12 November 2008

TD Bank to Boost Stake in TD Ameritrade

Reuters, Jonathan Spicer, 12 November 2008

Toronto-Dominion Bank will increase its stake in online broker TD Ameritrade Holding Corp to 45 percent from 40 percent, the chief executive of the Canadian bank said on Wednesday.

"We will go to 45 percent," Ed Clark, speaking at the Reuters Global Finance Summit, said of TD Bank's option to boost its stake by January.

When asked if TD Bank would eventually take full control of the discount brokerage, Clark said it is unlikely that Joseph Ricketts, the founder of Ameritrade who with his family owns about 22 percent, would sell.

"(Ricketts) likes his stake in the company, and I don't think he's given us any indication that he would want to sell," Clark said.

Both Clark and Ricketts sit on TD Ameritrade's board. Ricketts stepped down as chairman in September, and remains a director of the Omaha, Nebraska-based company he founded in 1971.

Jonathan Harding, an assistant to Ricketts, told Reuters the director had no comment on selling his stake in TD Ameritrade.

Ameritrade became TD Ameritrade when it acquired TD Waterhouse USA in 2006. It was then that TD Bank received a stake in TD Ameritrade.

The CEO of TD Ameritrade, Fred Tomczyk, said at a separate conference earlier Wednesday that although the company is "aggressive" about its prospects for making acquisitions, it will be cautious, given the difficult market conditions.

"We will not try to maximize quarterly earnings per share through this cycle," Tomczyk told a conference in New York.

The brokerage has been shifting its business model to rely less on trading and more on asset management -- in line with its closest rival, Charles Schwab Corp .

Tomczyk said TD Ameritrade would look for acquisitions before using cash to pay down debt.

TD Bank, Canada's second-biggest bank, holds five seats on TD Ameritrade's board.
Bloomberg, Sean B. Pasternak, 12 November 2008

Toronto-Dominion Bank, Canada's second-largest lender by assets, would consider acquisitions in the U.S. that don't involve ``significant'' asset risk, Chief Executive Officer Edmund Clark said.

``If we could find a bank that's in our space that we could buy for less than what it would cost to build new branches there, and doesn't involve significant asset risk, then we're interested,'' Clark, 61, said today in an interview in New York.

Toronto-Dominion has spent more than $15 billion over the past four years to expand in the U.S., including the acquisitions of Portland, Maine-based TD Banknorth and Cherry Hill, New Jersey-based Commerce Bancorp Inc.

``If things come up, then we'll buy, if they don't, then we're content to sit out the market,'' he said.

Clark said Toronto-Dominion doesn't need acquisitions to grow, and can increase its network of about 1,100 U.S. branches by opening new outlets on the east coast, including Florida.

``I look at Florida and say `no one wiped out the deposit base in Florida, what they wiped out was the asset base,''' Clark said. ``If you can get in there and build new branches and gather up deposits, that's a tremendous place to be.''

Toronto-Dominion is in a position to buy because it's the only large Canadian bank that has avoided debt writedowns in the financial crisis. The bank unloaded a structured products business in 2005, which included collateralized debt obligations and interest-rate derivatives.

Canada's five other main banks by assets have written down C$11.6 billon since the third quarter of 2007. Banks worldwide have recorded $704.6 billion in writedowns and credit losses since last year, according to Bloomberg data.

Clark said the financial crisis has ``terrified'' U.S. consumers, and he said he expects a sharp economic downturn.

``We've terrified the consumer, we've caused the equity in their house to disappear, and we've now added on investment losses to that,'' Clark said. ``You've got to think the U.S. consumer's going to go on strike until they feel better.''

Toronto-Dominion fell C$2.91, or 5.2 percent, to C$52.95 at 4:16 p.m. in trading on the Toronto Stock Exchange. The stock has fallen 24 percent this year, compared with a 22 percent decline on the nine-member S&P/TSX Banks Index.
Reuters, 12 November 2008

Canadian banks should be able to get through the financial crisis without relying on the kind of government aid that is being deployed to financial institutions in other countries, Toronto-Dominion Bank's top executive said on Wednesday.

While the Canadian government just announced an increase in the size of its bank mortgage buyback program -- boosting the program to C$75 billion from C$25 billion -- the federal government is actually making money on that program, TD Bank President and Chief Executive Ed Clark said.

"This is a pretty good deal from the government's point of view," since it gets paid to buy mortgages from banks that a government agency has already guaranteed, he said.

Canadian banks, with strong balance sheets and healthy mortgages on their books, are using the government buyback program to fund themselves at rates comparable with, or better than, what banks elsewhere in the world can get, he said.

Clark was speaking at a financial conference in New York organized by Merrill Lynch.

"We would like to get through this crisis without government bailouts, there have been no bailouts of the Canadian banking system," Clark said.

TD, which has grown substantially in the United States through acquisitions in recent years, does not have to make another U.S. purchase to fulfill its business objectives, he said.

The bank acquired New Jersey-based Commerce Bancorp earlier this year, and privatized TD Banknorth in 2007.

"We can grow organically, if you take a look at the average bank in the U.S. and strip out acquisitions, it's not obvious that there's a lot of organic growth there," Clark said.

But TD, Canada's second largest bank, would consider U.S. acquisitions if certain conditions were met -- that is, if a potential deal were in its existing East Coast footprint, if it were cheaper to buy than build out its branch network, and if it involved minimal asset risk.

"You're not going to see us suddenly move up the risk curve in this environment," Clark said.

