26 October 2006

TD Banknorth Q3 2006 Earnings

BMO Capital Markets reduced estimates for TD Banknorth by about 5%, on the back of third quarter results. It noted that TD Banknorth continues to grapple with competitive deposit pricing and mediocre loan growth. The reduced estimates amount to a negative impact of $0.02 per share to TD Bank’s earnings for 2007.
Analysts at Cohen Bros reiterate their "hold" rating on TD Banknorth. The target price has been reduced from $31 to $30.
Scotia Capital, 26 October 2006

TD Banknorth Q3/06 Earnings - Low End of Management Guidance

• TD Banknorth reported Q3/06 cash earnings of US$0.51 per share versus US$0.56 per share in the previous quarter and US$0.63 per share a year earlier, the low end of management guidance. Consensus was US$0.52 per share.

• On September 12, 2006 BNK had warned that third quarter earnings would be in the range of US$0.51-US$0.54 per share, versus the previous average estimate of US$0.58 per share.

• Reported earnings were US$0.38 per share and included the following after-tax items: US$0.10 per share for the amortization of intangible assets, US$0.04 per share for merger and restructuring costs, and US$0.01 per share related to the gain from discontinued operations.

• Operating EPS continues to be negatively impacted by earnings dilution from the acquisition of HU. The bank issued 62 million shares in conjunction with the HU acquisition (partly offset by the repurchase of 8.5 million shares) with weighted average diluted shares increasing 31% YOY to 229.1 million in Q3/06 compared to 174.4 million a year earlier and 228.8 million in the previous quarter.

• Also impacting earnings this quarter were higher loan loss provisions of US$13.8 million versus US$8.7 million in the previous quarter (after tax impact of US$0.01 per share), higher advertising and marketing expenses of US$12.7 million versus US$10.0 million in the previous quarter (after tax impact of US$0.01 per share) and a litigation reserve of US$3 million (after tax impact of US$0.01 per share).

• BNK continues to suffer from margin compression due to competitive deposit pricing, inverted yield curve and intense competition for high quality loans.

• TD Bank indicated that BNK's contribution this quarter would be C$63 million or C$0.09 per share versus C$68 million or C$0.09 per share in the previous quarter and C$69 million or C$0.10 per share a year earlier.

Net Interest Margin Declines

• Net interest margin (NIM) for the quarter declined to 4.01% from 4.07% in the previous quarter and from 4.09% a year earlier. The decline in NIM was primarily due to competitive deposit pricing, inverted yield curve and intense competition for high quality loans.

• The bank expects margin compression to remain a challenge and indicated that net interest margin might not hold at the 4.00% level in the fourth quarter, and potentially deteriorate in 2007.

Loan & Deposit Growth

• Average loans increased 28% YOY mainly due mainly to the HU acquisition. Organic loan growth was approximately 5.5% YOY with commercial loan growth stronger than consumer loan growth. On a QOQ basis, loan growth was 0.5%, slow due to competitive pressures. Management indicated that loan growth for the year would more likely be in the range of 4.5% to 5.5%.

• Average deposits increased 34% YOY due to the HU acquisition. However, organic deposit growth was flat YOY primarily due to continued competitive deposit pricing, and increased only 0.8% QOQ.

Revenues Decline Sequentially

• Total operating revenues (excluding securities gains/losses, and losses on derivatives) increased 22% YOY to US$429.4 million versus US$352.3 million a year earlier. However, operating revenues declined 1% QOQ with net interest income declining 2% QOQ and noninterest revenues increasing 1% QOQ.

• Non-interest revenues (excluding securities gains/losses, and losses on derivatives) increased to US$128.3 million from US$127.0 million in the previous quarter and from US$103.3 million a year earlier, primarily due to the HU acquisition.

Operating Expenses Increase 4% Sequentially

• Non-interest expenses increased 34% YOY (excluding amortization of intangibles and merger and restructuring costs) to US$240.5 million from US$179.5 million due to increased Hudson United-related operating expenses.

• Organic non-interest expense (excluding amortization of intangibles and merger and restructuring costs) increased 4% or US$8.5 billion from the previous quarter.

• Cost saves from Hudson United were offset by higher advertising and marketing expenses which increased $2.7 million or 27% QOQ. The bank mentioned that third quarter expenses also included a litigation reserve of $3 million related to a pending suit, and also indicated that they would not expect this litigation reserve to be there in the fourth quarter.

