17 August 2015

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.