Scotia Capital, 28 August 2009
Q3/09 - Strong Results - TD Securities Record Earnings - Upgrading to 2-Sector Perform
• Toronto-Dominion Bank (TD) third quarter operating earnings were strong, driven by record wholesale banking earnings, and record earnings at TDCT, partially offset by weak results from U.S. P&C with Wealth Management earnings down YOY but rebounding sequentially. Loan loss provisions were lower sequentially with slightly higher impaired loan formations particularly in the U.S. ROE was 14.3% with RRWA of 2.55%.
• TD's cash operating earnings increased 3% to $1.47 per share, well above our estimate of $1.20 per share and consensus due to record wholesale banking results driven by record trading revenues. Wholesale banking earnings tripled from a year earlier and almost doubled from the previous quarter with TDCT earnings increasing 5%. Reported earnings were $1.16 per share including restructuring charge, general reserve, and losses from hedges.
• We are increasing our 2009 and 2010 earnings estimates to $5.35 and $5.70 per share from $5.00 and $5.40 per share, respectively, due to strength in wholesale business although not sustainable at current level in our opinion. We are also increasing our share price target to $80 from $70 per share, representing 14.0x our 2010 earnings estimate.
• We are upgrading TD to 2-Sector Perform from 3-Sector Underperform due to less-than-expected deterioration in the U.S. business and improvement in the earnings power of its wholesale business, aided by the bank's high counterparty credit rating.
Items of Note
• Reported cash earnings were $1.16 per share including $43 million after-tax or $0.05 per share loss on economic hedge related to reclassified AFS debt securities, $70 million after-tax or $0.08 per share restructuring charge related to Commerce Bancorp, $75 million after-tax or $0.09 per share loss in fair value of CDS hedging the corporate loan book, $35 million after-tax or $0.04 per share charge from FDIC special assessment, and an increase in general allowance of $65 million or $46 million after-tax or $0.05 per share.
Canadian P&C Earnings Increase 5%
• Canadian P&C's solid performance was primarily driven by strong volume growth in personal and business deposits, and real estate secured lending. However, the bank indicated that volume growth is expected to slow down and LLPs are expected to continue to rise.
• Canadian P&C earnings increased 5% to $677 million from $644 million a year earlier.
• Retail net interest margin increased 2 basis points (bp) sequentially and declined 2 bp from a year earlier to 2.96%.
• Revenues increased by 8.2% year over year (YOY) to $2.5 billion, and expenses increased 3.6% to $1.2 billion.
• Card service revenue increased 13% YOY to $197 million.
• LLPs increased to $290 million from $286 million in Q2/09 and from $194 million a year earlier.
Total Wealth Management Earnings Decline 19%
• Wealth Management earnings, including the bank’s equity share of TD Ameritrade, declined 19% to $163 million.
Canadian Wealth Management Earnings Decline
• Domestic Wealth Management earnings declined 25% YOY to $95 million due to a significant decline in assets under management and administration, lower average fees earned, net interest margin compression, and lower margin loans.
• Operating leverage was negative 8.4%, with revenue declining 7.7% and expenses increasing 0.7%.
• Mutual fund revenue declined 19% to $183 million from a year earlier.
• Mutual fund assets under management (IFIC, includes PIC assets) declined 8.1% YOY to $56.2 billion.
TD Ameritrade – Earnings Decline 8%
• TD Ameritrade contributed $68 million or $0.08 per share to earnings in the quarter versus $48 million or $0.06 per share in the previous quarter and $74 million or $0.09 per share a year earlier. TD Ameritrade’s contribution represented 5% of total bank earnings.
U.S. P&C Earnings Decline 11%
• U.S. P&C earnings, which now include the contribution from Commerce Bancorp, declined to $242 million or $0.28 per share from $273 million a year earlier, representing 17% of total bank earnings. U.S. P&C earnings declined for the third straight quarter due to a higher Canadian dollar and higher credit losses. Gross impaired loans increased 9% sequentially to $961 million while net impaired loans increased 6% sequentially to $748 million.
