03 March 2011

TD Bank Q1 2011 Earnings

Financial Times, Bernard Simon, 3 March 2011

Canada’s two biggest financial institutions, Royal Bank of Canada and Toronto-Dominion, reported stronger-than-expected quarterly profits on Thursday, with TD lifting its dividend for the first time since the onset of the financial crisis.

RBC’s earnings hit a record C$1.84bn (US$1.89bn) in the three months to January 31, up 23 per cent from a year earlier. TD lifted earnings by 19 per cent to C$1.54bn, including record profits at its US and Canadian retail operations.

“It was a great quarter for both banks,” said Peter Routledge, analyst at National Bank Financial. Both benefited from lower loan loss provisions as a result of improved economic conditions.

However, Mr Routledge said that RBC may have felt less confident about lifting its dividend because of its heavier dependence on volatile capital markets business.

RBC lost its Moody’s triple-A credit rating last December because of its growing capital markets exposure.

TD is one of only five banks worldwide that still boasts a triple-A rating. Ed Clark, chief executive, forecast “a very good year” ahead, citing “TD’s strong capital position, ongoing investments in our franchises and the proven strength of our retail-focused strategy.”

The Canadian banks came through the financial crisis in far healthier condition than many of their US and European counterparts thanks to a more conservative lending culture, a resilient housing market and robust regulation.

All maintained their dividends. By contrast, almost every big US bank – Goldman Sachs is one notable exception – slashed its pay-out.

Mr Routledge expects that Bank of Nova Scotia, the number-three bank, will also raise its dividend when it reports next week.

With capital ratios well above regulatory minimums, the Canadian institutions have recently embarked on an acquisition spree.

TD agreed to pay US$6.3bn in cash last December for Chrysler Financial, the US-based vehicle finance group. The deal was part of a drive to expand the services offered through its extensive retail network, now the seventh biggest in the US.

Bank of Montreal signed a deal to buy the Wisconsin-based lender Marshall & Ilsley for $4.1bn, more than doubling its US presence. RBC’s expansion strategy is centred on global capital markets and wealth management.

Gordon Nixon, RBC’s chief executive, told the annual meeting on Thursday that the bank was committed to maintaining a balance between its retail and capital markets business of about 75-25 per cent.

While expressing confidence in the bank’s prospects, Mr Nixon said that “one of the biggest risks we face in Canada is that we push regulation so far ahead of other countries, we end up not only with an uneven playing field but with a real cost to Canadians in the form of compromised ability to grow and compete.”
Financial Times, Bernard Simon, 3 March 2011

Half-a-dozen intruders recently burst into the TD Bank branch in King of Prussia, Pennsylvania. They were not robbers but a group of bank employees, wearing green hats, waving green balloons and carrying gifts to welcome its new brokerage specialist.

The celebration marked another small step in an ambitious plan by Canada’s Toronto-Dominion Bank to make its mark in US retail banking.

TD Bank in the US is mainly the product of two big acquisitions – Maine-based Banknorth in 2005 and Commerce Bank, based in New Jersey, three years later – that have given the Canadians a presence in every east coast state except Georgia.

TD now operates the seventh-biggest retail bank in the US. With 1,300 branches, it has more outlets south of the border than in Canada.

The Canadians are trying to nudge their US subsidiary in a new direction, which is where the newly arrived brokerage specialist in King of Prussia comes in.

Like many other second-tier US banks, Banknorth and Commerce Bank traditionally focused on gathering cheap deposits through exceptional customer service, then recycling the funds into business loans.

They left other forms of lending mostly to specialised institutions, such as mortgage lenders and carmakers’ captive vehicle-finance companies.

TD wants to shift the emphasis by pushing a wider variety of loans, such as mortgages and car loans, as well as other services such as insurance and portfolio management.

“We are retailers that happen to be in banking,” says Bharat Masrani, head of TD’s US operations.

TD’s US rivals have also tried to move into cross-selling but in many cases with less-than-stellar success. Citigroup, Washington Mutual and Wachovia are among those that strayed from their core retail banking business with disastrous results, particularly amid the subprime mortgage crisis.

Turning branch managers and tellers into hard-nosed salespeople requires a sharp shift in culture, with potentially unpredictable results. As Mr Masrani acknowledges: “Selling is not always an easy conversation. You have to make sure that you win the hearts and minds of your people.”

The Canadians have several advantages. Commerce Bank was known as a maverick even before the acquisition. Using the slogan “America’s Most Convenient Bank”, its “stores” were open longer than most other banks, including Sundays. A Walmart-style greeter stood at the doors.

Toronto-Dominion already has a strong presence in the businesses that it wants its US branches to promote. The new brokerage specialist at the King of Prussia branch works for TD Ameritrade, one of the US’s biggest online brokers, which is 39 per cent owned by Toronto-Dominion.

TD also took a big step into vehicle financing last December, buying Chrysler Financial for $6.3bn.

“They’re sitting on two very powerful franchises on both sides of the border,” says Peter Routledge, analyst at National Bank Financial in Toronto.

The Canadians are confident that they can succeed where others have failed by imbuing TD Bank’s culture with some Canadian politeness, reinforced by rigorous training and a panoply of incentives and rewards.

TD has sought to instil a more sales-oriented culture by building on Commerce Bank’s “WOW!” system, which encourages employees “to surprise and delight” customers and each other. The celebration in King of Prussia was mounted by what the bank calls a WOW Patrol – a group of volunteers who commandeer a WOW van to surprise a colleague.

Mike Carbone, who heads TD’s operations in the Philadelphia area, says: “The more products and services you have with any one client, the less likely they are to leave you.”.