Loan Loss Provisions

• Loan Loss provisions (LLPs) were US$13.8 million or 0.21% of loans compared to US$8.7 million or 0.14% of loans in the previous quarter and US$5.5 million or 0.11% of loans a year earlier. Management indicated that loan loss provisions would mostly likely be at the same level in the fourth quarter.

• Total non-performing loans (NPLs) in the third quarter were US$91.8 million or 0.36% of total loans compared to US$89.0 million or 0.34% of total loans in the previous quarter and US$64.0 million or 0.32% of total loans a year earlier.

• Non-performing assets (NPAs) were US$93.8 million or 0.24% of total assets versus US$91.2 million or 0.23% in the previous quarter and US$66.9 million or 0.21% a year earlier.

Tier 1 Capital Ratio at 8.2%

• Tier 1 risk-based capital ratio was 8.2% versus 7.9% in the previous quarter and 8.5% a year earlier. Total risk-based capital ratio was 11.4%, versus 11.2% in the previous quarter and 11.7% a year earlier.

Fourth Quarter Earnings Guidance

• Management indicated on the conference call that they expect fourth quarter earnings to be in the range of US$0.51 - US$0.54 per share. IBES estimates are currently US$0.53 per share. Bharat Masrani to Take on Greater Role at TD Banknorth

• On October 23rd, BNK announced that Bharat Masrani will assume the role of Chief Executive Officer effective March 1, 2007 in addition to his role as President to which he was appointed on June 23, 2006.


• Our 2006 and 2007 earnings estimates for TD are C$4.67 per share and C$5.15 per share, respectively.

• Our 12-month share price target on TD is $78 representing 15.1x our 2007 cash earnings estimate.

• Maintain 2-Sector Perform rating on shares of TD Bank.
RBC Capital Markets, 26 October 2006


3Q06 Operating Cash EPS of $0.51 Per Share, $0.02 Below Our Estimate, $0.01 Below Consensus

Investment Opinion

• Earnings Summary: 3Q06 operating cash earnings declined by 19% year-over-year and 8.9% sequentially.

• Modest Margin Pressure: BNK's margin decreased 6 basis points sequentially to 4.01% due to higher deposit and borrowing costs. Modest margin pressure is expected to persist over the next couple of quarters.

• Loan Growth Trends: Commercial business loans increased by 0.3% sequentially, while consumer and residential loan balances contracted by 0.6% and 2.6% respectively during the quarter. We expect only moderate loan growth over the next several quarters due to extremely competitive pricing for high quality lending opportunities.

• Core Fee Revenue Pressure: Core fee income declined 4.4% sequentially, driven mostly by contracting insurance fees and merchant banking fees. Only moderate overall fee revenue growth is expected in upcoming quarters due to slowing deposit and loan growth, which is expected to result in slower growth in deposit and loan fee revenue.

• Asset Quality Held Steady: Non-performing assets increased by 2.8% sequentially to $93.8 million, and held relatively steady sequentially at 0.24% of total assets. Reserves remained healthy at 1.10% of total loans vs. 1.07% at the end of the prior quarter. We expect asset quality to remain stable for the remainder of 2006, though modest deterioration is expected in 2007.

• Adjustments: We lowered 2006E/2007E operating cash EPS estimates to $2.13 and $2.12 per share from $2.18/$2.34 per share to reflect reduced loan and fee revenue growth and ongoing margin pressure.

• Thoughts On The Stock: The operating environment is likely to remain challenging for BNK for the next couple of quarters. We are now forecasting a 14% contraction in cash EPS in 2006 and essentially flat cash EPS in 2007. At 14x our current 2007 cash EPS estimate, we view the stock as fairly to fully valued, and we view the company as an ongoing acquirer. Therefore, we would continue to avoid the stock.

• Rating: The stock trades at a modest premium to our price target of $28 per share, justifying our Sector Perform rating with Average risk, in our opinion.
Financial Post, Duncan Mavin, 26 October 2006

Toronto-Dominion Bank's stuttering U.S. growth plans ground to a halt yesterday as TD Banknorth revealed slipping quarterly earnings and a grim outlook for 2007.

TD Banknorth chief executive Bill Ryan said tough competition and unfavourable interest rates are forcing the bank to reduce prices and "aggressively" cut costs.

He also said the bank's acquisitive growth strategy is "pretty much shut down." TD Banknorth has spent US$2.5-billion to buy two banks this year and had targeted up to two more major purchases each year.

However, those plans now look to have been put on hold in the face of a dearth of acquisition targets and weak results.

The Portland, Maine-based bank's third-quarter profit fell to US$86.1-million, down from US$88.7-million last year.

