Financial Post, Duncan Mavin, 23 June 2008
Toronto-Dominion Bank has achieved critical mass in the U.S. with the acquisition of Commerce Bancorp, and although TD is now significantly more exposed to the weakening U.S. economy than its Canadian peers, there is plenty of upside from the deal, says National Bank analyst Rob Sedran.
The combination of Commerce and TD’s existing platform, TD Banknorth, will see TD rank in the top ten for deposit market share in eight states in the U.S., including New York, New Jersey and Massachusetts. It also increases TD’s existing branch platform from 626 branches to 1,071 branches, and positions the bank to do more deals.
“As a result of this larger footprint, future acquisitions are more likely to carry expense synergies, allowing TD to compete for assets on a more equal footing with the large U.S. banks,” Mr. Sedran said in a note.
The National Bank analyst also points out that TD appears to be committed to Commerce’s high-service level culture — what executives call the “wow” factor — which is a strong source of competitive advantage. The bank has already done a lot to bring Banknorth up to the high-service level model, he notes. Also, although TD now has more at stake in the U.S., it is mostly located in the northeast, where recent negative trends have not been as dramatic as in other parts of the country.
TD’s capital position is looking tight after the Commerce deal, but unlike its Canadian rivals, “the fact TD’s balance sheet has been stretched not by writedowns and losses, but by deployment, is a crucial distinction,” Mr. Sedran said.
Although all the Canadian banks have suffered a fairly lacklustre performance so far this year, that outlook could brighten in 2009 for TD at least. If TD hits or even beats its targeted earnings from the U.S. of $1.2-billion in 2009, there is potential upside to earnings estimates, Mr. Sedran said.
National Bank rates TD “outperform” with a $77.00 target price.
Toronto-Dominion Bank has achieved critical mass in the U.S. with the acquisition of Commerce Bancorp, and although TD is now significantly more exposed to the weakening U.S. economy than its Canadian peers, there is plenty of upside from the deal, says National Bank analyst Rob Sedran.
The combination of Commerce and TD’s existing platform, TD Banknorth, will see TD rank in the top ten for deposit market share in eight states in the U.S., including New York, New Jersey and Massachusetts. It also increases TD’s existing branch platform from 626 branches to 1,071 branches, and positions the bank to do more deals.
“As a result of this larger footprint, future acquisitions are more likely to carry expense synergies, allowing TD to compete for assets on a more equal footing with the large U.S. banks,” Mr. Sedran said in a note.
The National Bank analyst also points out that TD appears to be committed to Commerce’s high-service level culture — what executives call the “wow” factor — which is a strong source of competitive advantage. The bank has already done a lot to bring Banknorth up to the high-service level model, he notes. Also, although TD now has more at stake in the U.S., it is mostly located in the northeast, where recent negative trends have not been as dramatic as in other parts of the country.
TD’s capital position is looking tight after the Commerce deal, but unlike its Canadian rivals, “the fact TD’s balance sheet has been stretched not by writedowns and losses, but by deployment, is a crucial distinction,” Mr. Sedran said.
Although all the Canadian banks have suffered a fairly lacklustre performance so far this year, that outlook could brighten in 2009 for TD at least. If TD hits or even beats its targeted earnings from the U.S. of $1.2-billion in 2009, there is potential upside to earnings estimates, Mr. Sedran said.
National Bank rates TD “outperform” with a $77.00 target price.
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Financial Post, Janet Whitman, 21 June 2008
Commerce Bank customer Corey Singer was a little worried when he heard Toronto-Dominion Bank was taking over. But he soon got some reassurance after the newly named TD Commerce sent him a letter and an e-mail saying his bank-- which has built up one of the most powerful customer-centric U. S. brands with its free red lollipops, coin-counting machines and Sunday hours -- won't be changing.
"I trust Commerce," Mr. Singer, who works in public relations, said one recent evening outside a Commerce branch in Manhattan's East Village. "It appears that all of the major benefits are going to be the same--at least I hope."
Investors and analysts aren't so sure.
Since Cherry Hill, N. J.-based Commerce Bancorp agreed to accept a US$8.5-billion takeover offer from TD in October, the chief concern among analysts and investors has been whether the charismatic, customer-first culture at Commerce will slip.
"The $64,000 question of the Commerce transaction is what percentage of customers are at risk of losing should they scale back certain services to make an attempt at lowering expenses," said Gerard Cassidy, an analyst with Royal Bank's RBC Capital in Portland, Me. "Instead of opening up at 8 in the morning to capture commuters, they could, in certain locations, say now we're opening at 9:30. It's really a balancing act: how to increase the profitability of Commerce while at the same time lowering costs and not alienating their customer base."
Analysts don't doubt TD will be looking to cut costs.
For every dollar it takes in, Commerce lavishes around 75¢ on its customers. TD, which has built up a strong reputation for customer service in Canada since its 2000 acquisition of Canada Trust, spends only about 50¢.
Ed Clark, TD chief executive, and Bharat Masrani, TD Commerce CEO, acknowledged at TD's annual investor day in suburban New Jersey on Thursday that expenses at Commerce are high.
But they added that the free ballpoint pens, lollipops and dog biscuits handed out at the Commerce branches account for very little of that spending.
A big chunk of the expenses goes toward opening new branches, which, down the road, should fuel profits.
Aggressive growth has been a cornerstone of Commerce Bancorp's success since Vernon Hill II founded the bank in 1973 at the age of 27.
Mr. Hill, who owned Burger King retail franchises and modelled the bank on retail outlets such as Starbucks and Home Depot, had expanded to 470 branches before he was ousted last year amid a scandal over regulatory scrutiny involving deals with his family members and other company insiders.
