Scotia Capital, 4 December 2009
Q4/09 - Strong Results, Better Than Expected
• Toronto-Dominion Bank (TD) fourth quarter operating earnings were strong, driven by record wholesale banking earnings, solid earnings at TDCT, partially offset by weak results from U.S. P&C and Wealth Management. Credit quality remained relatively stable.
• ROE was 14.3% with RRWA of 2.63%.
• TD’s cash operating earnings increased 20% to $1.46 per share, better than our estimate of $1.31 per share and consensus of $1.27 per share due to the unexpected strength in wholesale banking aided by resilient trading revenue and security gains versus security losses previously. Wholesale banking earnings tripled from a year earlier with TDCT earnings increasing 4%.
• Fiscal 2009 operating earnings declined 1% to $5.35 per share from $5.42 per share in fiscal 2008. Operating ROE for the year was 13.3%.
• Our 2010 earnings estimate is unchanged at $5.70 per share. We are introducing our 2011 earnings estimate at $6.50 per share.
• Our 12-month share price target is unchanged at $80, representing 14.0x our 2010 earnings estimate. We maintain our 2-Sector Perform rating.
Items of Note
• Reported cash earnings were $1.25 per share including $73 million after-tax or $0.09 per share loss on economic hedge related to reclassified AFS debt securities, $89 million after-tax or $0.10 per share restructuring charge related to Commerce Bancorp, and a $19 million after-tax or $0.02 per share loss in fair value of CDS hedging the corporate loan book.
Canadian P&C Earnings Increase 4%
• Canadian P&C (TDCT) earnings increased 4% to $622 million from $600 million a year
earlier.
• TDCT’s solid performance was a result of strong volume growth in personal and business deposits and real estate secured lending, partially offset by higher provisions for credit losses and margin compression. Also, insurance earnings were weak this quarter with insurance revenue, net of claims, at $202 million versus $253 million in the previous quarter and $248 million a year earlier. Insurance weakness was due to high property and casualty insurance claims.
• Retail net interest margin declined 8 basis points (bp) sequentially and 1 bp from a year earlier to 2.88%.
• Revenues increased 6.6% year over year (YOY) to $2.4 billion, and expenses increased 2.0% to $1.2 billion.
• Card service revenue increased 7% YOY to $192 million.
• LLPs increased to $313 million from $290 million in Q3/09 and from $209 million a year earlier.
• TDCT earnings in fiscal 2009 increased a modest 2% to $2,472 million versus $2,424 million in 2008 as the bank absorbed a major spike in credit losses to $1,155 million versus $766 million as well as a 5 bp margin decline.
Total Wealth Management Earnings Decline 8%
• Wealth Management earnings, including the bank’s equity share of TD Ameritrade, declined 8% year over year in Q4/09 to $156 million.
Canadian Wealth Management Earnings Decline
• Domestic Wealth Management earnings declined 12% YOY to $97 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 4.4%, with revenue declining 0.7% and expenses increasing 3.7%.
• Mutual fund revenue declined 4% to $197 million from a year earlier.
• Mutual fund assets under management (IFIC, includes PIC assets) increased 11.5% YOY to $58.2 billion.
• Canadian Wealth Management earnings in fiscal 2009 were $345 million versus $480 million in 2008.
TD Ameritrade – Earnings Decline 2%
• TD Ameritrade contributed $59 million or $0.07 per share to earnings in the quarter versus $68 million or $0.08 per share in the previous quarter and $60 million or $0.07 per share a year earlier. TD Ameritrade’s contribution represented 4% of total bank earnings.
• TD Ameritrade's contribution for fiscal 2009 was $252 million versus $289 million a year earlier.
U.S. P&C Earnings Decline 24%
• U.S. P&C earnings declined to $211 million or $0.25 per share from $276 million a year earlier, representing 16% of total bank earnings. Earnings were negatively impacted by high loan losses, a strong Canadian dollar, and relatively high expenses. Return on invested capital remains low at 4.5%.
• Loan loss provisions in the U.S. increased 18% QOQ to $216 million (includes $41 million in debt securities) or 1.33% of loans versus $183 million in the previous quarter and $78 million a year earlier.
• Net interest margin increased 6 bp from the previous quarter and declined 35 bp from a year earlier to 3.46%.
