Inc., JPMorgan Chase & Co., Bank of America Corp., Wachovia Corp., Royal Bank of Scotland Plc's Citizens Bank and Commerce Bancorp Inc.

TD Banknorth operates 587 branches in eight states from Maine to Pennsylvania. It bought New Jersey's Hudson United Bancorp in January, and will add 30 branches in early 2007 when it buys New Jersey's Interchange Financial Services Corp.
Bloomberg, David Scanlan & Sean B. Pasternak, 12 September 2006

TD Banknorth Inc., the U.S. consumer-banking arm of Toronto-Dominion Bank, said third-quarter profit may fall short of analysts' estimates because of higher costs for deposits and marketing.

Profit will be 51 cents to 54 cents a share, compared with Thomson Financial estimates of 58 cents, the Portland, Maine- based bank said in a report presented at a conference in Toronto today. Profit in the same period a year ago was 51 cents.

The bank, whose earnings have declined in four of the last five quarters, said deposit costs rose because clients are shifting to higher-rate certificates of deposit and mutual funds. Consumer and commercial loan demand has "leveled off" because of increased competition. Non-interest income also slowed, the bank said.

"The banking environment in the U.S. is an extremely difficult one right now," Chief Financial Officer Stephen Boyle told investors. "There are too many banks with too much capital chasing too few profitable loans."

Shares of TD Banknorth fell 39 cents, or 1.3 percent, to $28.27 at 4:10 p.m. in trading on the New York Stock Exchange. Toronto-Dominion shares fell 24 cents to C$63.60 on the Toronto Stock Exchange.

TD Banknorth increased its advertising budget to between $10 million and $12 million a quarter, up from an average of $30 million to $33 million a year, targeting New York and New Jersey.

TD Banknorth, of which Toronto-Dominion owns 56 percent, is scheduled to report third-quarter results next month.

Toronto-Dominion Chief Executive Officer Edmund Clark, speaking at the same conference sponsored by Scotia Capital, said TD Banknorth's contribution to earnings will probably be "in the low-sixties" millions of dollars in the current quarter. The bank received C$68 million ($60.8 million) in profit from the unit in the previous period.

Clark said he doesn't see earnings growth at TD Banknorth "for some time."