• Loan loss provisions in the U.S. declined 9% QOQ to $183 million or 1.24% of loans versus $201 million in the previous quarter and $76 million a year earlier.
• Net interest margin declined 18 bp from the previous quarter and 52 bp from a year earlier to 3.40% due to lower interest rates and increased levels of impaired loans.
• The bank incurred a $55 million ($35 million after-tax or $0.04 per share) FDIC special assessment charge this quarter.
U.S. Platforms Combine to Represent 22% of Earnings
• U.S. P&C and TD Ameritrade contributed $310 million or $0.36 per share in the quarter, representing 22% of total bank earnings in the third quarter, down from a high of 29% in Q1/09.
Wholesale Banking Record Earnings
• Wholesale banking earnings continue to impress as strong customer activity, wider margins, higher liquidity, and normalized pricing in credit markets positively impacted interest rate, credit and FX trading, and capital market fee revenues.
• Wholesale banking earnings were very strong, increasing 89% sequentially to $327 million from $173 million the previous quarter, and up significantly from $102 million a year earlier.
Trading Revenue – Record
• Trading revenue remains very strong at $633 million versus $412 million in the previous quarter and $139 million a year earlier.
• Interest rate and credit trading revenue was very strong at $440 million versus a loss of $102 million a year earlier and a gain of $165 million in the previous quarter. Equity and other trading revenue declined to $39 million from $68 million a year earlier and from $93 million in the previous quarter. Foreign exchange trading revenue increased to $154 million from $77 million a year earlier and was flat from Q2/09.
Capital Markets Revenue
• Capital markets revenue was $389 million versus $374 million in the previous quarter and $365 million a year earlier.
Security Gains
• Security gains were a loss of $90 million or $0.07 per share versus a loss of $168 million or $0.13 per share in the previous quarter and a gain of $14 million or $0.01 per share a year earlier.
Unrealized Surplus – $177 million
• Unrealized surplus increased to $177 million from $75 million in the previous quarter and declined from $698 million a year earlier.
Securitization Revenue and Economic Impact
• Loan securitization revenue declined significantly in the quarter to $92 million from $184 million in the previous quarter, although up modestly from $77 million a year earlier.
• Securitization economic impact was a positive $48 million pre-tax or estimated $31 million after-tax or $0.04 per share, significantly lower than the previous quarter impact of $0.12 per share. Securitization activity is recorded in the Corporate segment.
Loan Loss Provisions
• Specific LLPs declined to $492 million or 0.80% of loans versus $546 million or 0.93% of loans the previous quarter, although they continue to run ahead of $288 million or 0.50% of loans a year earlier. However, excluding the currency impact, U.S. LLPs increased slightly to US$163 million from $161 million. Total LLPs were $557 million, which included a general allowance of $65 million ($46 million after tax or $0.05 per share).
• We are reducing our 2009 & 2010 LLP estimates to $2,030 million or 0.82% of loans and $2,100 million or 0.82% of loans from $2,100 million and $2,300 million, respectively.
Loan Formations Remain High
• Gross impaired loan formations increased to $969 million from $927 million in the previous quarter. U.S. gross impaired loan formations increased to US$387 million from US$288 million in the previous quarter. Net impaired loan formations declined to $603 million from $633 million in the previous quarter.
• Gross impaired loans increased to $1,947 million or 0.80% of loans from $1,875 million or 0.78% of loans in the previous quarter. Net impaired loans were negative $306 million.
Tier 1 Capital – Solid 11.2%
• Tier 1 ratio (Basel II) was 11.2% versus 10.9% in the previous quarter. Total capital ratio was 14.7% versus 14.1% in the previous quarter.
• Tangible common equity to risk-weighted assets (TCE/RWA) was 9.3% versus 9.0% in the previous quarter, while common equity to RWA was flat at 18.1% from the previous quarter.
• Book value increased 10% from a year earlier to $40.27.
• Risk-weighted assets increased 3% from a year earlier to $189.7 billion but declined 5% QOQ.