• In fiscal 2009, U.S. P&C earnings increased to $909 million versus $806 million in 2008 mainly due to the full year's inclusion of Commerce Bancorp's earnings versus two quarters a year earlier. However, the $900 million in earnings was 25% less than the banks' previous goal of $1.2 billion.
U.S. Platforms Combine to Represent 20% of Earnings
• U.S. P&C and TD Ameritrade contributed $270 million or $0.32 per share in the quarter, representing 20% of total bank earnings in the fourth quarter, down from a high of 29% in Q1/09.
Wholesale Banking Record Earnings
• Wholesale banking earnings were extremely strong at $372 million, tripling from $122 million a year earlier and increasing 14% sequentially from $327 million the previous quarter.
• Wholesale Banking earnings in fiscal 2009 more than doubled to $1,137 million from $480 million in 2008.
Trading Revenue – Resilient
• Trading revenue remains strong at $560 million versus a record of $633 million in the previous quarter and a weak $107 million a year earlier, driven by very strong fixed income trading.
• Interest rate and credit trading revenue was solid at $300 million versus a loss of $565 million a year earlier and a gain of $440 million in the previous quarter. Equity and other trading revenue increased significantly to $172 million from $1 million a year earlier and from $39 million in the previous quarter. Foreign exchange trading revenue declined to $88 million from $146 million a year earlier and $154 million in Q3/09.
• Trading revenue in fiscal 2009 more than quadrupled to $2,227 million from $544 million in 2008. We believe TD's Moody's Aaa credit rating is a major factor in the rebound in TD's trading platform.
Capital Markets Revenue
• Capital markets revenue was $343 million versus $342 million in the previous quarter and $276 million a year earlier.
• Capital Markets revenue for fiscal 2009 was $1,303 million versus $1,184 million a year earlier.
Security Gains
• Security gains were $26 million or $0.02 per share versus a loss of $90 million or $0.07 per share in the previous quarter and a gain of $55 million or $0.04 per share a year earlier.
Unrealized Surplus – $207 million
• Unrealized surplus was $207 million at quarter end versus $177 million in the previous quarter and $310 million a year earlier.
Securitization Revenue and Economic Impact
• Loan securitization revenue increased to $135 million in the quarter versus $92 million in the previous quarter.
• Securitization economic impact was a positive $74 million pre-tax, or an estimated $0.06 per share after-tax, versus $0.04 per share in the previous quarter. Securitization activity is recorded in the Corporate segment.
Loan Loss Provisions
• Specific LLPs increased to $521 million or 0.79% of loans versus $492 million or 0.76% of loans the previous quarter. The $521 million Q4/09 LLPs included $41 million related to debt securities. LLPs related to loans this quarter were $480 million, slightly lower than the $492 million in the previous quarter. Loan loss provisions have been restated for 2009 to included these debt securities provisions.
• Specific loan loss provisions in fiscal 2009 were $2,225 million or 0.85% of loans, including $250 million for debt securities, versus $1,063 million or 0.46% of loans in 2008. Total LLPs in fiscal 2009 were $2,480 million or 0.94% of loans including $255 million in general provisions.
• Our 2010 LLP forecast is unchanged at $2,100 million or 0.75% of loans. We are introducing our 2011 LLP forecast at $1,600 million or 0.54% of loans.
Loan Formations Stable
• Gross impaired loan formations before debt securities were stable at $974 million versus $969 million in the previous quarter. U.S. gross impaired loan formations increased moderately to US$412 million from US$387 million in the previous quarter. Gross impaired formations were $1,215 million in the quarter including $241 million in debt securities classified as loans versus $969 in the previous quarter.
• This quarter the bank reclassified $10.8 billion in securities (AFS & HTM) to loans in accordance with the CICA Handbook Section 3855. The August 2009 amendment changed the definition of a loan such that certain debt securities may be classified as loans if they do not have a quoted price in an active market and it is not the banks intent to sell the securities immediately or in the near term.
• Gross impaired loans increased to $2,311 million or 0.88% of loans from $1,947 million or 0.76% of loans in the previous quarter due primarily to debt securities classified as loans. Net impaired loans were negative $328 million.
Tier 1 Capital – 11.3%
• Tier 1 ratio was 11.3% versus 11.1% in the previous quarter. Total capital ratio was 14.9% versus 14.7% in the previous quarter.