Speaking with reporters following the investor meeting, Mr. Clark and Mr. Masrani said they'd be loath to slow the pace of opening new branches.
"If we stopped new branch growth, we could get our expenses way down, but that's not our strategy," said Mr. Masrani. "Commerce has shown it can go into markets and take share."
The executives pointed to the bank's foray into Manhattan's Chinatown as an example. When Commerce opened in the neighbourhood, it gave away rice cookers and offered 7,500 safety deposit boxes built around the number eight, considered a lucky number by many Chinese. Commerce opened a whopping 10,000 accounts there in the first month, a rate unheard of in the U. S. banking business.
The TD executives noted that they've already found a way to lower costs considerably -- without skimping on services -- by spending 25% less money on building each new Commerce branch.
"We can source materials cheaper and we've modified certain aspects," said Mr. Masrani.
The executives also said they can improve profitability at Commerce by selling new services to customers at higher profit margins.
Throughout Thursday's meeting, which included a tour of a local bank and call centre and five hours of powerpoint presentations, executives took pains to assure analysts and investors that they see the value in protecting and expanding the "wow-the-customer" cul-ture at Commerce. The bank's slogan, "America's Most Convenient Bank," is "not just a tagline," said Mr. Masrani. "It is the essence of our brand and who we are as a company."
TD, which began its foray into U. S. retail banking in 2005 when it took a stake in Banknorth, faces a lot more competition down here than in Canada, where five banks dominate the landscape.
Nevertheless, TD executives said they expect to dominate the "hassle-free" convenience banking space from Maine to Florida when its 1,100 Commerce and Banknorth branches are converted to the TD Commerce brand in 2009.
"As you well know, in the financial-services industry, products and price can be matched in a millisecond," Mr. Masrani told the dozens of investors and analysts gathered for the investor day at "Commerce University, " a training ground for bank employees in Mt. Laurel, N. J. "But providing a legendary 'wow' customer experience -- founded on unparalleled convenience -- cannot be easily replicated by our competitors who simply do not have the locations we do, the customer conveniences we offer, the people we have, or, frankly, the hours we keep -- including seven-day banking across much of our network."
This year, TD plans to replace the prominent red "C" logo at Commerce with its new green TD Commerce colour scheme. The TK Banknorth branches will be converted next year.
The rebranding effort hasn't come without hiccups.
In parts of Massachusetts, a federal judge blocked some Banknorth branches from switching to the TD Commerce Bank name after another Commerce bank -- Commerce Bank & Trust Co. -- filed a lawsuit arguing the name change would confuse customers.
Beyond the dozen branches held up in the legal spat, the naming rights of the sports arena where the Boston Bruins and Celtics play is in limbo. The arena, sponsored by TD Commerce, is currently called TD Banknorth Garden.
Mr. Masrani said the dispute is giving him more grey hair. "Our name is TD Commerce. It has the globally known TD shield in front of it. We think that's a significant differentiator."
Commerce Bank customer Corey Singer was a little worried when he heard Toronto-Dominion Bank was taking over. But he soon got some reassurance after the newly named TD Commerce sent him a letter and an e-mail saying his bank-- which has built up one of the most powerful customer-centric U. S. brands with its free red lollipops, coin-counting machines and Sunday hours -- won't be changing.
"I trust Commerce," Mr. Singer, who works in public relations, said one recent evening outside a Commerce branch in Manhattan's East Village. "It appears that all of the major benefits are going to be the same--at least I hope."
Investors and analysts aren't so sure.
Since Cherry Hill, N. J.-based Commerce Bancorp agreed to accept a US$8.5-billion takeover offer from TD in October, the chief concern among analysts and investors has been whether the charismatic, customer-first culture at Commerce will slip.
"The $64,000 question of the Commerce transaction is what percentage of customers are at risk of losing should they scale back certain services to make an attempt at lowering expenses," said Gerard Cassidy, an analyst with Royal Bank's RBC Capital in Portland, Me. "Instead of opening up at 8 in the morning to capture commuters, they could, in certain locations, say now we're opening at 9:30. It's really a balancing act: how to increase the profitability of Commerce while at the same time lowering costs and not alienating their customer base."
Analysts don't doubt TD will be looking to cut costs.
For every dollar it takes in, Commerce lavishes around 75¢ on its customers. TD, which has built up a strong reputation for customer service in Canada since its 2000 acquisition of Canada Trust, spends only about 50¢.
Ed Clark, TD chief executive, and Bharat Masrani, TD Commerce CEO, acknowledged at TD's annual investor day in suburban New Jersey on Thursday that expenses at Commerce are high.
But they added that the free ballpoint pens, lollipops and dog biscuits handed out at the Commerce branches account for very little of that spending.
A big chunk of the expenses goes toward opening new branches, which, down the road, should fuel profits.
Aggressive growth has been a cornerstone of Commerce Bancorp's success since Vernon Hill II founded the bank in 1973 at the age of 27.
Mr. Hill, who owned Burger King retail franchises and modelled the bank on retail outlets such as Starbucks and Home Depot, had expanded to 470 branches before he was ousted last year amid a scandal over regulatory scrutiny involving deals with his family members and other company insiders.
Speaking with reporters following the investor meeting, Mr. Clark and Mr. Masrani said they'd be loath to slow the pace of opening new branches.
"If we stopped new branch growth, we could get our expenses way down, but that's not our strategy," said Mr. Masrani. "Commerce has shown it can go into markets and take share."
The executives pointed to the bank's foray into Manhattan's Chinatown as an example. When Commerce opened in the neighbourhood, it gave away rice cookers and offered 7,500 safety deposit boxes built around the number eight, considered a lucky number by many Chinese. Commerce opened a whopping 10,000 accounts there in the first month, a rate unheard of in the U. S. banking business.
