• BMO Capital Markets raises target price from $56 to $60
• Dundee Securities raises target price from $51 to $54
• Genuity Capital Markets raises target price from $60 to $61
• National Bank Financial raises target price from $50 to $55
• RBC Capital Markets has a target price of $75
• Scotia Capital has a target price of $60
• TD Securities raises target price from $59 to $62
• UBS Securities raises target price from $53 to $54
• Dundee Securities raises target price from $51 to $54
• Genuity Capital Markets raises target price from $60 to $61
• National Bank Financial raises target price from $50 to $55
• RBC Capital Markets has a target price of $75
• Scotia Capital has a target price of $60
• TD Securities raises target price from $59 to $62
• UBS Securities raises target price from $53 to $54
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Scotia Capital, 29 May 2009
Q2/09 Earnings Solid - Strong Wholesale
• Toronto-Dominion Bank (TD) reported operating earnings of $1.23 per share, slightly better than expected. Operating earnings declined 7% from a year earlier. ROE was 11.9% versus 15.3% a year earlier, which is expected to be a bank group low due to dilution from the Commerce Bancorp acquisition. However, return on risk weighted assets (RRWA) was solid at 2.09%.
• Incremental securitization revenue added $0.10 per share to TD earnings. Thus, excluding the incremental securitization revenue underlying earnings would be $1.13 per share versus operating earnings of $1.23 per share.
• Strong wholesale results and securitization revenue helped offset a decline in earnings in the US (spike in loan losses), flat earnings at TDCT, and weak wealth management earnings.
• Reported cash earnings were $0.82 per share including a $134 million after-tax or $0.16 per share loss on economic hedge related to reclassified AFS debt securities, $50 million after-tax or $0.06 per share restructuring charge related to Commerce Bancorp, $44 million after-tax or $0.05 per share loss in fair value of CDS hedging the corporate loan book, $39 million after-tax or $0.05 per share settlement of TD Banknorth shareholder litigation, and an increase in general allowance of $110 million or $77 million after-tax or $0.09 per share.
Canadian P&C Earnings Increase 1%
• Canadian P&C earnings increased a modest 1% to $589 million from $582 million a year earlier.
• Retail net interest margin increased 12 bp sequentially and decreased 2 bp from a year earlier to 2.94%.
• Revenues increased by 6.7% YOY to $2.3 billion, and expenses increased 4.4% to $1.1 billion.
• Loan securitization revenue was very high at $184 million versus $91 million a year earlier.
Card service revenue increased 31% YOY to $152 million.
• LLPs increased to $286 million from $266 million in Q1/09 and from $191 million a year earlier.
Total Wealth Management Earnings Decline 31%
• Wealth Management earnings, including the bank’s equity share of TD Ameritrade, declined 31% to $126 million.
Canadian Wealth Management Earnings Decline
• Domestic Wealth Management earnings declined 32% YOY to $78 million due to a significant decline in assets under management, lower average fees earned, and net interest margin compression.
• Operating leverage was negative 12.4%, with revenue declining 5.4% and expenses increasing 7.0%.
• Mutual fund revenue declined 23% to $164 million from a year earlier.
• Mutual fund assets under management (IFIC, includes PIC assets) declined 12% YOY to $51.9 billion.
TD Ameritrade – Earnings Decline 28%
• TD Ameritrade contributed $48 million, or $0.06 per share, to earnings in the quarter versus $77 million, or $0.09 per share, in the previous quarter and $67 million, or $0.09 per share, a year earlier. TD Ameritrade’s contribution represented 4% of total bank earnings.
U.S. P&C Earnings Decline Sequentially
• U.S. P&C earnings, which now includes the contribution from Commerce, declined quarter over quarter t $281 million, or $0.33 per share, from $307 million, representing 24% of total bank earnings. This compares with an earnings contribution of $130 million, or $0.17 per share, a year earlier before the Commerce Bancorp acquisition.
