25 May 2007

TD Bank Q2 2007 Earnings

Analysts' ratings and target prices for TD Bank:

• BMO Capital Markets maintains "outperform," 12 month target price has been raised from $75.00 to $76.00

• Blackmont Capital maintains "hold," 12-month target price is $73.00

• Desjardins Securities maintains "top pick", 12-month target price has been raised to $79.00

• RBC Capital Markets maintains "outperform," 12 month target price has been raised from $78.00 to $82.00

• Scotia Capital upgrades from "sector perform" to "sector "outperform." 12 month target price has been raised from $81.00 to $85.00

• UBS maintains "buy." The target price has been raised from $82.00 to $85.00.

In a research note published this morning, UBS mentioned that the company’s superior revenue growth is being driven by investments into domestic retail. According to UBS, the commencement of synergies at TD Ameritrade would bolster TD Bank’s 2H07/08 earnings. The EPS estimates for 2007 and 2008 have been raised from C$5.30 to C$5.51 and from C$5.90 to C$6.11, respectively.
BMO Capital Markets, 25 May 2007

TD Bank reported Q2/07 cash earnings of $952 million, or $1.31 per share, compared to $998 million, or $1.37 per share, in the last quarter, and $818 million, or $1.12 per share, in the same quarter of last year. Various unusual items were included in all three quarters, including a $43 million pre-announced TD Banknorth restructuring charge taken this quarter and a $60 million reversal of general taken in the second quarter of last year. After adjustments, the operating comparison is $1.36 per share in this quarter, $1.38 in the last quarter, and $1.09 in the same quarter of last year. Results were ahead of both our estimates and street forecasts.

On virtually all bases, this was another very strong quarter for TD. While the U.S businesses had its challenges, the Canadian operations appear to be going full steam. From the same quarter of last year, Canadian P&C earnings are up 16%, Wealth Management earnings are up 19% and Wholesale earnings are up 55%.

The Canadian Personal and Commercial Banking segment reported earnings of $540 million, roughly unchanged from last quarter but up solidly from last year. Loan volume and market share growth remain strong across most products. Net interest margin remained stable. Provisions for credit losses were largely unchanged from last quarter and expenses remained very well controlled.

The privatization of TD Banknorth is now complete. The operating environment south of the border continues to be challenging, and the strengthening Canadian dollar has not provided relief. Management, however, has expressed optimism about the long-term opportunities to improve performance by leveraging TD Bank's retail expertise. Wealth Management, including TD Ameritrade, reported earnings of $197 million, up from $186 million last quarter.

The contribution from AMTD was pre-announced at $63 million. In the domestic business, growth came from all business areas. The bank's market share of both long-term and money market funds continued to grow. Expense increases were largely volume-related.

TD Securities reported earnings of $217 million, well ahead of our forecasts of $139 million. Results out of this segment over the past few quarters indicate that TD's wholesale franchise is becoming an increasingly important player within its defined markets. Robust underwriting and advisory activity as well as strong corporate lending contributed to the growth. Trading revenues came in at $289 million - consistent with previous quarters and in line with our expectations. Investment securities gains were $102 million, somewhat higher than they have tracked in the past. This was an unusually strong quarter for TD Securities and we are forecasting a contribution closer to $150 million quarterly.

On the credit front, loan losses of $172 million were roughly in line with our expectations. Gross impaired loans tracked up in the quarter, due mainly to TD Banknorth. Loan losses in domestic banking continue to run above the bank's historical levels reflecting the acquisition of VFC and the substantial volume growth over the past couple of years. So far, we are unconcerned on the loan loss front, but TD has clearly moved up the 'credit risk' scale.

From a capital perspective, TD's Tier 1 ratio was 9.8%, down from 11.9% in the last quarter due to the buyout of the remaining shares of TD Banknorth. TD has traditionally operated with some of the higher capital ratios in the bank group, but this decline puts the bank in line with its peers.