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Q3/09 - Strong Results - TD Securities Record Earnings - Upgrading to 2-Sector Perform
• Toronto-Dominion Bank (TD) third quarter operating earnings were strong, driven by record wholesale banking earnings, and record earnings at TDCT, partially offset by weak results from U.S. P&C with Wealth Management earnings down YOY but rebounding sequentially. Loan loss provisions were lower sequentially with slightly higher impaired loan formations particularly in the U.S. ROE was 14.3% with RRWA of 2.55%.
• TD's cash operating earnings increased 3% to $1.47 per share, well above our estimate of $1.20 per share and consensus due to record wholesale banking results driven by record trading revenues. Wholesale banking earnings tripled from a year earlier and almost doubled from the previous quarter with TDCT earnings increasing 5%. Reported earnings were $1.16 per share including restructuring charge, general reserve, and losses from hedges.
• We are increasing our 2009 and 2010 earnings estimates to $5.35 and $5.70 per share from $5.00 and $5.40 per share, respectively, due to strength in wholesale business although not sustainable at current level in our opinion. We are also increasing our share price target to $80 from $70 per share, representing 14.0x our 2010 earnings estimate.
• We are upgrading TD to 2-Sector Perform from 3-Sector Underperform due to less-than-expected deterioration in the U.S. business and improvement in the earnings power of its wholesale business, aided by the bank's high counterparty credit rating.
Items of Note
• Reported cash earnings were $1.16 per share including $43 million after-tax or $0.05 per share loss on economic hedge related to reclassified AFS debt securities, $70 million after-tax or $0.08 per share restructuring charge related to Commerce Bancorp, $75 million after-tax or $0.09 per share loss in fair value of CDS hedging the corporate loan book, $35 million after-tax or $0.04 per share charge from FDIC special assessment, and an increase in general allowance of $65 million or $46 million after-tax or $0.05 per share.
Canadian P&C Earnings Increase 5%
• Canadian P&C's solid performance was primarily driven by strong volume growth in personal and business deposits, and real estate secured lending. However, the bank indicated that volume growth is expected to slow down and LLPs are expected to continue to rise.
• Canadian P&C earnings increased 5% to $677 million from $644 million a year earlier.
• Retail net interest margin increased 2 basis points (bp) sequentially and declined 2 bp from a year earlier to 2.96%.
• Revenues increased by 8.2% year over year (YOY) to $2.5 billion, and expenses increased 3.6% to $1.2 billion.
• Card service revenue increased 13% YOY to $197 million.
• LLPs increased to $290 million from $286 million in Q2/09 and from $194 million a year earlier.
Total Wealth Management Earnings Decline 19%
• Wealth Management earnings, including the bank’s equity share of TD Ameritrade, declined 19% to $163 million.
Canadian Wealth Management Earnings Decline
• Domestic Wealth Management earnings declined 25% YOY to $95 million due to a significant decline in assets under management and administration, lower average fees earned, net interest margin compression, and lower margin loans.
• Operating leverage was negative 8.4%, with revenue declining 7.7% and expenses increasing 0.7%.
• Mutual fund revenue declined 19% to $183 million from a year earlier.
• Mutual fund assets under management (IFIC, includes PIC assets) declined 8.1% YOY to $56.2 billion.
TD Ameritrade – Earnings Decline 8%
• TD Ameritrade contributed $68 million or $0.08 per share to earnings in the quarter versus $48 million or $0.06 per share in the previous quarter and $74 million or $0.09 per share a year earlier. TD Ameritrade’s contribution represented 5% of total bank earnings.
U.S. P&C Earnings Decline 11%
• U.S. P&C earnings, which now include the contribution from Commerce Bancorp, declined to $242 million or $0.28 per share from $273 million a year earlier, representing 17% of total bank earnings. U.S. P&C earnings declined for the third straight quarter due to a higher Canadian dollar and higher credit losses. Gross impaired loans increased 9% sequentially to $961 million while net impaired loans increased 6% sequentially to $748 million.
