15 August 2011

How TD Bank Is Invading the US Market

The Wall Street Journal, Caroline Van Hasselt, 15 August 2011

Toronto-Dominion Bank has quietly launched an assault south of the border, hungry for growth opportunities that have dried up in its home country.

Canada's second-largest bank by assets now has 1,285 retail branches in the U.S., compared with 1,131 in Canada. TD's retail-banking unit is the 10th-largest in the U.S., bulking up with four takeovers last year that deepened its reach in Florida and pushed TD into North Carolina and South Carolina.

Some analysts expect TD Ameritrade Holding Corp., the online brokerage firm that is 43%-owned by TD, to bid for E*Trade Financial Corp. That could deliver yet another boost to the Canadian bank. TD declined to comment on the possibility of a takeover bid.

On Monday, TD announced an agreement to buy Bank of America Corp.'s MBNA Canada, the fourth-largest credit-card issuer in Canada, for C$7.5 billion (US$7.64 billion) in cash, or a 1% premium above the portfolio's book value.

As part of the deal, TD will assume C$1.1 billion in liabilities. The purchase, expected to be completed later this year, will more than double the bank's outstanding credit-card balances to C$16.7 billion, or about US$16.9 billion.

Given the U.S. economy's struggles, TD's expansion is risky. Still, the U.S. is a tempting growth market for Canadian banks, since their home country has a saturated retail-banking market with no opportunities to consolidate because of government restrictions on big bank mergers.

The pressure of slowing economic growth has intensified recently, with low Canadian interest rates triggering a borrowing binge. Canadian household-debt levels are now above those in the U.S. That has many economists and analysts warning Canadians may be tapped out, threatening to slow retail-banking growth opportunities.

TD moved cautiously into the U.S., acquiring in 2004 a 51% stake in Banknorth, based in Portland, Maine. TD bought the entire company three years later. In 2008, TD paid $8.5 billion to acquire Commerce Bancorp, of Cherry Hill, N.J. In April, TD completed a $6.3 billion acquisition of U.S. auto lender Chrysler Financial Corp.

TD's acquisition of Commerce was initially jeered as poorly timed. But the deal now is an example of how the bank hopes to tap the U.S. market and wring more profit out of its recent purchases there.

Commerce was a convenience-oriented lender, bent on getting customers in and out quickly with ample branch hours. That resembles the "8-to-8, six days straight" service model of Canada Trust, which TD acquired in 2000 and renamed TD Canada Trust.

Ed Clark, TD's chief executive, said an 18-month integration effort at Commerce puts TD in position to win more market share along the East Coast. "If we did nothing more than what we've done now and just exploited the organic, in-place opportunities, I'd be a very happy camper," he said.

TD's branches in the U.S. still aren't nearly as profitable as those in Canada, but executives hope to narrow the gap by boosting sales of everything from checking accounts to mortgages. The growth potential eases the pressure for more acquisitions, Mr. Clark said.

Greater New York City, for instance, boasts a deposit base just shy of $1 trillion, about two-thirds the size of the whole of Canada. TD Bank is now fifth by deposits in that retail-banking market, with a 3.6% share. Mr. Clark wants to be No. 3 in four or five years, without new acquisitions.

His strategy is rooted in U.S. community banking, including extending banking hours and opening branches on Saturday and, in some states, on Sunday. But the Toronto-based bank is also pushing its U.S. branches to rev up so-called cross-selling—for instance, marketing mortgages or other financial services to plain-vanilla checking account holders. TD is tying a portion of compensation to those new product sales.

By targeting mortgage lending, Mr. Clark said he can capture new customers neglected by U.S. banks still shell-shocked from the American housing bust. "In the U.S. today, people with great credit scores and sitting on houses that are not going to depreciate dramatically cannot get mortgages," he said.

Branch employees now spend 30% more of their time selling products compared to last year, said TD Bank's Fred Graziano, head of regional commercial banking. In the first six months of the year, insurance referrals have more than doubled from the year-earlier period, and store employees sent more than 17,000 referrals to TD Ameritrade, he said.

But TD Bank has ceded some ground in terms of customer satisfaction. Last year, it lost Commerce's coveted top ranking by J.D. Powers and Associates for customer satisfaction in the Mid-Atlantic market, dropping to No. 5. TD has moved back up in this year's survey, now ranking No. 3.

"They have challenges that typically come with acquisitions," said Lubo Li, J.D. Powers' senior director of financial services.

TD says it doesn't think its efforts at selling more products will detract from the customer experience. "As much as we love the service end of the business and want to own that space, we actually want to own the sales and service space" as well, Mr. Graziano said. "And, that's being driven from Canada."