Projections and Valuations

We are increasing our 2007 and 2008 cash EPS estimates by $0.10 to $5.40 and $5.85, respectively, and we are increasing our target price to $76. We are assuming a moderation in the earnings contribution of TD Securities, and modest improvement in the contribution from the U.S. operations.

We also note that with the debt financing for the buyout of the minority interest of Banknorth, some of the earnings growth at TD Bank is being driven by leverage of the balance sheet rather than fundamental improvements.

We have been long-time bulls on TD shares, and this quarter was a perfect reflection of what we like at the bank. We believe that management has achieved a solid marriage of investing for the long-term, while delivering short-term earnings. To date, however, TD's investment in the U.S. and its caution on aggressive expansion in Wholesale have exacted an opportunity cost for shareholders. Over time, we believe that the TD's two U.S. vehicles will deliver growth (and better returns). This should ensure that TD can maintain earnings growth when the inevitable slowdown occurs in Canada.
RBC Capital Markets, 25 May 2007

Q2/07 Results Ahead of Expectations

Core cash EPS of $1.37 were well ahead of our $1.22 estimate and the Street estimate of $1.26, and were up 27% YoY. Both retail and wholesale banking came in ahead of our expectations on strong revenue growth and controlled expense growth. Domestic wealth management net income was slightly above our expectations, up 19% YoY while TD Ameritrade and TD Banknorth results had been pre-released.

Bar Has Been Set High For Other Banks

Both TD and BMO reported results that were well ahead of expectations, setting the bar high for banks that have yet to report results. Core retail banking revenue growth of 12% at TD and 7% at BMO (in spite of market share losses) suggest continued strength in retail banking results. Buoyant capital markets activity was also a key driver of the outperformance at both banks, with revenue increases of 20% and 13% respectively in wholesale banking. Other banks should also post strong results.

TD Offers Balance of Growth and Lower Risk

Domestic retail growth and higher earnings from the U.S. (driven by cost synergies at TD Ameritrade, and by higher ownership of TD Banknorth) should buoy earnings growth for TD. We believe that TD can grow 2007 and 2008 earnings per share by 19% and 11%, respectively, ahead of median expected growth of 16% in 2007 and 8% in 2008 for the bank's five Canadian peers. We also believe that there is less downside risk to our forecast for TD than for the industry.

12-month Price Target up to $82 from $78

Our 12-month price target of $82 implies a multiple of 13.4x 2008E cash EPS, compared to the current 12.9x multiple on 2007E earnings and a 5-year average forward multiple of 12.1x. Our EPS estimates were raised for both 2007 and 2008; to $5.50 and $6.10, up $0.20 and $0.15. The increases reflect the positive earnings variance this quarter and the portion we expect to be sustained going forward. Our 12-month target price is up on increased earnings estimates, a higher than expected increase in book value in the quarter, and a slight increase in our valuation multiple from 13.1x to 13.4x.
Scotia Capital, 25 May 2007

• Wholesale Banking led earnings growth up 55% due to strong capital markets activity. Wealth Management and TDCT produced strong results with earnings growth of 30% and 16% with TD Banknorth up a modest 5%.

• TDCT earnings were particularly impressive driven by 12% revenue growth aided by net interest margin improvement. Expense growth was modest at 4% for 8% operating leverage fully offsetting higher LLPs.

• We are increasing our 2007 earnings estimate to $5.50 per share from $5.30 per share and our 2008 earnings estimate to $6.10 per share from $5.90 per share based on operating earnings strength at TDCT and Wholesale Banking. We are increasing our 12-month share price target to $85 from $81.

• We are upgrading TD to a 1-Sector Outperform from a 2-Sector Perform based on earnings increases, valuation discount and continued operating strength at TDCT, Wealth Management, a more stable wholesale platform and substantially lower downside risk at TD Banknorth.
The Globe and Mail, Tara Perkins, 24 May 2007

Toronto-Dominion Bank became the second big bank to top analyst estimates for second-quarter earnings yesterday, as it reported a profit gain of 19 per cent.