• Loan loss provisions in the U.S. declined 9% QOQ to $183 million or 1.24% of loans versus $201 million in the previous quarter and $76 million a year earlier.
• Net interest margin declined 18 bp from the previous quarter and 52 bp from a year earlier to 3.40% due to lower interest rates and increased levels of impaired loans.
• The bank incurred a $55 million ($35 million after-tax or $0.04 per share) FDIC special assessment charge this quarter.
U.S. Platforms Combine to Represent 22% of Earnings
• U.S. P&C and TD Ameritrade contributed $310 million or $0.36 per share in the quarter, representing 22% of total bank earnings in the third quarter, down from a high of 29% in Q1/09.
Wholesale Banking Record Earnings
• Wholesale banking earnings continue to impress as strong customer activity, wider margins, higher liquidity, and normalized pricing in credit markets positively impacted interest rate, credit and FX trading, and capital market fee revenues.
• Wholesale banking earnings were very strong, increasing 89% sequentially to $327 million from $173 million the previous quarter, and up significantly from $102 million a year earlier.
Trading Revenue – Record
• Trading revenue remains very strong at $633 million versus $412 million in the previous quarter and $139 million a year earlier.
• Interest rate and credit trading revenue was very strong at $440 million versus a loss of $102 million a year earlier and a gain of $165 million in the previous quarter. Equity and other trading revenue declined to $39 million from $68 million a year earlier and from $93 million in the previous quarter. Foreign exchange trading revenue increased to $154 million from $77 million a year earlier and was flat from Q2/09.
Capital Markets Revenue
• Capital markets revenue was $389 million versus $374 million in the previous quarter and $365 million a year earlier.
Security Gains
• Security gains were a loss of $90 million or $0.07 per share versus a loss of $168 million or $0.13 per share in the previous quarter and a gain of $14 million or $0.01 per share a year earlier.
Unrealized Surplus – $177 million
• Unrealized surplus increased to $177 million from $75 million in the previous quarter and declined from $698 million a year earlier.
Securitization Revenue and Economic Impact
• Loan securitization revenue declined significantly in the quarter to $92 million from $184 million in the previous quarter, although up modestly from $77 million a year earlier.
• Securitization economic impact was a positive $48 million pre-tax or estimated $31 million after-tax or $0.04 per share, significantly lower than the previous quarter impact of $0.12 per share. Securitization activity is recorded in the Corporate segment.
Loan Loss Provisions
• Specific LLPs declined to $492 million or 0.80% of loans versus $546 million or 0.93% of loans the previous quarter, although they continue to run ahead of $288 million or 0.50% of loans a year earlier. However, excluding the currency impact, U.S. LLPs increased slightly to US$163 million from $161 million. Total LLPs were $557 million, which included a general allowance of $65 million ($46 million after tax or $0.05 per share).
• We are reducing our 2009 & 2010 LLP estimates to $2,030 million or 0.82% of loans and $2,100 million or 0.82% of loans from $2,100 million and $2,300 million, respectively.
Loan Formations Remain High
• Gross impaired loan formations increased to $969 million from $927 million in the previous quarter. U.S. gross impaired loan formations increased to US$387 million from US$288 million in the previous quarter. Net impaired loan formations declined to $603 million from $633 million in the previous quarter.
• Gross impaired loans increased to $1,947 million or 0.80% of loans from $1,875 million or 0.78% of loans in the previous quarter. Net impaired loans were negative $306 million.
Tier 1 Capital – Solid 11.2%
• Tier 1 ratio (Basel II) was 11.2% versus 10.9% in the previous quarter. Total capital ratio was 14.7% versus 14.1% in the previous quarter.
• Tangible common equity to risk-weighted assets (TCE/RWA) was 9.3% versus 9.0% in the previous quarter, while common equity to RWA was flat at 18.1% from the previous quarter.
• Book value increased 10% from a year earlier to $40.27.
• Risk-weighted assets increased 3% from a year earlier to $189.7 billion but declined 5% QOQ.