The TD executives noted that they've already found a way to lower costs considerably -- without skimping on services -- by spending 25% less money on building each new Commerce branch.
"We can source materials cheaper and we've modified certain aspects," said Mr. Masrani.
The executives also said they can improve profitability at Commerce by selling new services to customers at higher profit margins.
Throughout Thursday's meeting, which included a tour of a local bank and call centre and five hours of powerpoint presentations, executives took pains to assure analysts and investors that they see the value in protecting and expanding the "wow-the-customer" cul-ture at Commerce. The bank's slogan, "America's Most Convenient Bank," is "not just a tagline," said Mr. Masrani. "It is the essence of our brand and who we are as a company."
TD, which began its foray into U. S. retail banking in 2005 when it took a stake in Banknorth, faces a lot more competition down here than in Canada, where five banks dominate the landscape.
Nevertheless, TD executives said they expect to dominate the "hassle-free" convenience banking space from Maine to Florida when its 1,100 Commerce and Banknorth branches are converted to the TD Commerce brand in 2009.
"As you well know, in the financial-services industry, products and price can be matched in a millisecond," Mr. Masrani told the dozens of investors and analysts gathered for the investor day at "Commerce University, " a training ground for bank employees in Mt. Laurel, N. J. "But providing a legendary 'wow' customer experience -- founded on unparalleled convenience -- cannot be easily replicated by our competitors who simply do not have the locations we do, the customer conveniences we offer, the people we have, or, frankly, the hours we keep -- including seven-day banking across much of our network."
This year, TD plans to replace the prominent red "C" logo at Commerce with its new green TD Commerce colour scheme. The TK Banknorth branches will be converted next year.
The rebranding effort hasn't come without hiccups.
In parts of Massachusetts, a federal judge blocked some Banknorth branches from switching to the TD Commerce Bank name after another Commerce bank -- Commerce Bank & Trust Co. -- filed a lawsuit arguing the name change would confuse customers.
Beyond the dozen branches held up in the legal spat, the naming rights of the sports arena where the Boston Bruins and Celtics play is in limbo. The arena, sponsored by TD Commerce, is currently called TD Banknorth Garden.
Mr. Masrani said the dispute is giving him more grey hair. "Our name is TD Commerce. It has the globally known TD shield in front of it. We think that's a significant differentiator."
__________________________________________________________
RBC Capital Markets, 20 June 2008
Integration on track
The integration of Commerce Bancorp is underway with the leadership team announced and legal entities consolidated under one national charter. The bank has also started to close overlapping branches while continuing to open others in optimal locations, and still intends to meet its systems conversion target in H2/09 and cost synergy target of $310 million.
The bank reiterated its guidance for TD Commerce to contribute at least $750 million to earnings in 2008 and $1.2 billion in 2009 despite the tough economic environment and an expected increase in loan losses. Initiatives to grow earnings from the Q3/08 estimate of $250 million include organic balance sheet growth, improved spreads on loans and securities, expense initiatives and synergies from integrating TD Banknorth and Commerce. Total U.S. earnings currently make up about 20% of total earnings, and management expects this to grow to up to 25-30% of total earnings in upcoming years.
A smooth integration is key to TD's stock price since our forecast Tier 1 ratio of 8.1% at the end of Q4/08 gives TD very little room for slippage against profitability estimates, particularly when considering ratios based on tangible equity. TD's Tier 1 ratio of 9.1% is lowest of its peer group and the excess capital the bank generates between now and Q4/08 will be offset by a negative impact of 1.3% on the bank's Tier 1 ratio (given changes to the way the bank accounts for its investment in TD Ameritrade). However, if the year goes as management plans for TD, then we believe it can improve the ratio quickly after Q4/08 because TD generates about 20-30 basis points of Tier 1 capital per quarter.
Management reiterated that its #1 priority is integration related, but that a compelling acquisition would be considered. We believe this is reflective of the environment in U.S. banking, which may lead to banks being sold at attractive prices. We do not believe that TD could execute two integrations at the same time and any acquired bank would have to be left alone for a few years while the integration of TD Banknorth and Commerce Bancorp continues. We understand management's reluctance to categorically state that it will not participate in acquisitions, but do not believe that a transaction would be initially well received by investors.
We are still concerned about U.S. credit quality
TD Commerce has not yet seen major problems in its loan portfolio as some other U.S. banks have, and management believes that TD Commerce will be a positive outlier relative to peers. TD's management acknowledged the worsening economic environment but believes that it has adequate reserve coverage, and even if loan losses were higher, it would still expect to meet its earnings guidance unless the U.S. entered into a deep recession.
We are not as concerned about TD's loan losses as we are with other banks in the U.S., but we expect credit quality deterioration in the U.S. will continue especially in HELOCs, credit cards, automobile lending, construction lending, commercial real estate and leveraged lending.
• We believe TD's U.S. exposures (26% of total loans) are worth paying attention to, but we believe that issues are more likely to arise in 2009 than 2008 as TD fair valued Commerce Bancorp's loan book as at the acquisition closing date. The bank would have had a fair bit of visibility on potential near term impairments, in our view, and would have fair valued the loans that had the potential to become impaired in the near term.
• TD has been a positive outlier so far from a credit perspective, which management attributes to a focus on in-market lending, underwriting to hold, not participating in loans originated by brokers, avoiding the sub-prime market and exotic types of real estate lending, not having had to "reach for assets" to generate earnings growth since deposit growth was more rapid than average, and being located in a geographic segment that has held up better than other areas of the U.S.
• Provisions for credit losses have so far exceeded write-offs.