• Tangible common equity to risk-weighted assets (TCE/RWA) was 9.9% versus 9.5% in the
previous quarter, while common equity to RWA increased to 18.6% from the previous
quarter.
• Book value per share increased 12% from a year earlier to $41.13.
• Risk-weighted assets declined 10% from a year earlier to $189.6 billion.
Q4/09 - Strong Results, Better Than Expected
• Toronto-Dominion Bank (TD) fourth quarter operating earnings were strong, driven by record wholesale banking earnings, solid earnings at TDCT, partially offset by weak results from U.S. P&C and Wealth Management. Credit quality remained relatively stable.
• ROE was 14.3% with RRWA of 2.63%.
• TD’s cash operating earnings increased 20% to $1.46 per share, better than our estimate of $1.31 per share and consensus of $1.27 per share due to the unexpected strength in wholesale banking aided by resilient trading revenue and security gains versus security losses previously. Wholesale banking earnings tripled from a year earlier with TDCT earnings increasing 4%.
• Fiscal 2009 operating earnings declined 1% to $5.35 per share from $5.42 per share in fiscal 2008. Operating ROE for the year was 13.3%.
• Our 2010 earnings estimate is unchanged at $5.70 per share. We are introducing our 2011 earnings estimate at $6.50 per share.
• Our 12-month share price target is unchanged at $80, representing 14.0x our 2010 earnings estimate. We maintain our 2-Sector Perform rating.
Items of Note
• Reported cash earnings were $1.25 per share including $73 million after-tax or $0.09 per share loss on economic hedge related to reclassified AFS debt securities, $89 million after-tax or $0.10 per share restructuring charge related to Commerce Bancorp, and a $19 million after-tax or $0.02 per share loss in fair value of CDS hedging the corporate loan book.
Canadian P&C Earnings Increase 4%
• Canadian P&C (TDCT) earnings increased 4% to $622 million from $600 million a year
earlier.
• TDCT’s solid performance was a result of strong volume growth in personal and business deposits and real estate secured lending, partially offset by higher provisions for credit losses and margin compression. Also, insurance earnings were weak this quarter with insurance revenue, net of claims, at $202 million versus $253 million in the previous quarter and $248 million a year earlier. Insurance weakness was due to high property and casualty insurance claims.
• Retail net interest margin declined 8 basis points (bp) sequentially and 1 bp from a year earlier to 2.88%.
• Revenues increased 6.6% year over year (YOY) to $2.4 billion, and expenses increased 2.0% to $1.2 billion.
• Card service revenue increased 7% YOY to $192 million.
• LLPs increased to $313 million from $290 million in Q3/09 and from $209 million a year earlier.
• TDCT earnings in fiscal 2009 increased a modest 2% to $2,472 million versus $2,424 million in 2008 as the bank absorbed a major spike in credit losses to $1,155 million versus $766 million as well as a 5 bp margin decline.
Total Wealth Management Earnings Decline 8%
• Wealth Management earnings, including the bank’s equity share of TD Ameritrade, declined 8% year over year in Q4/09 to $156 million.
Canadian Wealth Management Earnings Decline
• Domestic Wealth Management earnings declined 12% YOY to $97 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 4.4%, with revenue declining 0.7% and expenses increasing 3.7%.
• Mutual fund revenue declined 4% to $197 million from a year earlier.
• Mutual fund assets under management (IFIC, includes PIC assets) increased 11.5% YOY to $58.2 billion.
• Canadian Wealth Management earnings in fiscal 2009 were $345 million versus $480 million in 2008.
TD Ameritrade – Earnings Decline 2%
• TD Ameritrade contributed $59 million or $0.07 per share to earnings in the quarter versus $68 million or $0.08 per share in the previous quarter and $60 million or $0.07 per share a year earlier. TD Ameritrade’s contribution represented 4% of total bank earnings.
• TD Ameritrade's contribution for fiscal 2009 was $252 million versus $289 million a year earlier.
U.S. P&C Earnings Decline 24%
• U.S. P&C earnings declined to $211 million or $0.25 per share from $276 million a year earlier, representing 16% of total bank earnings. Earnings were negatively impacted by high loan losses, a strong Canadian dollar, and relatively high expenses. Return on invested capital remains low at 4.5%.
