03 February 2011

TD Bank CEO Says Capital Push Won't Impact M&A & Dividends

Bloomberg, Sean B. Pasternak, 3 February 2011

Toronto-Dominion Bank Chief Executive Officer Edmund Clark came to Wall Street this week with a simple recipe for bankers trying to avert another financial crisis: more transparency and less arrogance.

“Hubris is the biggest risk in the banking system,” Clark said in an interview at Bloomberg’s headquarters in New York. “It is the most dangerous emotion to run a financial institution.”

Clark is in a position to dispense advice. As head of Canada’s second-largest bank, he averted most of the writedowns and credit losses that led to the financial crisis in 2008. The bank is one of five lenders rated Aaa at Moody’s Investors Service and its stock gained 24 percent in the past three years, compared with a 40 percent drop in the KBW Bank Index.

Toronto-Dominion exited a structured products business in 2005, which included collateralized debt obligations, after Clark said he didn’t understand the risks associated with it. As a result, the lender recorded less than C$1 billion ($1 billion) in debt-related writedowns during the financial crisis, compared with the $1.49 trillion recorded by banks and brokers worldwide.

Canada’s banks received no government bailouts during the crisis and has been ranked the world’s soundest for three straight years by the Geneva-based World Economic Forum.

Clark warned against Canadian lenders resting on their laurels after weathering the crisis better than many U.S. or European competitors.

“The risk in Canada is we get too comfortable with how well we did,” Clark said.

Clark, 63, says he’s tried to foster transparency and openness at his Toronto-based company so that employees and executives aren’t afraid to speak up when they think the bank is heading in the wrong direction.

“You’ve got to build cultures of transparency; comfort where people say ‘Ed, I don’t agree with this. It’s a really stupid idea,’” Clark said.

He cites an example of a bank teller who posted a comment on the company’s internal message board complaining about Clark’s compensation package, which totaled C$10.4 million last year.

“This teller in one of the branches writes ‘Ed, I love you to death, but this is ridiculous how much you get paid.’ Someone sees that, then they say ‘maybe it’s alright for me to push back here.’”

He warned against banks believing “their own propaganda” and creating a culture where people don’t push back.

“I always tell my people, take the business totally seriously but don’t take yourself too seriously,” Clark said.

Clark, who holds a Doctorate in economics from Harvard University, has no plans to extend his term beyond 2013, when he will retire. He was appointed CEO in 2002.

“I look at myself as being lucky to get a chance, for 10 years or whatever, to run a 155-year-old institution in Canada, have a shot at making it better for my successor to do the same,” he said. “To go and blow up those institutions, is a terrible, terrible thing to have done, just by letting your ego get out of control.”

Clark said the lack of hubris applies to his investment- banking unit TD Securities, which last year trailed RBC Capital Markets and BMO Capital Markets in Bloomberg rankings for stock issuance and merger advice.

About 21 percent of Toronto-Dominion’s C$4.6 billion in profit last year came from wholesale banking, compared with 32 percent at domestic rival Royal Bank of Canada. Clark said he doesn’t want TD Securities to make risky bets on capital markets.

“It’s a totally different strategy,” to what other investment banks have done in Canada, said Clark, who spoke yesterday at an investor conference in New York sponsored by Morgan Stanley. “I’ve always said ‘I don’t care what percentage you are; I care what you do’.”

The investment bank will continue to earn about C$800 million to C$1 billion a year working on large Canadian transactions and assisting clients in the U.S. and abroad.

“The trick is not to let them drift and say, ‘why don’t I take on Goldman, or why don’t I take on Morgan Stanley?’” Clark said. “Because I don’t think it’s a space we can occupy.”

Toronto-Dominion will focus expansion mostly in North America instead of markets such as China, Clark said.

“Trying to figure out an Asian strategy would be one of our harder tasks,” said Clark. “If I would go head to head with a competitor, why am I going to get more, on average? What’s my competitive edge?”

Toronto-Dominion rose C$1.45, or 1.9 percent, to C$77.63 at 4:28 p.m. on the Toronto Stock Exchange. The shares have climbed 4.6 percent this year.
Reuters, 2 February 2011

The head of Toronto-Dominion Bank says a push to rapidly phase in tighter capital rules won't affect the bank's plans for dividend hikes or acquisitions.

The Basel III rules, unveiled last year, set higher capital ratio levels for global banks, and Canada's financial regulator said this week that Canadian banks should meet the new levels "as soon as possible".

The Office of the Superintendent of Financial Institutions, also said banks should be cautious on "actions that weaken their capital position", such as dividends and acquisitions.

"It doesn't change the way I feel about acquisitions," TD Chief Executive Ed Clark said at the Morgan Stanley Financials Conference in New York. He said TD would issue equity in conjunction with an acquisition if it felt it was necessary.

"I believe you shouldn't do acquisition unless you were prepared to issue shares," Clark said.

The bank's capital ratio under Basel III rules is believed to be well below the 7 percent standard that must be in place by 2019.

Clark said the bank sets dividend on earnings levels, targeting a payout ratio of 35-45 percent.

He has said the bank will issue guidance on dividends when it reports first-quarter results next month. Analysts have taken that to mean the bank will raise its payout at that point.

Canada's other big banks are also expected to raise dividends over the next year. Most of the banks have not raised their payouts since 2008, when the financial crisis took hold.

Brad Smith, an analyst at Stonecap Securities, said the banks with lower capital levels, like TD, may feel compelled to implement a smaller dividend hike than a better-capitalized bank.

The Basel rules are designed to stave off a repeat of the global financial crisis. Canada's banks emerged from the crisis relatively unscathed, without needing any government bailouts, unlike many U.S. and European rivals.