The bank's bread-and-butter domestic personal and commercial banking unit saw profit rise 16 per cent to $540-million, on the back of a strong showing in real estate secured lending, small business banking, life insurance and credit cards.

The outlook for revenue growth from that division "remains solid for the balance of the year but is expected to be lower compared to the first half of the year," TD said. Provisions for bad loans on both the personal and business banking side are expected to grow modestly, it added.

TD, which took its New England-based TD Banknorth unit private last month, will not be satisfied with subpar earnings from the U.S. retail business, TD president and chief executive officer Ed Clark said.

"We know the U.S. banking environment is challenging right now, and that TD Banknorth is delivering below our long-term expectations," Mr. Clark said.

"Our focus is on turning TD Banknorth into a consistent earnings growth engine," he added.

TD Banknorth, based in Portland, Me., reported lower profit as job cuts and branch closings boosted costs. Banknorth earned $23-million in the quarter, down 61 per cent.

TD Banknorth was the only dark cloud in an otherwise sunny second quarter.

TD's total provision for credit losses rose from $16-million a year ago to $172-million this quarter.

Meanwhile, one of the top performers this quarter was wholesale banking, where profit rose 55 per cent to $217-million. Gains came from TD's equity investment portfolio, or trading, as well as investment banking.

"While wholesale banking had a very strong performance in the first half of this year, it is not expected that this performance will be repeated in the traditionally slower second half of the year," TD said.

Wealth management, which includes TD's stake in TD Ameritrade, saw profit rise 30 per cent to $197-million, propelled largely by the Canadian mutual fund and advice business.

"In Canada, we're really starting to get traction from the investments we've made in our client-facing adviser network and supporting infrastructure," Mr. Clark said.

The bank saw more transactions at its discount and full-service brokerages and strong growth in client assets. But, lower commissions per trade for active traders and wealthy households led to a decrease in commission revenue at the discount brokerage.

TD Ameritrade contributed $63-million to the bank's profit. TD said it will be selling some of its shares in TD Ameritrade, as share buybacks brought its ownership stake up to 40.3 per cent at the end of April. The bank plans to bring that back down to 39.9 per cent.

While this quarter exceeded expectations, profit was 5 per cent lower than in the first quarter of this year. TD has earned $1.8-billion so far this fiscal year, down 41 per cent from the same period last year. In 2006, the bank recorded a $1.67-billion gain on the sale of TD Waterhouse to Ameritrade.
Canadian Press, David Friend, 24 May 2007

Cautiously looking towards the future, the CEO of TD Bank Financial Group said Thursday that reining in expenses will help eclipse an expected slowdown in revenue growth.

Chief executive Edmund Clark said during a quarterly earnings call that preparing for the worst actually helped the bank's second-quarter profits jump 19 per cent, and that the bank expects a similar approach will help it do so in the future.

"We continue to worry about the effects of (the) high Canadian dollar on Central Canada and we still expect some slowing in revenue growth, but we're going to keep expenses growing less quickly so that we maintain our traditional three per cent expense gap," he said.

The plan comes on the heels of second quarter earnings that exceeded market expectations.

The bank said it earned $879 million or $1.20 per share in its second quarter ended April 30, up from $738 million or $1.01 per share in the year-earlier period.

Revenue rose 12 per cent to $3.5 billion from $3.12 billion, and assets expanded by two per cent to $396.7 billion.

Clark credited the results to a cautious plan outlined in the first quarter.

"Earlier this year, we said we expected revenues to slow down. So we wanted to slow expense growth and get ahead of the curve while still investing in business for the future," he said.

"Clearly revenue growth continued to grow faster than we had expected. Combine that with expense discipline and you get exceptional earnings growth."

TD shares closed ahead 21 cents to $70.74 after hitting a record high of $71.85 in the morning - up from $56 last summer - on the Toronto Stock Exchange.

