02 April 2009

TD Bank Hopes to Maintain Earnings from Falling in 2009

Reuters, Jeffrey Hodgson, 2 April 2009

Toronto-Dominion Bank Chief Executive Ed Clark said on Thursday it would be a "big accomplishment" for Canada's No 2 lender to keep its earnings from falling in 2009, given the pressures of a weak economy.

Clark also said it would take far worse economic conditions before the bank would consider cutting its dividend, although the current outlook means a dividend hike is also unlikely.

"In 2009, our job may be to simply maintain flat earnings per share. And, frankly, that would be a big accomplishment in today's environment," he told investors at the bank's annual meeting, held in Saint John, New Brunswick.

Clark had warned in February that while TD Bank would like to increase earnings this year, this would be "tough."

RBC Capital Markets said in a research note last month that Canadian banks should consider suspending their common share dividends. It said this would increase internal capital generation and reduce the need to raise capital if loan losses and writedowns accelerate.

Clark said that given their wide ownership by retail investors, the banks would be reluctant to cut their dividends and would do so "with agony".

"If the world turned out to be way more dire than any of us are contemplating, then you'd have a responsibility to look at those things. But I think we're a long way away from that," he told reporters after the meeting.

The chief executive had earlier told shareholders that TD has a policy of paying out 35 to 45 percent of earnings as dividends, but could go above this ratio in order to maintain its dividend.

"In the first quarter, we were right at the upper limit, the 45 percent," Clark said.

"If our earnings don't grow or if in fact they decline, as long as the economic environment remains reasonably stable, we can go above that ratio for a period of time, a considerable period of time, and not be in danger because of our strong capital base."

Clark also warned investors attending the meeting that they should not expect dividend hikes any time soon.

"We don't see this year, in 2009, that we will have significant earnings per share growth, so as a consequence of that it's unlikely that we would have dividend growth either."

Clark, who told Reuters early last month the bank was not considering U.S. acquisitions without regulatory assistance, said he was still wary of making big buys in the United States.

"The economic outlook remains sufficiently uncertain that other than deals where we can have significant protection against the assets that we acquired, we'd be reluctant to make a major acquisition now," he told reporters.

The bank is more interested in building out its U.S. branch network in its current geographic footprint, which it could fill out or expand with smaller "tack-on" acquisitions at some point, Clark said.
Bloomberg, Sean B. Pasternak, 2 April 2009

Toronto-Dominion Bank may post earnings this year that are little changed from last year, and is unlikely to raise its dividend as it sets aside more money for bad loans in the U.S.

“In 2009, our job may be to simply maintain flat earnings per share,” Chief Executive Officer Edmund Clark said. “That would be a big accomplishment in today’s environment.”

Provisions for credit losses in the U.S. may be higher than the bank previously estimated as the economy slows, Clark told shareholders at the bank’s annual meeting today in Saint John, New Brunswick.

Canada’s second-biggest bank is expected to post earnings per share of C$4.38 in fiscal 2009, based on a survey of seven analysts by Bloomberg. Net income was C$4.87 a share for the year ended Oct. 31, 2008.

Clark said he sees “enormous potential” in the bank’s U.S. business, and is likely to begin buying assets once it completes the integration of Commerce Bancorp Inc. this year. He may look at “tack-on” purchases, and plans to add 30 branches in the U.S. this year and in 2010.

The Financial Times reported this week that Canadian Prime Minister Stephen Harper urged banks such as Toronto-Dominion to capitalize on their strong balance sheets by buying banks in the U.S. Toronto-Dominion isn’t likely to do so immediately, Clark said.

Reluctant to Acquire

“Other than deals where we would have significant protection against the assets we acquired, we’d be reluctant to make a major acquisition now,” Clark told reporters after the meeting.

Toronto-Dominion has spent more than $15 billion over the past four years expanding in the U.S., buying Portland, Maine- based TD Banknorth and Cherry Hill, New Jersey-based Commerce Bancorp. Toronto-Dominion has more branches in the U.S. than in Canada.

“I think we can create ourselves a franchise, really, from Maine into Philadelphia (where) we are in the top-three slot everywhere in that territory,” Clark said.

In Canada, where the lender has 11 million consumer-bank clients, Clark said the bank is getting about 1,000 visits a week from customers seeking financial advice on mortgages, credit cards and other loans because of job losses.
The Globe and Mail, Tara Perkins, 2 April 2009

Toronto-Dominion Bank chief executive officer Ed Clark says the bank's U.S. loan portfolio will probably sour more than expected, but he stands by TD's decision to make a major U.S. acquisition last year.

“I recognize that some people are worried about our operations in the United States,” he told shareholders at the bank's annual meeting in Saint John on Thursday. “They wonder whether we can actually pull off the integration of TD Banknorth and Commerce.”