• Non-performing loans of 68 bps in Q1/08 compared to an average of 116 bps for retail banks with assets of $50-$250 billion while non-performing assets of 33 bps compared to an average of 83 bps. Both measures improved slightly from Q4/07 to Q1/08, although we expect deterioration in the upcoming year given the moribund state of the U.S. economy and broadening of credit losses to sectors other than those tied directly to residential real estate..
• The U.S. commercial lending portfolio has $29.7 billion outstanding as at March 31, 2008.
• Management believes it has adequate reserves as long as the U.S. avoids a deep recession.
• Geographic exposures are concentrated in the U.S. Northeast (Massachusetts 22%, New Jersey 18%, Northern New England 17%, Metro New York 14% and Metro Pennsylvania 14%) with only 2% exposure in Southeast Florida.
• Sector exposures included Investment real estate (36%, of which appears to be diversified by property type and geography), Manufacturing (8%), Health care (8%, Retail trade (7%), Wholesale (6%), Finance/Insurance (5%) and Other.
• The U.S. consumer lending portfolio has $15.9 billion outstanding as at March 31, 2008.
• The average FICO score is 745, and the bank states that rising delinquencies are within acceptable levels.
• The geographic distribution is mixed in the Northeast with only 1% in Florida.
• The product mix is 31% home equity 2nd lien, 30% residential mortgage, 17% home equity 1st lien, 14% indirect auto, 4% credit card and 4% other.
• Average loan to value in the HELOC portfolio is 62% while it is 67% in the first mortgage portfolio.
TD will maintain the core attributes that made Commerce Bancorp successful
Management spent a considerable amount of time conveying the importance of preserving many of the attributes that made Commerce Bancorp successful and taking advantage of its convenience advantage. Prior to the merger, both TD Bank and Commerce Bancorp had "owned the convenience space" and we expect them to leverage the brand further to maximize customer loyalty and to grow business.
• The high standards for customer service lead to an expensive model to execute but it leads to a high level of employee engagement and customer satisfaction, and ultimately attractive profitability in mature branches.
• Commerce Bancorp has ranked first in JD Power's customer satisfaction survey in recent years, and TD Banknorth's customer surveys showed satisfaction results that were comparable to TD Canada Trust.
• Commerce Bancorp has higher deposits per branch than its peers ($110 million versus an average of $71 million in spite of having many "immature" stores in its network while deposit growth has also outpaced the competition).
Successful features that the bank intends to maintain and leverage include:
• Longer branch hours and open 7 days per week / 360 days per year in many metro markets;
• Timely service on the phone and in the branch (Commerce completes 6,095 monthly transactions per teller, almost double its peers while its call centers are less automated than the competition's);
• Fast turnaround on account openings including on site issuing of debit cards;
• A refined product suite with fees that are lower than the competition's
• Upgrading legacy TD Banknorth branches with customer friendly designs and in branch services such as penny arcades for free coin counting and a friendly environment for kids and pets. The bank will initially target the branches in areas where there was overlap between Banknorth and Commerce;
• Building distinct "cookie-cutter" retail branches in key metro markets. TD believes it can open 300+ branches in Long Island, Metro Boston and New York/New Jersey, although we believe that the pace of expansion will be muted until the integration of TD Banknorth and Commerce is completed in H2/09. Management stated that 33 stores are set to open in 2008, with another 22 projected in 2009.
TD highlighted multiple growth initiatives
TD management acknowledged the tough operating and economic environment in the U.S., but it does not appear that it will slow down initiatives to add customers and share of wallet. The following are highlights of some opportunities and initiatives underway at TD Commerce.
• The commercial banking group will leverage TD Securities resources by providing new products for legacy Commerce's 150+ clients such as foreign exchange, interest rate derivatives and trade finance. With over 3,000 potential client prospects, it will look to add more debt capital markets, investment banking and private equity products and services. TD has shown that it can successfully bring some of TD Securities' expertise to U.S. banking clients in TD Banknorth.
• The retail banking group is focusing on:
• Cross-platform referrals. For example, insurance referrals, which are not limited by regulatory constraints in the U.S., rose 8% at TD Banknorth after TD introduced new sales practices and incentives, of which 36% were sold products;
• Extended branch hours in the legacy TD Banknorth branches to strengthen the convenience brand. TD Banknorth extended hours in 253 of 580 stores since early 2007, which helped increase the number of chequing accounts by 21,000 versus stores that maintained their operating hours;
• Sales initiatives. In addition to brand and marketing campaigns, TD Commerce is implementing sales revenue tracking to improve employee engagement, and surveys customers to continue improving products and services.
• Management intends on leveraging the best of both Commerce and Banknorth models. For example, penetration of home equity loans are 50% higher for TD Banknorth customers than Commerce Bancorp. The bank has already run pilot programs that showed similar results can be accomplished in Commerce branches. Growing credit cards is also something the bank plans on doing in the early years as a relatively easy way to take advantage of existing customer relationships.
• Retail deposit growth opportunities via new household origination and cross-sell initiatives. TD Banknorth's new household origination rate was 10.7% versus 21.7% at Commerce Bank (November 2006 – 2007). Conversely, the average deposit balance per household at Commerce Bank was $9,459 as at November 2007 versus $19,074 at TD Banknorth. Marrying the deposit growth capabilities of Commerce Bancorp as well as some of the attributes of TD Banknorth, and the maturing of recently opened Commerce Bancorp stores would lead to above-industry deposit growth.