TD, which owns 56% of TD Banknorth, will see its share of the U.S. bank's earnings this quarter slashed to $63-million from $69-million last year.

Looking to 2007, Mr. Ryan said management has not yet calculated the amount it plans to squeeze out of the banks costs. He said savings will come partly through automating some processes, such as credit approval.

"When you are under the price pressures that banks are under right now, you better be watching the little things and making sure they are in order," he said.

The bank will also close between 10 and 20 branches, and reduce prices on loans and other products to compete with local banks in the fragmented U.S. banking sector, said Mr. Ryan.

The belt-tightening forecast did not offer much hope to investors looking for improvements from TD's U.S. retail banking, which has now seen declining earnings in five of the past six quarters.

Genuity Capital Markets analyst Mario Mendonca called the outlook for TD Banknorth "dour" with management signaling a tough year ahead.

"Both interest rate conditions and the competitive environment for balance sheet growth are not showing signs of improving," said Mr. Mendonca.

Morgan Stanley analyst Paul Delaney forecast a "tepid" 2007 with "poor organic growth prospects."

Earlier this week, TD Banknorth also announced that TD's Bharat Masrani will take over from Mr. Ryan as chief executive in March 2007. The bank said Mr. Masrani will take over running the day-to-day operations at the bank, freeing up Mr. Ryan to look for acquisitions.

The move surprised many analysts because TD has previously trumpeted the strength of the local management team, and because Mr. Masrani does not have a retail banking background.

However, Mr. Ryan said Mr. Masrani is the best person available for the CEO position. He also said Mr. Masrani's appointment was "not forced down our throat by our parent in Canada," and cited health concerns for his own stepping aside.

TD Banknorth's results followed disappointing earnings reported by TD's other U.S. venture, TD Ameritrade.

The discount brokerage in which TD has a 39.5% stake reported adjusted earnings per share of 20 cents a share compared to analysts' expectations of 22 cents a share, with competition a significant factor. The Omaha, Nebraska-based brokerage has cut the price it charges for trades to keep up with similar cuts at rival brokerages.
Bloomberg, Sean B. Pasternak, 25 October 2006

TD Banknorth Inc., the U.S. consumer-banking unit of Toronto-Dominion Bank, said quarterly profit fell for the fifth time in six quarters after it set aside more money for bad loans and advertising costs rose.

Profit fell to $86.1 million, or 38 cents a share, from $88.7 million, or 51 cents, the Portland, Maine-based bank said today in a statement. Earnings met the bank's revised estimate.

Non-interest expenses increased 39 percent to $294 million, mostly because of higher salaries and advertising costs following the $1.9 billion acquisition of Mahwah, New Jersey- based Hudson United Bancorp. The bank plans to reduce costs and halt acquisitions, after making 27 purchases in 13 years.

"Our strategy of buying banks in the near future is pretty much shut down," Chief Executive Officer William Ryan said on a conference call.

TD Banknorth shares fell 29 cents to $29.53 at 4:01 p.m. in New York composite trading. Toronto-Dominion rose 54 cents to C$64.43 on the Toronto Stock Exchange.

Before one-time items such as acquisition costs, profit was 51 cents a share. The bank said on Sept. 12 that higher costs for deposits and marketing would lead to earnings of 51 cents to 54 cents on that basis. That was below the average analyst estimate of 58 cents, according to Thomson Financial.

Profit will be between 51 cents and 54 cents a share in the fourth quarter as well, said Ryan, who plans to step down as CEO in March, and stay on as chairman until 2010.

The bank's net interest margin "is suffering under increased competition on both the deposit and loan side," he said.

TD Banknorth, which operates in the New England states, as well as New York and New Jersey, said revenue rose 22 percent to $429.4 million as loans and deposits rose from the Hudson United purchase. The bank set aside $13.8 million for bad loans, more than twice as much as the year-earlier quarter.

Merger and restructuring costs soared to $14.1 million, from $1.1 million.

TD Banknorth President Bharat Masrani was appointed this week to replace Ryan, 62, who said "health issues," contributed to the change.

Toronto-Dominion, which bought a controlling stake of TD Banknorth last year, has said it will buy up to two-thirds of the bank over an unspecified period. Toronto-Dominion, Canada's second-biggest bank by assets, said that TD Banknorth will add C$63 million ($56 million) to profit when the bank reports earnings on Dec. 8.

The bank said yesterday that TD Ameritrade Holding Corp., the third-largest online broker, will add C$53 million to profit. Toronto-Dominion is the largest shareholder of TD Ameritrade.