• Loan loss provisions in the US spiked 45% QOQ to $201 million or 1.24% of loans versus $139 million in the previous quarter ($78 million in Q4/08). Loan losses in the US have nearly tripled thus far in fiscal 2009.
• Net interest margin declined 4 bp from the previous quarter and 15 bp from a year earlier to 3.58% as the bank competes aggressively for deposits.
• The bank is expected to incur a US$50 million FDIC special deposit premium charge in Q3/09.
U.S. Platforms Combine to Represent 32% of Earnings
• U.S. P&C and TD Ameritrade contributed $329 million, or $0.39 per share, in the quarter, representing 32% of total bank earnings in the second quarter.
Wholesale Banking Earnings Strong
• Wholesale banking earnings were strong, increasing 86% to $173 million from $93 million a year earlier but were down from $265 million the previous quarter.
Trading Revenue – Remains Strong
• Trading revenue was very strong at $412 million versus $622 million in the previous quarter and $101 million a year earlier.
• Interest rate and credit trading revenue was very strong at $165 million versus a loss of $93 million a year earlier and a gain of $274 million in the previous quarter. Equity and other trading revenue declined to $93 million from $99 million a year earlier and from $171 million in the previous quarter. Foreign exchange products trading revenue increased to $154 million from $95 million a year earlier and $177 million in Q1/09.
Capital Markets Revenue
• Capital markets revenue was $374 million versus $337 million in the previous quarter and $332 million a year earlier.
Security Gains
• Security gains were a loss of $168 million or $0.13 per share versus a loss of $205 million or $0.16 per share in the previous quarter and a gain of $110 million or $0.09 per share a year earlier. The bank has exited its head office security portfolio, freeing up capital.
Unrealized Surplus – $75 million
• Unrealized surplus increased to $75 million from $47 million in the previous quarter and from $746 million a year earlier.
Loan Loss Provisions
• Specific LLPs increased to $546 million, or 0.93% of loans, from $232 million, or 0.43% of loans, a year earlier. TD increased general allowances by $110 million ($77 million after tax or $0.09 per share).
• We are increasing our 2009 LLP estimate to $2,100 million, or 0.85% of loans, and our 2010 LLP estimate to $2,300 million, or 0.89% of loans, from $1,800 million and $2,100 million, respectively, due to loan quality deterioration in the US.
Loan Formations Remain High
• Gross impaired loan formations increased to $927 million from $575 million a year earlier and from $990 million in the previous quarter. Net impaired loan formations increased to $633 million from $341 million a year earlier and $693 million in the previous quarter.
• Gross impaired loans increased to $1,875 million or 0.78% of loans from $1,543 million or 0.65% of loans in the previous quarter. Net impaired loans were negative $303 million.
Tier 1 Capital – Solid 10.9%
• Tier 1 ratio (Basel II) was 10.9% versus 10.1% in the previous quarter. Total capital ratio was 14.1% versus 13.6% in the previous quarter.
• Tangible common equity to risk weighted assets (TCE/RWA) was 9.0% versus 7.8% in the previous quarter, while common equity to RWA was significantly higher at 18.1% versus 16.7% in the previous quarter.
• Book value growth was 3% sequentially, aided by foreign exchange translation gains from the declining Canadian dollar more than offsetting AFS writedowns.
• Risk-weighted assets increased 12% from a year earlier to $199.7 billion as a result of the Commerce Bancorp acquisition, and declined 6% quarter over quarter.
Recent Events
• On February 6, 2009, TD announced that it would increase its holding in TD Ameritrade by 5% to 45% from approximately 39.9%. In September 2006, the bank entered into an agreement for a financial hedge for the potential purchase of 27 million shares of TD Ameritrade. On February 5, 2009, TD amended the hedge agreement to provide settlement in TD Ameritrade shares instead of cash. The cost of the financial hedge was US$515 million, or $19.07 per share, versus the recent price range of $12-$13 per share. TD expects no material impact to earnings or capital levels since the hedge, which was established in 2006, has been consolidated in the bank’s financial statements.