• The business banking group intends to leverage product and distribution in order to grow its customer base and deepen relationships. For example, TD Commerce has a 16% share of 2.2 million potential customers in its footprint and would like to improve penetration to 20%. In addition, opportunity exists to increase the penetration rate of loan balances per business customer (6% penetration at Commerce and 19% at TD Banknorth) and deposit balances per business customer (99% penetration at Commerce and 92% at TD Banknorth). Initiatives to achieve these goals include enrolling more clients in BusinessDirect online banking and streamlining and automating underwriting processes.
• Other divisions such as wealth management, insurance and TD Ameritrade are also working on initiatives to leverage TD Commerce's distribution infrastructure and client relationships.
Valuation
TD (Sector Perform, Average Risk): Our 12-month price target of $69 is based on a price to book methodology. Our P/B target of 1.7x in 12 months is slightly lower than our target for banks given a lower ROE offset by its relatively lower exposure to headline risks and leading domestic retail franchise. It implies an approximate P/E multiple of 10.9x 2009E earnings, compared to the 5-year average forward multiple of 12.2x.
Price Target Impediment
Risks to our price target include the health of the overall economy, sustained deterioration in the capital markets environment and greater than anticipated impact from off-balance sheet commitments. Additional risks include an unexpected acquisition, integration risk with Commerce Bank, TD Ameritrade and TD Banknorth, pricing pressure in the discount brokerage industry, a rising Canadian dollar, litigation risk and a worse than expected impact from Enron-related litigation (although it appears that risk has declined, given a court ruling in another Enron trial).
Company Description
TD Bank Financial Group is Canada's second-largest bank by market capitalization. TD currently has more than 1,110 retail branches in Canada, 1110 branches in the U.S. and 250 retail brokerage offices. Our estimated 2008 earnings mix is as follows: TD Canada Trust (54%), US Personal & Commercial (16%), TD Securities (13%), TD Wealth Management (10%), and TD Ameritrade (7%).
Integration on track
The integration of Commerce Bancorp is underway with the leadership team announced and legal entities consolidated under one national charter. The bank has also started to close overlapping branches while continuing to open others in optimal locations, and still intends to meet its systems conversion target in H2/09 and cost synergy target of $310 million.
The bank reiterated its guidance for TD Commerce to contribute at least $750 million to earnings in 2008 and $1.2 billion in 2009 despite the tough economic environment and an expected increase in loan losses. Initiatives to grow earnings from the Q3/08 estimate of $250 million include organic balance sheet growth, improved spreads on loans and securities, expense initiatives and synergies from integrating TD Banknorth and Commerce. Total U.S. earnings currently make up about 20% of total earnings, and management expects this to grow to up to 25-30% of total earnings in upcoming years.
A smooth integration is key to TD's stock price since our forecast Tier 1 ratio of 8.1% at the end of Q4/08 gives TD very little room for slippage against profitability estimates, particularly when considering ratios based on tangible equity. TD's Tier 1 ratio of 9.1% is lowest of its peer group and the excess capital the bank generates between now and Q4/08 will be offset by a negative impact of 1.3% on the bank's Tier 1 ratio (given changes to the way the bank accounts for its investment in TD Ameritrade). However, if the year goes as management plans for TD, then we believe it can improve the ratio quickly after Q4/08 because TD generates about 20-30 basis points of Tier 1 capital per quarter.
Management reiterated that its #1 priority is integration related, but that a compelling acquisition would be considered. We believe this is reflective of the environment in U.S. banking, which may lead to banks being sold at attractive prices. We do not believe that TD could execute two integrations at the same time and any acquired bank would have to be left alone for a few years while the integration of TD Banknorth and Commerce Bancorp continues. We understand management's reluctance to categorically state that it will not participate in acquisitions, but do not believe that a transaction would be initially well received by investors.
We are still concerned about U.S. credit quality
TD Commerce has not yet seen major problems in its loan portfolio as some other U.S. banks have, and management believes that TD Commerce will be a positive outlier relative to peers. TD's management acknowledged the worsening economic environment but believes that it has adequate reserve coverage, and even if loan losses were higher, it would still expect to meet its earnings guidance unless the U.S. entered into a deep recession.
We are not as concerned about TD's loan losses as we are with other banks in the U.S., but we expect credit quality deterioration in the U.S. will continue especially in HELOCs, credit cards, automobile lending, construction lending, commercial real estate and leveraged lending.
• We believe TD's U.S. exposures (26% of total loans) are worth paying attention to, but we believe that issues are more likely to arise in 2009 than 2008 as TD fair valued Commerce Bancorp's loan book as at the acquisition closing date. The bank would have had a fair bit of visibility on potential near term impairments, in our view, and would have fair valued the loans that had the potential to become impaired in the near term.
• TD has been a positive outlier so far from a credit perspective, which management attributes to a focus on in-market lending, underwriting to hold, not participating in loans originated by brokers, avoiding the sub-prime market and exotic types of real estate lending, not having had to "reach for assets" to generate earnings growth since deposit growth was more rapid than average, and being located in a geographic segment that has held up better than other areas of the U.S.
• Provisions for credit losses have so far exceeded write-offs.
• Non-performing loans of 68 bps in Q1/08 compared to an average of 116 bps for retail banks with assets of $50-$250 billion while non-performing assets of 33 bps compared to an average of 83 bps. Both measures improved slightly from Q4/07 to Q1/08, although we expect deterioration in the upcoming year given the moribund state of the U.S. economy and broadening of credit losses to sectors other than those tied directly to residential real estate..
• The U.S. commercial lending portfolio has $29.7 billion outstanding as at March 31, 2008.
• Management believes it has adequate reserves as long as the U.S. avoids a deep recession.
• Geographic exposures are concentrated in the U.S. Northeast (Massachusetts 22%, New Jersey 18%, Northern New England 17%, Metro New York 14% and Metro Pennsylvania 14%) with only 2% exposure in Southeast Florida.