• Loan loss provisions in the U.S. increased 18% QOQ to $216 million (includes $41 million in debt securities) or 1.33% of loans versus $183 million in the previous quarter and $78 million a year earlier.
• Net interest margin increased 6 bp from the previous quarter and declined 35 bp from a year earlier to 3.46%.
• In fiscal 2009, U.S. P&C earnings increased to $909 million versus $806 million in 2008 mainly due to the full year's inclusion of Commerce Bancorp's earnings versus two quarters a year earlier. However, the $900 million in earnings was 25% less than the banks' previous goal of $1.2 billion.
U.S. Platforms Combine to Represent 20% of Earnings
• U.S. P&C and TD Ameritrade contributed $270 million or $0.32 per share in the quarter, representing 20% of total bank earnings in the fourth quarter, down from a high of 29% in Q1/09.
Wholesale Banking Record Earnings
• Wholesale banking earnings were extremely strong at $372 million, tripling from $122 million a year earlier and increasing 14% sequentially from $327 million the previous quarter.
• Wholesale Banking earnings in fiscal 2009 more than doubled to $1,137 million from $480 million in 2008.
Trading Revenue – Resilient
• Trading revenue remains strong at $560 million versus a record of $633 million in the previous quarter and a weak $107 million a year earlier, driven by very strong fixed income trading.
• Interest rate and credit trading revenue was solid at $300 million versus a loss of $565 million a year earlier and a gain of $440 million in the previous quarter. Equity and other trading revenue increased significantly to $172 million from $1 million a year earlier and from $39 million in the previous quarter. Foreign exchange trading revenue declined to $88 million from $146 million a year earlier and $154 million in Q3/09.
• Trading revenue in fiscal 2009 more than quadrupled to $2,227 million from $544 million in 2008. We believe TD's Moody's Aaa credit rating is a major factor in the rebound in TD's trading platform.
Capital Markets Revenue
• Capital markets revenue was $343 million versus $342 million in the previous quarter and $276 million a year earlier.
• Capital Markets revenue for fiscal 2009 was $1,303 million versus $1,184 million a year earlier.
Security Gains
• Security gains were $26 million or $0.02 per share versus a loss of $90 million or $0.07 per share in the previous quarter and a gain of $55 million or $0.04 per share a year earlier.
Unrealized Surplus – $207 million
• Unrealized surplus was $207 million at quarter end versus $177 million in the previous quarter and $310 million a year earlier.
Securitization Revenue and Economic Impact
• Loan securitization revenue increased to $135 million in the quarter versus $92 million in the previous quarter.
• Securitization economic impact was a positive $74 million pre-tax, or an estimated $0.06 per share after-tax, versus $0.04 per share in the previous quarter. Securitization activity is recorded in the Corporate segment.
Loan Loss Provisions
• Specific LLPs increased to $521 million or 0.79% of loans versus $492 million or 0.76% of loans the previous quarter. The $521 million Q4/09 LLPs included $41 million related to debt securities. LLPs related to loans this quarter were $480 million, slightly lower than the $492 million in the previous quarter. Loan loss provisions have been restated for 2009 to included these debt securities provisions.
• Specific loan loss provisions in fiscal 2009 were $2,225 million or 0.85% of loans, including $250 million for debt securities, versus $1,063 million or 0.46% of loans in 2008. Total LLPs in fiscal 2009 were $2,480 million or 0.94% of loans including $255 million in general provisions.
• Our 2010 LLP forecast is unchanged at $2,100 million or 0.75% of loans. We are introducing our 2011 LLP forecast at $1,600 million or 0.54% of loans.
Loan Formations Stable
• Gross impaired loan formations before debt securities were stable at $974 million versus $969 million in the previous quarter. U.S. gross impaired loan formations increased moderately to US$412 million from US$387 million in the previous quarter. Gross impaired formations were $1,215 million in the quarter including $241 million in debt securities classified as loans versus $969 in the previous quarter.
• This quarter the bank reclassified $10.8 billion in securities (AFS & HTM) to loans in accordance with the CICA Handbook Section 3855. The August 2009 amendment changed the definition of a loan such that certain debt securities may be classified as loans if they do not have a quoted price in an active market and it is not the banks intent to sell the securities immediately or in the near term.