Recommendation
• We are increasing our 2009 and 2010 earnings estimates to $5.00 and $5.40 per share from $4.85 and $5.10 per share, respectively, due to improved net interest margin and stronger wholesale earnings.
• Our share price target remains unchanged at $60 per share, representing 12.0x our 2009 earnings estimate and 11.1x our 2010 earnings estimate.
• TD is rated 3-Sector Underperform.
;
Q2/09 Earnings Solid - Strong Wholesale
• Toronto-Dominion Bank (TD) reported operating earnings of $1.23 per share, slightly better than expected. Operating earnings declined 7% from a year earlier. ROE was 11.9% versus 15.3% a year earlier, which is expected to be a bank group low due to dilution from the Commerce Bancorp acquisition. However, return on risk weighted assets (RRWA) was solid at 2.09%.
• Incremental securitization revenue added $0.10 per share to TD earnings. Thus, excluding the incremental securitization revenue underlying earnings would be $1.13 per share versus operating earnings of $1.23 per share.
• Strong wholesale results and securitization revenue helped offset a decline in earnings in the US (spike in loan losses), flat earnings at TDCT, and weak wealth management earnings.
• Reported cash earnings were $0.82 per share including a $134 million after-tax or $0.16 per share loss on economic hedge related to reclassified AFS debt securities, $50 million after-tax or $0.06 per share restructuring charge related to Commerce Bancorp, $44 million after-tax or $0.05 per share loss in fair value of CDS hedging the corporate loan book, $39 million after-tax or $0.05 per share settlement of TD Banknorth shareholder litigation, and an increase in general allowance of $110 million or $77 million after-tax or $0.09 per share.
Canadian P&C Earnings Increase 1%
• Canadian P&C earnings increased a modest 1% to $589 million from $582 million a year earlier.
• Retail net interest margin increased 12 bp sequentially and decreased 2 bp from a year earlier to 2.94%.
• Revenues increased by 6.7% YOY to $2.3 billion, and expenses increased 4.4% to $1.1 billion.
• Loan securitization revenue was very high at $184 million versus $91 million a year earlier.
Card service revenue increased 31% YOY to $152 million.
• LLPs increased to $286 million from $266 million in Q1/09 and from $191 million a year earlier.
Total Wealth Management Earnings Decline 31%
• Wealth Management earnings, including the bank’s equity share of TD Ameritrade, declined 31% to $126 million.
Canadian Wealth Management Earnings Decline
• Domestic Wealth Management earnings declined 32% YOY to $78 million due to a significant decline in assets under management, lower average fees earned, and net interest margin compression.
• Operating leverage was negative 12.4%, with revenue declining 5.4% and expenses increasing 7.0%.
• Mutual fund revenue declined 23% to $164 million from a year earlier.
• Mutual fund assets under management (IFIC, includes PIC assets) declined 12% YOY to $51.9 billion.
TD Ameritrade – Earnings Decline 28%
• TD Ameritrade contributed $48 million, or $0.06 per share, to earnings in the quarter versus $77 million, or $0.09 per share, in the previous quarter and $67 million, or $0.09 per share, a year earlier. TD Ameritrade’s contribution represented 4% of total bank earnings.
U.S. P&C Earnings Decline Sequentially
• U.S. P&C earnings, which now includes the contribution from Commerce, declined quarter over quarter t $281 million, or $0.33 per share, from $307 million, representing 24% of total bank earnings. This compares with an earnings contribution of $130 million, or $0.17 per share, a year earlier before the Commerce Bancorp acquisition.
• Loan loss provisions in the US spiked 45% QOQ to $201 million or 1.24% of loans versus $139 million in the previous quarter ($78 million in Q4/08). Loan losses in the US have nearly tripled thus far in fiscal 2009.
• Net interest margin declined 4 bp from the previous quarter and 15 bp from a year earlier to 3.58% as the bank competes aggressively for deposits.
• The bank is expected to incur a US$50 million FDIC special deposit premium charge in Q3/09.
