12 October 2006

NBF Cuts TD Bank to 'Sector Perform'

Toronto-Dominion Bank was downgraded from 'outperform' to 'sector perform' by analyst Robert Wessel at National Bank Financial. The price target is C$72.00 per share.
Scotia Capital, 12 October 2006

Price Competition in Discount Brokerage - U.S. Platforms Under Pressure

• Bank of America announced that effective immediately, its primary retail brokerage company, Banc of America Investment Services, Inc., will offer free online equity trades for self-directed investors who maintain a combined balance of US$25,000 or more in BAC deposit accounts.

• Customers with a combined US$25,000 in CDs, savings and checking accounts can make up to 30 free stock trades per month.

• The potential impact of this particular announcement is difficult to gauge, although the incumbents feel that active trading rates are already low, with the primary concern for these traders being the ability to execute. However, this announcement is consistent with the trend of lower pricing and increased competition.

• TD Ameritrade shares fell 11.9%, with E*Trade declining 8.8% and Charles Schwab declining 4.7% in response to BAC's announcement.

• In April, AMTD announced a simplified pricing structure of US$9.99 for all equity trades regardless of the number of shares or order type. However, BAC's announcement creates further concerns about earnings and profitability for the brokerage industry as price competition is expected to continue to put pressure on margins and earnings.

• TD AMTD earnings represented 6% of TD Bank earnings in Q3/06. Every 10% decline in TD AMTD earnings would impact TD earnings by 1%.

TD Ameritrade to Announce Fiscal Year End Results - October 24

• AMTD will announce fiscal year end results on Tuesday October 24, 2006. Current IBES estimates are US$0.22 per share for the September quarter and US$0.89 per share for the year end.

• Earnings estimates (IBES) for FYE 2006 declined 7% to US$0.89 from US$0.96 going into 2006, primarily due to fee cuts. We suspect earnings will continue to be under pressure due to price competition, with further earnings estimate reductions possible.

TD Banknorth - Earnings Expected to Decline 13% in 2006

• TD's U.S. platforms continue to face a difficult operating environment, particularly TD Banknorth. TD Banknorth’s fiscal earnings are expected to decline 13% to US$2.17 per share (IBES) in fiscal 2006 as the bank continues to face margin pressure, flat/inverted yield curve and price competition in deposits.

Maintain 2-Sector Perform on TD Bank

• Our 2006 and 2007 earnings estimates remain unchanged at $4.67 per share and $5.15 per share, respectively. TD continues to rely on TDCT and wealth management for earnings momentum with BNK and potentially AMTD muting earnings growth.

• Maintain 2-Sector Perform rating on shares of TD as the strong operating performance of TDCT is being somewhat offset by weakness at BNK and AMTD.

• In the third quarter, BNK and AMTD earnings represented 14% of total bank earnings, with BNK representing 8% and AMTD 6%.

• We expect TD valuation to trend to a premium P/E multiple to the group longer term, but in the near term, concerns about the bank's U.S. operating platforms are expected to negatively impact valuation.