Review of Bank's Q3 2011 Earnings

Scotia Capital, 23 September 2011

• Third quarter operating earnings were modestly better than expected, increasing 16% YOY and 2% QOQ. Volatile and depressed wholesale banking results were offset by resilient retail banking earnings and strong earnings growth from both wealth management and international.

Implications

• Despite the challenging quarter, profitability remained strong (ROE 17.2%, RRWA 2.36%) with CM and TD both increasing dividends a modest 3%.

Recommendation

• Reducing our 2012E EPS by 4.5% due to expected decline in retail NIM and our target prices by 14% based on a contraction in P/E multiples due to the overall decline in valuations, systemic risk, and lower earnings estimates. We are introducing our 2013E EPS with expected growth of 9% YOY.

• We are upgrading LB to 2-SP from 3-SU as its valuation discount has widened to 27% versus CWB and its shares have underperformed in 2011. We are also downgrading BMO to 3-SU from 2-SP due to high relative valuation versus profitability and potential for weaker wholesale earnings.

• Maintain overweight the bank group.

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TD Bank Q3 2011 Earnings

The Wall Street Journal, Caroline Van Hasselt, 1 September 2011

Toronto-Dominion Bank raised its dividend for the second time this fiscal year as strong retail earnings in Canada and the U.S. helped push the lender's third-quarter profit up a better-than-expected 23%.

Strong personal and commercial banking results on both sides of the border were tempered somewhat by a 40% drop in earnings from wholesale banking, which posted lower fixed-income and currency trading revenue because of market uncertainty and volatility.

TD, ranked No. 2 in Canada and No. 10 in the U.S. by assets, earned C$1.45 billion (US$1.48 billion), or C$1.58 a share, in the three months ended July 31, up from C$1.18 billion, or C$1.29, a year earlier. Adjusted earnings jumped to C$1.72 a share, well ahead of the Thomson Reuters mean estimate of C$1.62.

Credit-loss provisions rose 10% to C$374 million, as the bank set aside more money for potentially bad loans in the U.S. that it picked up through acquisitions. TD last year moved into the Carolinas and Florida through the purchase of a handful of troubled retail banks. The increase was partially offset by lower credit-loss provisions at TD Canada Trust, its domestic personal and commercial bank.

"I don't think we're going to see much more of a decline in credit losses," Colleen Johnston, TD's chief financial officer, said. "Loss rates are probably bottoming out, but now we'll have volume-related increases in credit losses, but the rate of losses by category will remain fairly stable with where we are now. So, we're really quite comfortable from a credit standpoint."

TD, which had raised its dividend in the first quarter, will now pay a quarterly dividend of 68 Canadian cents. The bank is the second of Canada's big banks to boost its dividend this quarter. Canadian Imperial Bank of Commerce announced a dividend increase Wednesday.

In Toronto, TD shares rose 77 Canadian cents, or 1%, to C$78.25. The stock jumped up as much as 2% at the opening bell.

TD said its Canadian personal and commercial banking division earned C$954 million in the latest quarter, up 13% from a year earlier, while earnings from its U.S. personal and commercial banking operations rose 21% to US$328 million.

Last month, TD, a Visa-card issuer, agreed to buy MBNA Canada's MasterCard portfolio, a deal that when it closes in the first quarter of 2012 will make the bank a dual credit-card issuer in Canada.

Net income in its global wealth-management division, excluding TD Ameritrade, jumped 26% to C$195 million primarily from higher fee revenue. Expenses rose 9% mainly from higher compensation. TD added 216 employees, up 3% from a year ago, as it beefs up the division.

The bank now has about 750 investment advisers, Ms. Johnston said.

"Historically, we haven't had as much strength on the full-service brokerage side, and that's an area where we've been growing quite significantly. We have more than doubled our group of advisers" over the last number of years, she said.

Wholesale banking earnings dropped to C$105 milion, as revenue fell 20% to C$458 million.

As with other Canadian banks, TD's fixed-income and currency trading revenue dropped sharply, reflecting reduced market volumes as clients lowered their risk and increased cash holdings amid weak U.S. economic data and the possibility of sovereign-debt defaults in Europe.

TD rounds out a mixed third-quarter reporting season for Canada's big banks. Canadian Imperial, Bank of Nova Scotia and Bank of Montreal all posted better-than-expected results, while National Bank of Canada's results were in line. Canada's largest lender, Royal Bank of Canada, posted a loss—its second in 18 years—after taking a big hit from discontinued operations in the U.S.

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