U.S. Platforms Combine to Represent 32% of Earnings
• U.S. P&C and TD Ameritrade contributed $329 million, or $0.39 per share, in the quarter, representing 32% of total bank earnings in the second quarter.
Wholesale Banking Earnings Strong
• Wholesale banking earnings were strong, increasing 86% to $173 million from $93 million a year earlier but were down from $265 million the previous quarter.
Trading Revenue – Remains Strong
• Trading revenue was very strong at $412 million versus $622 million in the previous quarter and $101 million a year earlier.
• Interest rate and credit trading revenue was very strong at $165 million versus a loss of $93 million a year earlier and a gain of $274 million in the previous quarter. Equity and other trading revenue declined to $93 million from $99 million a year earlier and from $171 million in the previous quarter. Foreign exchange products trading revenue increased to $154 million from $95 million a year earlier and $177 million in Q1/09.
Capital Markets Revenue
• Capital markets revenue was $374 million versus $337 million in the previous quarter and $332 million a year earlier.
Security Gains
• Security gains were a loss of $168 million or $0.13 per share versus a loss of $205 million or $0.16 per share in the previous quarter and a gain of $110 million or $0.09 per share a year earlier. The bank has exited its head office security portfolio, freeing up capital.
Unrealized Surplus – $75 million
• Unrealized surplus increased to $75 million from $47 million in the previous quarter and from $746 million a year earlier.
Loan Loss Provisions
• Specific LLPs increased to $546 million, or 0.93% of loans, from $232 million, or 0.43% of loans, a year earlier. TD increased general allowances by $110 million ($77 million after tax or $0.09 per share).
• We are increasing our 2009 LLP estimate to $2,100 million, or 0.85% of loans, and our 2010 LLP estimate to $2,300 million, or 0.89% of loans, from $1,800 million and $2,100 million, respectively, due to loan quality deterioration in the US.
Loan Formations Remain High
• Gross impaired loan formations increased to $927 million from $575 million a year earlier and from $990 million in the previous quarter. Net impaired loan formations increased to $633 million from $341 million a year earlier and $693 million in the previous quarter.
• Gross impaired loans increased to $1,875 million or 0.78% of loans from $1,543 million or 0.65% of loans in the previous quarter. Net impaired loans were negative $303 million.
Tier 1 Capital – Solid 10.9%
• Tier 1 ratio (Basel II) was 10.9% versus 10.1% in the previous quarter. Total capital ratio was 14.1% versus 13.6% in the previous quarter.
• Tangible common equity to risk weighted assets (TCE/RWA) was 9.0% versus 7.8% in the previous quarter, while common equity to RWA was significantly higher at 18.1% versus 16.7% in the previous quarter.
• Book value growth was 3% sequentially, aided by foreign exchange translation gains from the declining Canadian dollar more than offsetting AFS writedowns.
• Risk-weighted assets increased 12% from a year earlier to $199.7 billion as a result of the Commerce Bancorp acquisition, and declined 6% quarter over quarter.
Recent Events
• On February 6, 2009, TD announced that it would increase its holding in TD Ameritrade by 5% to 45% from approximately 39.9%. In September 2006, the bank entered into an agreement for a financial hedge for the potential purchase of 27 million shares of TD Ameritrade. On February 5, 2009, TD amended the hedge agreement to provide settlement in TD Ameritrade shares instead of cash. The cost of the financial hedge was US$515 million, or $19.07 per share, versus the recent price range of $12-$13 per share. TD expects no material impact to earnings or capital levels since the hedge, which was established in 2006, has been consolidated in the bank’s financial statements.
Recommendation
• We are increasing our 2009 and 2010 earnings estimates to $5.00 and $5.40 per share from $4.85 and $5.10 per share, respectively, due to improved net interest margin and stronger wholesale earnings.
• Our share price target remains unchanged at $60 per share, representing 12.0x our 2009 earnings estimate and 11.1x our 2010 earnings estimate.
• TD is rated 3-Sector Underperform.