• Sector exposures included Investment real estate (36%, of which appears to be diversified by property type and geography), Manufacturing (8%), Health care (8%, Retail trade (7%), Wholesale (6%), Finance/Insurance (5%) and Other.
• The U.S. consumer lending portfolio has $15.9 billion outstanding as at March 31, 2008.
• The average FICO score is 745, and the bank states that rising delinquencies are within acceptable levels.
• The geographic distribution is mixed in the Northeast with only 1% in Florida.
• The product mix is 31% home equity 2nd lien, 30% residential mortgage, 17% home equity 1st lien, 14% indirect auto, 4% credit card and 4% other.
• Average loan to value in the HELOC portfolio is 62% while it is 67% in the first mortgage portfolio.
TD will maintain the core attributes that made Commerce Bancorp successful
Management spent a considerable amount of time conveying the importance of preserving many of the attributes that made Commerce Bancorp successful and taking advantage of its convenience advantage. Prior to the merger, both TD Bank and Commerce Bancorp had "owned the convenience space" and we expect them to leverage the brand further to maximize customer loyalty and to grow business.
• The high standards for customer service lead to an expensive model to execute but it leads to a high level of employee engagement and customer satisfaction, and ultimately attractive profitability in mature branches.
• Commerce Bancorp has ranked first in JD Power's customer satisfaction survey in recent years, and TD Banknorth's customer surveys showed satisfaction results that were comparable to TD Canada Trust.
• Commerce Bancorp has higher deposits per branch than its peers ($110 million versus an average of $71 million in spite of having many "immature" stores in its network while deposit growth has also outpaced the competition).
Successful features that the bank intends to maintain and leverage include:
• Longer branch hours and open 7 days per week / 360 days per year in many metro markets;
• Timely service on the phone and in the branch (Commerce completes 6,095 monthly transactions per teller, almost double its peers while its call centers are less automated than the competition's);
• Fast turnaround on account openings including on site issuing of debit cards;
• A refined product suite with fees that are lower than the competition's
• Upgrading legacy TD Banknorth branches with customer friendly designs and in branch services such as penny arcades for free coin counting and a friendly environment for kids and pets. The bank will initially target the branches in areas where there was overlap between Banknorth and Commerce;
• Building distinct "cookie-cutter" retail branches in key metro markets. TD believes it can open 300+ branches in Long Island, Metro Boston and New York/New Jersey, although we believe that the pace of expansion will be muted until the integration of TD Banknorth and Commerce is completed in H2/09. Management stated that 33 stores are set to open in 2008, with another 22 projected in 2009.
TD highlighted multiple growth initiatives
TD management acknowledged the tough operating and economic environment in the U.S., but it does not appear that it will slow down initiatives to add customers and share of wallet. The following are highlights of some opportunities and initiatives underway at TD Commerce.
• The commercial banking group will leverage TD Securities resources by providing new products for legacy Commerce's 150+ clients such as foreign exchange, interest rate derivatives and trade finance. With over 3,000 potential client prospects, it will look to add more debt capital markets, investment banking and private equity products and services. TD has shown that it can successfully bring some of TD Securities' expertise to U.S. banking clients in TD Banknorth.
• The retail banking group is focusing on:
• Cross-platform referrals. For example, insurance referrals, which are not limited by regulatory constraints in the U.S., rose 8% at TD Banknorth after TD introduced new sales practices and incentives, of which 36% were sold products;
• Extended branch hours in the legacy TD Banknorth branches to strengthen the convenience brand. TD Banknorth extended hours in 253 of 580 stores since early 2007, which helped increase the number of chequing accounts by 21,000 versus stores that maintained their operating hours;
• Sales initiatives. In addition to brand and marketing campaigns, TD Commerce is implementing sales revenue tracking to improve employee engagement, and surveys customers to continue improving products and services.
• Management intends on leveraging the best of both Commerce and Banknorth models. For example, penetration of home equity loans are 50% higher for TD Banknorth customers than Commerce Bancorp. The bank has already run pilot programs that showed similar results can be accomplished in Commerce branches. Growing credit cards is also something the bank plans on doing in the early years as a relatively easy way to take advantage of existing customer relationships.
• Retail deposit growth opportunities via new household origination and cross-sell initiatives. TD Banknorth's new household origination rate was 10.7% versus 21.7% at Commerce Bank (November 2006 – 2007). Conversely, the average deposit balance per household at Commerce Bank was $9,459 as at November 2007 versus $19,074 at TD Banknorth. Marrying the deposit growth capabilities of Commerce Bancorp as well as some of the attributes of TD Banknorth, and the maturing of recently opened Commerce Bancorp stores would lead to above-industry deposit growth.
• The business banking group intends to leverage product and distribution in order to grow its customer base and deepen relationships. For example, TD Commerce has a 16% share of 2.2 million potential customers in its footprint and would like to improve penetration to 20%. In addition, opportunity exists to increase the penetration rate of loan balances per business customer (6% penetration at Commerce and 19% at TD Banknorth) and deposit balances per business customer (99% penetration at Commerce and 92% at TD Banknorth). Initiatives to achieve these goals include enrolling more clients in BusinessDirect online banking and streamlining and automating underwriting processes.
• Other divisions such as wealth management, insurance and TD Ameritrade are also working on initiatives to leverage TD Commerce's distribution infrastructure and client relationships.
Valuation
TD (Sector Perform, Average Risk): Our 12-month price target of $69 is based on a price to book methodology. Our P/B target of 1.7x in 12 months is slightly lower than our target for banks given a lower ROE offset by its relatively lower exposure to headline risks and leading domestic retail franchise. It implies an approximate P/E multiple of 10.9x 2009E earnings, compared to the 5-year average forward multiple of 12.2x.