Annualized return on equity for the quarter was 17.1 per cent, compared with 16.5 per cent in the February-April period of last year.

The bank said its adjusted earnings were up 27.5 per cent to $995 million or $1.36 per share, excluding items such as amortization of intangibles and a $43-million charge on TD's restructuring and taking full ownership of TD Banknorth and other American operations.

The ex-items result handily exceeded the Thomson Financial average analyst expectation of $1.25 per share. This came after Bank of Montreal (TSX:BMO) beat forecasts Wednesday with a 3.1 per cent profit increase to $671 million despite natural gas trading losses.

TD said its provisions for credit losses were $172 million, deepening from $16 million a year earlier and from $163 million in the November-January quarter.

The quarter's profit gain was led by wholesale banking, including investment banking and trading, which had what Clark called a "fantastic quarter" and raised its earnings by 55 per cent from a year earlier to $217 million. But the bank warned it doesn't expect this strength to continue in what's traditionally a slower second half of the year.

Profits in Canadian personal and commercial banking increased 16 per cent to $540 million, while TD's wealth management unit boosted its profit by 30 per cent to $197 million thanks to strong growth in mutual fund and advisory businesses.

Clark predicted that the bank would exceed its earnings objectives for the full year.

"Yes, good markets clearly are helping our performance, but the reality is that you're now seeing the outcome of the tough decisions that we made and the hard work that we undertook that's been going on in the wholesale bank for the last few years," he said.

The bank has been focusing on customer service, convenience and a stronger relationship with its clients, said Tom Kersting, a financial services analyst with Edward Jones in St. Louis.

"You can see that through the increased mutual funds sales. It's making the customer sticky and enjoy the service that they receive," he said.

TD Ameritrade, the Omaha-based brokerage owned 40 per cent by TD, contributed $63 million to wealth management earnings.

U.S. personal and commercial banking was the slack segment, earning $23 million, down from $59 million a year ago.

"We're continuing to tackle a tough banking and credit environment head-on while leveraging some of TD's industry-leading practices in Canada to improve growth at TD Banknorth," Clark stated.

Excluding restructuring, privatization and other merger-related charges, U.S. personal and commercial banking earned $62 million.

At Maine-headquartered TD Banknorth, where TD raised its ownership to 100 per cent from 59 per cent effective April 20, "we're very positive about TD Banknorth's long-term potential to grow organically and deliver value to our shareholders," Clark added.

In what will continue to be a "challenging year" in U.S. banking, TD said stateside results are expected to improve on cost cuts and a focus on extending branch hours, simplifying fees and adding new retail products.
Financial Post, Jonathan Ratner, 24 May 2007

Toronto-Dominion Bank’s shares were up on Thursday morning after its second quarter earnings per share of $1.36 (adjusted) came in 3¢ higher than Blackmont Capital analyst Brad Smith forecasted because of a lower-than-expected effective tax rate.

TD’s consolidated revenues of $3.5-billion were in line with his projections and 12% ahead of the previous year.

Mr. Smith made no changes to his earnings estimates, “hold” rating or $73 per share target price for TD.
Bloomberg, Sean B. Pasternak, 24 May 2007

Toronto-Dominion Bank, Canada's second-largest lender, said profit climbed 19 percent, topping analysts' estimates, on higher fees from trading, investment banking and mutual funds.

Net income in the second quarter ended April 30 rose to C$879 million ($813 million), or C$1.20 a share, from C$738 million, or C$1.01, a year earlier, the Toronto-based bank said today in a statement. Revenue jumped 12 percent to C$3.5 billion, the highest in at least nine quarters.

Profit from the TD Securities investment bank jumped 55 percent to C$217 million, close to a six-year high, as the value of mergers and new stock sales in Canada surged. Chief Executive Officer Edmund Clark has pledged to expand the investment bank so that it ranks in the top three among Canadian lenders for advisory services.