He also said it seems "inevitable" that a U.S. recession will spread to Canada, where the bank's loan book is more retail oriented. TD expects provisions for credit losses to rise in the next few years, but from a low base, Clark said.
Reuters, Lynne Olver, 12 November 2008

Toronto-Dominion Bank, which is rebranding its recently acquired Commerce Bank branches under the TD logo, wants to keep growing along the U.S. East Coast and has a soft spot for Florida, its chief executive said on Wednesday.

"We would like to grow in Florida. I actually think now's not a bad time to go into Florida," TD Bank President and CEO Ed Clark told the Reuters Finance Summit in New York.

"A couple of years ago was a bad time to go into Florida."

TD Bank, Canada's second largest bank, added branches in Southeast Florida earlier this year when it bought Cherry Hill, New Jersey-based Commerce Bancorp.

The deposit base at banks in Florida "hasn't disappeared," Clark noted, so if one could bulk up into Florida without taking on asset risk, it would be a good time to do so.

He also said the bank would like to keep growing in Washington, Virginia and Maryland.

But the U.S. Midwest and West Coast do not interest TD due to economies of scale, Clark noted.

"Retail is very much, in the end, local, so we'd much rather keep penetrating down into major cities down the East Coast, where we get some brand extension, than to flip over to another part of the country."

If the bank was "scale challenged," Clark said he might have to get up his nerve and venture into other U.S. regions beyond the East Coast, but said that was not the case.

Commerce Bank's model stressing service and convenience works best in urban areas, where people are pressed for time, he said. Middle-class and upper-middle-class household growth is also concentrated in urban areas.

"There's enough cities in the United States down the East Coast to conquer to make us a super growth company for a long period of time."

The company is integrating the Commerce branches with its TD Banknorth network in New England, which will also be rebranded under the TD Bank name. In Canada, the bank's retail operations are known as TD Canada Trust.
Wall Street Journal, Jane J. Kim, 12 November 2008

Next week, some checking-account customers at TD Bank Financial Group's TD Banknorth -- which acquired Commerce Bancorp Inc. earlier this year -- could see higher fees as the combined entity, TD Bank, adopts and rolls out Commerce's fee structure. Although some fees will disappear -- such as charges to use another bank's ATM -- some legacy TD Banknorth customers will face higher overdraft fees as the bank adopts a flat fee of $35 per overdraft instead of the previous fee structure, which ranged from $25 to $35.

"Clearly, this is a very different operating environment for banks, and all banks have to be looking for ways to meet the requirements of shareholders," says Thomas Dyck, executive vice president at TD Bank. "That naturally has them looking for alternative sources of revenue." From the bank's perspective, he says, adopting Commerce's products and pricing structure "positions us to compete aggressively for new customers as our primary way to grow revenues."
Financial Post, 12 November 2008

A challenging economic environment that makes valuations not overly cheap on a historical basis, the expectations for continued pressure on profitability as a result of the slowing economy and challenging credit and funding markets, and earnings estimates that look like they need to be lowered by the Street, suggest that it is still too early to buy Canadian bank stocks. In fact, there won’t be much of a difference in terms of returns over the next 12 months.

This comes from RBC Capital Markets analyst Andre-Phillipe Hardy who cut his earnings estimates and price targets on five of the Big Six, excluding Royal Bank, which he is restricted on.

He cut his 2009 earnings estimates by 11% to reflect higher than previously forecast loan losses, accelerating global economic weakness and lower wealth management revenues. They are now 13% below consensus.

“While we have high conviction that loan losses will rise and that the street’s estimates need to be revised down, we also have high conviction that the banks are in excellent shape to go through a credit cycle, given their capital positions and reduced exposure to lending in general (and particularly to business lending),” Mr. Hardy said in a research note.

His reduced price targets are intended to reflect lower estimated book values and valuation multiples closer to the early 2000s, the last time Canadian banks were faced with rising loan losses, weak equity markets and slower loan growth.

The analyst noted these valuations, which are higher than their European and U.S. counterparts, reflect the low probability that they will run into solvency problems.

Mr. Hardy said TD appears to have an adequate capital position with an estimated Tier 1 capital ratio of 8.7% in the fourth quarter of 2008, but it is the lowest of the big six as a result of changes in calculations related to its TD Ameritrade investment.

He estimates CIBC’s capital ratio will be 9.6%, enough to navigate through its exposures as long as the value of its collateralized loan and debt obligations or corporate debt do not collapse. He added that the bank would likely be able to withstand a pre-tax writedown of $4-billion and still have a Tier 1 ratio above 8%.

The analyst noted that pressure on banks’ capital ratios has likely been offset by the issuance of non-common equity capital as well as income generation.

Canada’s Big 6 banks report fourth quarter results between November 25 and December 5. Mr. Hardy does not expect any of them to raise its dividend.
Bloomberg, Doug Alexander, 12 November 2008

Canada is allowing the nation's banks to bolster their capital positions by including more preferred shares when accounting for their adequacy against international rivals.

The limit for preferred shares and ``innovative instruments'' recognized as part of Tier 1 capital was raised to 40 percent, from 30 percent, the Office of the Superintendent of Financial Institutions said in an advisory on its Web site. The financial services regulator also allowed more flexibility for bank debt insured by the government under the Canadian Lenders Assurance Facility program, introduced last month.

``These initiatives reflect recent developments in global financial markets,'' Assistant Superintendent Robert Hanna said in a Nov. 11 letter. ``These changes should assist Canada's financial institutions in maintaining their position of strength when compared to their international competition.''

Tier 1 is a measure of a lender's ability to absorb losses.