• Gross impaired loans increased to $2,311 million or 0.88% of loans from $1,947 million or 0.76% of loans in the previous quarter due primarily to debt securities classified as loans. Net impaired loans were negative $328 million.
Tier 1 Capital – 11.3%
• Tier 1 ratio was 11.3% versus 11.1% in the previous quarter. Total capital ratio was 14.9% versus 14.7% in the previous quarter.
• Tangible common equity to risk-weighted assets (TCE/RWA) was 9.9% versus 9.5% in the
previous quarter, while common equity to RWA increased to 18.6% from the previous
quarter.
• Book value per share increased 12% from a year earlier to $41.13.
• Risk-weighted assets declined 10% from a year earlier to $189.6 billion.
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Financial Post, 4 December 2009
Picking through the aftermath of a big earnings day on Thursday for Canadian banks, the markets seemed decidedly more enthused with CIBC's results compared with those of TD Bank and National Bank.
Shares in CIBC rose 2.22% yesterday as the company beat market expectations, while both TD (-2.52%) and National Bank (-5.85%) tumbled.
However, while TD Bank actually put out better-than-expected numbers it also made some very cautious outlook statements, Peter Rozenberg, analyst with UBS, noted.
"TD had a better than expected quarter, but management remained cautious regarding its 2010 outlook with U.S. PCLs (provisions for credit losses) expected to remain extended longer till the end of 2010," he said. "The current outlook is dependent on lower U.S. PCLs and higher returns which will take some time."
Mr. Rozenberg maintains a Neutral rating for TD while nudging the target price to $71 from $70.
This is still more bullish than Brad Smith with Blackmont, who is negative on the bank's U.S. business, noting its income fell 13% to $211-million.
"Given our less optimistic view with respect to the return potential of the U.S. strategy, we are maintaining our Underperform rating and $58 target price," he said in a note.
Meanwhile, both analysts are ambivalent on National Bank, which slightly missed consensus expectations.
"The bulk of the miss from our estimate ($1.40 versus $1.45) came from the net of increased minority interest and decreased taxes, while provisions for credit losses of $54-million were up 18% from last quarter and $4-million ahead of our estimate," Mr. Smith said.
"National Bank has done a good job of managing credit, driving good Capital Markets results, and managing expenses. While valuation is attractive, we think there is better leverage in other banks with trading profits expected to normalize, and credit leverage also higher at other banks," Mr. Rozenberg said.
Mr. Smith maintains a Sector Perform and $65 target price for National Bank, while Mr. Rozenberg has a Neutral rating while upping the target price to $65 from $63.
;
Picking through the aftermath of a big earnings day on Thursday for Canadian banks, the markets seemed decidedly more enthused with CIBC's results compared with those of TD Bank and National Bank.
Shares in CIBC rose 2.22% yesterday as the company beat market expectations, while both TD (-2.52%) and National Bank (-5.85%) tumbled.
However, while TD Bank actually put out better-than-expected numbers it also made some very cautious outlook statements, Peter Rozenberg, analyst with UBS, noted.
"TD had a better than expected quarter, but management remained cautious regarding its 2010 outlook with U.S. PCLs (provisions for credit losses) expected to remain extended longer till the end of 2010," he said. "The current outlook is dependent on lower U.S. PCLs and higher returns which will take some time."
Mr. Rozenberg maintains a Neutral rating for TD while nudging the target price to $71 from $70.
This is still more bullish than Brad Smith with Blackmont, who is negative on the bank's U.S. business, noting its income fell 13% to $211-million.
"Given our less optimistic view with respect to the return potential of the U.S. strategy, we are maintaining our Underperform rating and $58 target price," he said in a note.
Meanwhile, both analysts are ambivalent on National Bank, which slightly missed consensus expectations.
"The bulk of the miss from our estimate ($1.40 versus $1.45) came from the net of increased minority interest and decreased taxes, while provisions for credit losses of $54-million were up 18% from last quarter and $4-million ahead of our estimate," Mr. Smith said.
"National Bank has done a good job of managing credit, driving good Capital Markets results, and managing expenses. While valuation is attractive, we think there is better leverage in other banks with trading profits expected to normalize, and credit leverage also higher at other banks," Mr. Rozenberg said.
Mr. Smith maintains a Sector Perform and $65 target price for National Bank, while Mr. Rozenberg has a Neutral rating while upping the target price to $65 from $63.