TD paid $8.5-billion (U.S.) for New Jersey-based Commerce Bancorp last year, a large acquisition that resulted in roughly half of the bank's branches being south of the border. However, three-quarters of the bank's revenue still came from Canada in its latest quarter.

In the U.S., “we're expecting to take greater provisions for credit losses than originally anticipated,” Mr. Clark told shareholders. But he said that TD's U.S. banking operation is performing better than its American peers, “and we're totally confident that the integration will be a complete success.”

TD's earnings dropped 27 per cent in the first quarter, to $712-million (Canadian), partially because of higher provisions for loan losses on both sides of the border. Its profit margins are also being squeezed by the high cost of raising money to lend. But Mr. Clark said the bank is showing that it's able to successfully attract deposits.

“Just this past weekend, we opened a store in New York City's Chinatown,” he said. “In just three days, we raised the same amount of deposits that other banks in the area would normally take four months to do.”

The bank's chairman assured shareholders at the meeting Mr. Clark deserves more than $8-million for his performance last year.

John Thompson told the annual meeting the CEO and his management team “had the foresight to avoid the U.S. subprime market; we didn't invest in or sell third-party asset-backed commercial paper and other risky financial instruments.”

As a result, Mr. Thompson said, TD avoided billions of dollars in losses and is ranked as one of the safest banks in the world.

The board awarded Mr. Clark $11-million in total compensation for 2008, down 19 per cent from 2007, and Mr. Clark then declined to take $3-million, for a total reduction of 41 per cent.

Mr. Thompson, noting that TD's share price is down by one-third from the start of 2008, said the stock market “hasn't differentiated between the winners and losers at this point in time, but TD is clearly a winner.”

He cited “a populist sentiment” that CEOs are overpaid, but emphasized that “great executive leadership is a rare talent, and obtaining rare talent in any field means that you pay a top price for it.”

Ahead of the annual meeting, TD last month joined the other Canadian banks in announcing that shareholders will get a so-called say on pay vote starting with next year's meeting.

Mr. Thompson said that “while your board fully supports the new shareholder advisory vote on pay, we truly hope that this power will be used judiciously and not become politicized in the future.”

Mr. Clark, who recently had its contract extended until at least 2013, told the meeting that he is “a cautiously optimistic guy” about the economy.

“The world is going to recover,” he said. “And this crisis, like most crises, will create opportunities if we remain prudent and patient and stay focused on our winning strategy.”

He also allayed worries about the 74,000-employee bank's sizable and growing presence in the northeastern United States, saying earnings are up 400 per cent since TD entered that market in 2005.

“The disruption has meant that many U.S. banks aren't lending,” while “our lending volumes have been terrific” and TD's financial solidity is making it “a bank of choice” for anxious Americans, he said.

In Canada, he stressed, TD is expanding its lending to hard-pressed businesses and consumers.

“TD is stepping in and replacing the foreign banks and non-banks that have withdrawn from the market,” he declared.

“For example, in our auto lending business, new loan originations have grown 43 per cent year-over-year.”

He noted that interest rates are at historic lows, and said profit margins are being squeezed as “the reality is that we've dropped our lending prices by more than we've dropped our deposit rates.”

TD is “managing our businesses as if it will get tougher before it gets better,” he added, planning 20 new Canadian branches this year after 30 in 2008.

He repeated that for this year simply maintaining flat earnings per share will be a big accomplishment.

“We can have a good debate about how long this crisis will last and how deep it will go,” Mr. Clark said. “But I think the important message is that things will get better.”

In a press conference following the bank's annual meeting, Mr. Clark said he welcomes Prime Minister Stephen Harper's comments that the government would be supportive if the big Canadian banks made acquisitions abroad, noting that it runs counter to the isolationist sentiment that's increasingly being expressed by some governments.

However, he said that TD has no plans to make another major acquisition in the near future. The bank is still digesting Commerce Bancorp, and will have a better sense toward the end of this year of where the economy lies. Any major acquisition would likely be in the U.S. because there are no significant takeover opportunities in Canada, and TD doesn't plan to do any significant deals outside of North America, Mr. Clark said.

As for dividends, Mr. Clark reiterated that all of the big Canadian banks would be very reluctant to cut them. He suggested that it's easier for U.S. banks to cut their dividends because a larger proportion of their shareholder bases are generally institutional, rather than individual, investors. For Canadian banks, it would be an agonizing move, he said.

“We're all sitting here saying lets try to get through here without doing that,” he said. “But there's no quick answer,” he added. “If the world turned out to be way more dire than any of us are contemplating, then you have a responsibility to look at those things, but I think we're a long way away from that.”