Price Target Impediment
Risks to our price target include the health of the overall economy, sustained deterioration in the capital markets environment and greater than anticipated impact from off-balance sheet commitments. Additional risks include an unexpected acquisition, integration risk with Commerce Bank, TD Ameritrade and TD Banknorth, pricing pressure in the discount brokerage industry, a rising Canadian dollar, litigation risk and a worse than expected impact from Enron-related litigation (although it appears that risk has declined, given a court ruling in another Enron trial).
Company Description
TD Bank Financial Group is Canada's second-largest bank by market capitalization. TD currently has more than 1,110 retail branches in Canada, 1110 branches in the U.S. and 250 retail brokerage offices. Our estimated 2008 earnings mix is as follows: TD Canada Trust (54%), US Personal & Commercial (16%), TD Securities (13%), TD Wealth Management (10%), and TD Ameritrade (7%).
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Scotia Capital, 20 June 2008
TD Commerce Bank Integration On Track
• The TD Commerce Bank Investor Day was positive as the bank reaffirmed its earnings target from TD Commerce Bank at $750 million and $1,200 million for fiscal 2008 and 2009.
• The bank indicated that integration is on track. Cost synergies of $310 million were affirmed.
Systems conversion is scheduled for the last half of 2009.
• Multiple state and federal charters were merged into one national charter. The bank emphasized its focus on successfully integrating its two legacy brands into TD Commerce Bank (green).
Strong Market Presence in Attractive Markets - Strong Brand
• TD Commerce Bank highlighted its strong market presence in attractive markets of metropolitan NY, Boston and Philadelphia. The bank's competitive advantage is branch location, branch design, customer service and brand.
• High customer service is driven by efficient tellers, free services such as a Penny Arcade, branches open seven days a week and branch experience.
• The bank is positioned for organic growth with market turmoil providing growth opportunities.
Minimal Real Estate Exposure Outside North-East U.S.
• Real estate exposure is 98% in the North-East U.S. and only 2% in Florida. The bank expects to be a positive outlier in credit quality and loan losses. Very little lending was done out of the bank's footprint.
Recommendation
• The Investor Day tone was very positive. We believe TD Commerce Bank has positioned itself for growth and has a high probability of being successful in the U.S. market.
• Our 2008 and 2009 earnings estimates remain unchanged at $5.70 per share and $6.60 per share, respectively. Our share price target is unchanged at $95 per share representing 16.7x our 2008 earnings estimate.
• We maintain a 2-Sector Perform on share of TD.
TD Commerce Bank Integration On Track
• The TD Commerce Bank Investor Day was positive as the bank reaffirmed its earnings target from TD Commerce Bank at $750 million and $1,200 million for fiscal 2008 and 2009.
• The bank indicated that integration is on track. Cost synergies of $310 million were affirmed.
Systems conversion is scheduled for the last half of 2009.
• Multiple state and federal charters were merged into one national charter. The bank emphasized its focus on successfully integrating its two legacy brands into TD Commerce Bank (green).
Strong Market Presence in Attractive Markets - Strong Brand
• TD Commerce Bank highlighted its strong market presence in attractive markets of metropolitan NY, Boston and Philadelphia. The bank's competitive advantage is branch location, branch design, customer service and brand.
• High customer service is driven by efficient tellers, free services such as a Penny Arcade, branches open seven days a week and branch experience.
• The bank is positioned for organic growth with market turmoil providing growth opportunities.
Minimal Real Estate Exposure Outside North-East U.S.
• Real estate exposure is 98% in the North-East U.S. and only 2% in Florida. The bank expects to be a positive outlier in credit quality and loan losses. Very little lending was done out of the bank's footprint.
Recommendation
• The Investor Day tone was very positive. We believe TD Commerce Bank has positioned itself for growth and has a high probability of being successful in the U.S. market.
• Our 2008 and 2009 earnings estimates remain unchanged at $5.70 per share and $6.60 per share, respectively. Our share price target is unchanged at $95 per share representing 16.7x our 2008 earnings estimate.
• We maintain a 2-Sector Perform on share of TD.
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Reuters, Lynne Olver, 19 June 2008
TD Commerce Bank, the U.S. unit of Toronto-Dominion Bank, has its hands full in integrating its recent Commerce Bancorp purchase, but would be "foolish" to ignore potential acquisitions along the East Coast, its chief executive said on Thursday.
"Obviously integration is our top priority," Bharat Masrani, president and CEO of TD Commerce Bank, told analysts at an investor briefing in New Jersey. "We're busy right now."
But if a "compelling" acquisition opportunity popped up because of turmoil in the U.S. banking market, "we'd be foolish not to look at it seriously," Masrani said.
He noted that this was the same answer he had given a year earlier, but stressed that TD has "a big integration" on its plate -- merging New Jersey-based Commerce Bancorp, which it acquired in March, into TD Banknorth, creating a larger retail bank with 1,100 U.S. branches, or "stores."
"From my perspective, in the U.S. we have now got scale, we think we can expand the model we have," Masrani said.
Ed Clark, president and chief executive of Canadian parent TD Bank, said that asset quality would be a big worry in any U.S. acquisition right now.
"I'm more inclined to see the knife bounce off the floor than try to catch it before it hits the floor, because I'm not a hedge fund manager," Clark said.
He also said TD would not go to the effort of building a customer-focused U.S. bank and then "dismantle it" by adding a new culture that did not fit.
Asked whether TD would try to increase its stake in 40 percent owned discount brokerage TD Ameritrade, Clark said it was "probably not" economically attractive to do so, given the capital the bank would have to put up
He called the existing Ameritrade set-up "a wonderful relationship" that was working well.
