TD Bank Warns of Impact of Oil’s Fall on Canadian Economy

Financial Times, Ben McLannahan, 17 August 2015

Bharat Masrani, the chief executive of Toronto-Dominion Bank has warned of the chilling effects of lower oil prices on the Canadian economy, which could check the lender’s ambitions in the US, its most important growth market.

The Toronto-based bank, the country’s joint largest lender by assets alongside Royal Bank of Canada, has expanded more quickly in the US than any other big foreign bank since the crisis. But in an interview with the Financial Times, president and chief executive Bharat Masrani said the latest drop in the oil price could hurt consumption in certain parts of Canada that are highly reliant on energy exports — and by extension, affect the bank’s earnings power.

Mr Masrani said that while he does not worry about the bank’s direct lending to energy companies — which at about 1 per cent of total assets of C$1tn, is less than the peer-group average of about 2.5 per cent — he is concerned about the indirect exposures for a bank with dominant shares in retail markets across Canada. “If there is a knock-on effect on consumer confidence, then obviously that is something not to take lightly,” he said.

TD Bank has been building US presence since 2004, when it bought Banknorth Group, based in Portland, Maine. But since 2008 — when it added Commerce Bank of New Jersey — TD has accelerated the pace of expansion, taking advantage of tactical retreats by overextended US and European rivals. The bank was more or less unscarred by the financial crisis, benefiting from a decision to exit structured products in 2005, well before detonations in mortgage-related markets.

TD’s assets in the US have doubled since December 2008 to $317bn at the end of last year, according to Federal Reserve data, as the bank has built out an east coast network centred on wealthy urban areas. By doing so, says Moody’s, the credit rating agency, TD has “effectively addressed the core strategic dilemma of the Canadian banks”, which is how to deploy the capital they generate in their mature, oligopolistic home market.

“We took the view 10 years ago that the US retail market would be our next growth platform,” said Mr Masrani. “We are one of the best-rated banks in the world, and we are highly liquid. Obviously we are looking to expand where appropriate.”

But oil’s renewed slide could give the bank a less stable platform. TD has about C$52bn of consumer loans in the oil-producing provinces of Alberta, Saskatchewan and Manitoba, estimates Moody’s, second only to RBC. The rating agency warns that losses could multiply in the event of a prolonged downturn in crude, which has hit a six-year low.

“If our customers suffer, we suffer; that is how we take it, but from a financial perspective, it is a manageable situation,” said Mr Masrani.

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TD Bank Bets on US Branches as Rivals Cut Back

Financial Times, Ben McLannahan, 17 August 2015

If you are idling away time in a TD Bank branch, try throwing some change in the free TD coin-counter. If your children are nagging, let them play on the jukebox-like quiz machine. If your dog fidgets, toss it a TD biscuit.

It is all part of the service at TD, the Toronto-based lender that is still a big believer in the power of bricks and mortar. In the 12 months to the end of April, TD opened more branches across the US than it closed, defying an industry-wide trend. Across the five boroughs of New York City, the lender with C$1tn in assets recently eclipsed Bank of America by branch count — a strategic goal it had set at the annual meeting in 2012 — and is closing in on the top three of Chase, Citi and Capital One.

“The physical presence continues to be central to our customers’ needs in many ways,” says chief executive Bharat Masrani, during an interview in a flagship branch opposite Sony’s headquarters on Madison Avenue.

He describes an “omni-channel experience”, where a person could start a loan application in the morning on an iPad, pick it up again on an iPhone on the train, then walk into a store at lunch to close the deal. “How can we make that experience seamless?”

TD’s belief in the branch is not unusual. Unlike in the UK and parts of Europe, for example, where banks have spent years slimming down networks, US banks have tended to want to “put branches on every street corner”, says David Haber, chief executive of Bond Street, an online lender to small businesses.

It is only recently, in fact, that the tide has turned. Data from the Federal Deposit Insurance Corporation shows the total US branch-count falling each year since a peak of 99,550 in 2009, dropping to 94,725 as of June 2014.

But for many of the big banks, the pace of closures is beginning to pick up. JPMorgan Chase wants to cut about 6 per cent of its retail footprint by the end of next year, eliminating a net 300 branches in the process. Citigroup reduced its US branch count by 7 per cent in the 12 months to June. It is now focused on six cities, down from 14, pulling out of markets such as Dallas and Houston altogether.

Analysts say that some lenders are eyeing a gradual return to more normal monetary policy from the US Federal Reserve, which could catch banks with big branch networks on the hop.

“We suspect that when [interest] rates do rise, technology will allow depositors to move their money to high interest rate accounts with a speed never before seen,” wrote Frederick Cannon, global director of research at Keefe, Bruyette & Woods, in a recent report.

Bob Meara, a senior analyst at Celent in New York, says that simple pressure from shareholders for higher returns should result in faster shrinkage of costly branch networks. “There’s no two ways around it — banks do not need the densities they used to. The scales will have to tip.”

Mr Masrani, whose rise to chief executive last November capped a 35-year career with TD, does not worry that his network-building puts him out of step with the industry. He notes that, with 1,302 US branches in April — a slight increase from 1,297 a year earlier — TD is still 10th by total branch count, well behind the likes of Chase, with 5,504.

He also sees plenty of scope for “optimisation” of TD’s US network, which after acquisitions in 2004 and 2008 stretches down the entire East Coast, from Maine to Florida. TD is now experimenting with “five, six or seven” different formats for its branches, Mr Masrani says, up from just one or two a few years ago. In Baltimore, for example, it recently opened its first teller-less branch, about one-third smaller than the previous default size, featuring three high-tech cash machines and a handful of “financial services associates” to help customers use the machines.

The important thing is to “wow” the customer, says Mr Masrani, 59, who ran TD divisions in India and Europe before overseeing the bank’s expansion in the US. He notes that every new employee does at least one course at TD University, a purpose-built campus in Mt Laurel, New Jersey, to learn the TD way. All staff are encouraged to use the phrase, “TD Bank, America’s most convenient bank” like a mantra. (The chief executive does so himself about half a dozen times during the interview.)

That is why the openings will continue. When it cut the ribbon last month on a new branch on the corner of Grand St and Allen St on Manhattan’s Lower East Side, TD brought its New York branch tally to 127. It has committed to opening another 10 by the end of the year, and may consolidate a few others. However, its chief executive cautions that the pace of expansion in the US may be held back as the falling oil price could affect the bank’s earnings power in its home market.

“We may build a new location and bring business to that location if there is a better look and feel to it, and it has better technology,” says Mr Masrani. “But that doesn’t mean we are not committed to our physical presence, because that is central to what we do.”

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