``That isn't usually one of their strong points, but certainly here it seems to have contributed very well,'' said John Kinsey, a fund manager at Caldwell Securities Ltd. in Toronto, which oversees $900 million in assets, including Toronto-Dominion shares.

Toronto-Dominion rose 21 cents to C$70.74 at 4:10 p.m. trading on the Toronto Stock Exchange and earlier touched a record C$71.85. Shares of Royal Bank of Canada and Canadian Imperial Bank of Commerce also hit records.

Clark reiterated today that the bank will probably exceed its 2007 target of increasing earnings per share before one-time items by as much as 10 percent. Profit on that basis rose 22 percent in the first half of the fiscal year.

``We expect to exceed by a significant margin our earnings objectives for 2007,'' Clark told investors on a conference call today.

The bank expects profit growth to slow in the second half of the year, Chief Financial Officer Colleen Johnston said in an interview today.

``We don't see that type of growth rate continuing, but we still do very much expect to achieve good double-digit growth in the latter half of the year,'' Johnston said.

Capital markets revenue will probably slow after mergers surpassed last year's record pace in the first five months of the year. TD Securities advised on seven mergers and acquisitions in the quarter valued at $6.36 billion, up from two deals worth $1.84 billion a year ago, according to data compiled by Bloomberg. The firm managed $1.37 billion of stock sales in the quarter, compared with $516 million a year ago.

Trading revenue climbed 15 percent to C$289 million in the quarter, led by equity and fixed income. That contrasts with Bank of Montreal, which reported yesterday a loss of C$10 million in that business, on losses from natural gas trading.

Profit from asset management rose 30 percent to C$197 million, the highest in eight years. Canadian mutual funds sales soared to a nine-year high last month, with Toronto-Dominion leading net sales among the 24 fund companies tracked by the Investment Funds Institute of Canada.

``The banks, with not only their branch networks, but also their brokers, have very strong distribution channels,'' said John Aiken, an analyst at Dundee Securities in Toronto. ``It's becoming a bit of a challenge for the independent mutual fund sellers.''

The bank also owns about 40 percent of TD Ameritrade Holding Corp. in the U.S., the third-largest online brokerage, which added C$63 million to asset management earnings, up 62 percent from a year ago.

Excluding one-time items such as costs for job cuts, the bank said it earned C$1.36 a share. Toronto-Dominion was expected to earn C$1.25 a share on that basis, according to the median estimate of nine analysts polled by Bloomberg News.

Canadian consumer banking profit climbed 16 percent to C$540 million because of higher revenue from credit cards, mortgages and deposits.

Earnings from consumer banking in the U.S., where the bank owns Portland, Maine-based TD Banknorth, dropped 61 percent to C$23 million. The bank said in March it will cut jobs and close as many as 24 branches to offset lower demand for loans and higher advertising costs.

``TD Banknorth expects 2007 to continue to be a challenging year,'' the bank said in the statement. ``Competition for customers remains keen, while the interest rate environment is not expected to improve."

Toronto-Dominion last month bought the 40.2 percent it didn't already own of TD Banknorth, whose profit has declined in six of the past eight quarters.

The bank set aside C$172 million for bad loans, more than 10 times higher than the C$16 million it had a year ago.

Bank of Montreal was the first Canadian bank to report second-quarter earnings. Canada's fourth-biggest bank said yesterday that profit rose 3 percent to C$671 million, or C$1.29 a share, topping analysts' estimates, as mutual fund sales offset the biggest commodities trading loss ever for a bank in Canada.

Profits before one-time items for the six-biggest Canadian banks are expected to rise on average 14 percent this quarter from a year ago, according to Genuity Capital Markets.

Earnings have risen nine straight quarters for the banks. Mergers are running ahead of last year's record pace, increasing advisory fees, while a 30-year-low jobless rate boosts demand for consumer loans and mortgages. The banks' trading revenue also rose after volume on the Toronto Stock Exchange climbed 10 percent from a year ago.;