And executives said there is plenty of scope to cross-sell products and services between customers of Ameritrade and TD Commerce, to the benefit of both businesses.
Bank clients will be encouraged to open Ameritrade brokerage accounts, while Ameritrade customers will be encouraged to open new deposit accounts at the bank.
"We really believe there's a significant opportunity by leveraging the scale and distribution strengths of each other's businesses to reach these new audiences," said David Boone, TD Commerce's corporate development executive.
TD Commerce will put Ameritrade kiosks in various Boston-area branches as a pilot project this month.
During the investor briefing, executives highlighted TD Commerce's customer-friendly ways, including long branch hours, Sunday openings in urban areas, free pens and piggy banks, pet treats, and a coin-counting service known as Penny Arcade.
TD Commerce Bank, the U.S. unit of Toronto-Dominion Bank, has its hands full in integrating its recent Commerce Bancorp purchase, but would be "foolish" to ignore potential acquisitions along the East Coast, its chief executive said on Thursday.
"Obviously integration is our top priority," Bharat Masrani, president and CEO of TD Commerce Bank, told analysts at an investor briefing in New Jersey. "We're busy right now."
But if a "compelling" acquisition opportunity popped up because of turmoil in the U.S. banking market, "we'd be foolish not to look at it seriously," Masrani said.
He noted that this was the same answer he had given a year earlier, but stressed that TD has "a big integration" on its plate -- merging New Jersey-based Commerce Bancorp, which it acquired in March, into TD Banknorth, creating a larger retail bank with 1,100 U.S. branches, or "stores."
"From my perspective, in the U.S. we have now got scale, we think we can expand the model we have," Masrani said.
Ed Clark, president and chief executive of Canadian parent TD Bank, said that asset quality would be a big worry in any U.S. acquisition right now.
"I'm more inclined to see the knife bounce off the floor than try to catch it before it hits the floor, because I'm not a hedge fund manager," Clark said.
He also said TD would not go to the effort of building a customer-focused U.S. bank and then "dismantle it" by adding a new culture that did not fit.
Asked whether TD would try to increase its stake in 40 percent owned discount brokerage TD Ameritrade, Clark said it was "probably not" economically attractive to do so, given the capital the bank would have to put up
He called the existing Ameritrade set-up "a wonderful relationship" that was working well.
And executives said there is plenty of scope to cross-sell products and services between customers of Ameritrade and TD Commerce, to the benefit of both businesses.
Bank clients will be encouraged to open Ameritrade brokerage accounts, while Ameritrade customers will be encouraged to open new deposit accounts at the bank.
"We really believe there's a significant opportunity by leveraging the scale and distribution strengths of each other's businesses to reach these new audiences," said David Boone, TD Commerce's corporate development executive.
TD Commerce will put Ameritrade kiosks in various Boston-area branches as a pilot project this month.
During the investor briefing, executives highlighted TD Commerce's customer-friendly ways, including long branch hours, Sunday openings in urban areas, free pens and piggy banks, pet treats, and a coin-counting service known as Penny Arcade.
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Reuters, Phil Wahba, 17 June 2008
TD Ameritrade Holding Corp on Tuesday said it expected earnings in the current quarter to be at the high end of its previous forecast, as the discount brokerage also reported that average daily trading volume in May had risen by 3 percent from the previous month.
TD Ameritrade had previously said it expected to earn 27 cents to 33 cents a share in the quarter, up slightly from 26 cents in the year-ago period.
Growth in the company's monthly volume numbers was in line with that reported by Charles Schwab Corp last week. That led some analysts to attribute the gains, which came amid stagnant equity markets, to resilient retail investor trends than efforts by specific retail brokerages.
Analysts had expected industry volumes to decline in April and May with lower market volatility.
TD Ameritrade has said that asset management is now the focus of its business development. It reported client assets rose 9 percent in May from the previous year to $326 billion, a gain of 2 percent over April. Some of that growth came from its acquisition of Fiserv, completed in February.
In May, average fee-based investment balances shot up 55 percent to $79.2 million from a year ago.
Analysts say developing asset management is more important for the company's growth prospects than trading volumes.
"The market for online equity retail trading is not a high growth market given high penetration rates and Ameritrade needs to evolve its model more in terms of serving the investor versus being a place to trade," said Michael Hecht, an analyst with Banc of America Securities.
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TD Ameritrade Holding Corp on Tuesday said it expected earnings in the current quarter to be at the high end of its previous forecast, as the discount brokerage also reported that average daily trading volume in May had risen by 3 percent from the previous month.
TD Ameritrade had previously said it expected to earn 27 cents to 33 cents a share in the quarter, up slightly from 26 cents in the year-ago period.
Growth in the company's monthly volume numbers was in line with that reported by Charles Schwab Corp last week. That led some analysts to attribute the gains, which came amid stagnant equity markets, to resilient retail investor trends than efforts by specific retail brokerages.
Analysts had expected industry volumes to decline in April and May with lower market volatility.
TD Ameritrade has said that asset management is now the focus of its business development. It reported client assets rose 9 percent in May from the previous year to $326 billion, a gain of 2 percent over April. Some of that growth came from its acquisition of Fiserv, completed in February.
In May, average fee-based investment balances shot up 55 percent to $79.2 million from a year ago.
Analysts say developing asset management is more important for the company's growth prospects than trading volumes.
"The market for online equity retail trading is not a high growth market given high penetration rates and Ameritrade needs to evolve its model more in terms of serving the investor versus being a place to trade," said Michael Hecht, an analyst with Banc of America Securities.
