UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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TD BANK FINANCIAL GROUP
Q1 2007 EARNINGS CONFERENCE CALL
THURSDAY FEBRUARY 22, 2007
Q1 2007 EARNINGS CONFERENCE CALL
THURSDAY FEBRUARY 22, 2007
DISCLAIMER
THE INFORMATION CONTAINED IN THIS TRANSCRIPT IS A TEXTUAL REPRESENTATION OF THE
TORONTO-DOMINION BANK’S (“TD” or the “Bank”) Q1 2007 EARNINGS CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE
REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALL. IN NO WAY DOES TD ASSUME ANY RESPONSIBILITY FOR
ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON TD’S WEB SITE OR IN
THIS TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE CONFERENCE CALL ITSELF AND TD BANKNORTH’S AND TD’S
SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
FORWARD-LOOKING INFORMATION
From time to time, the Bank makes written and oral forward-looking statements, including in
this report, in other filings with Canadian regulators or the U.S. Securities and Exchange
Commission (SEC), and in other communications. All such statements are made pursuant to the “safe
harbour” provisions of applicable Canadian securities legislation. Forward-looking statements
include, among others, statements regarding the Bank’s objectives and targets for 2007 and beyond
and strategies to achieve them, the outlook for the Bank’s business lines, and the Bank’s
anticipated financial performance. The economic assumptions for 2007 for each of the business
segments are set out in the 2006 Annual Report under the headings “Economic Outlook” and “Business
Outlook and Focus for 2007”. Forward-looking statements are typically identified by words such as
“believe”, “expect”, “anticipate”, “intend”, “estimate”, “plan”, “may” and “could”. By their very
nature, these statements require the Bank to make assumptions and are subject to inherent risks and
uncertainties, general and specific, which may cause actual results to differ materially from the
expectations expressed in the forward-looking statements. Some of the factors that could cause such
differences include: credit, market, liquidity, interest rate, operational, reputational,
insurance, strategic, foreign exchange, regulatory, legal and other risks discussed in the
management discussion and analysis section in other regulatory filings made in Canada and with the
SEC, including the Bank’s 2006 Annual Report; general business and economic conditions in Canada,
the U.S. and other countries in which the Bank conducts business, as well as the effect of changes
in monetary policy in those jurisdictions and changes in the foreign exchange rates for the
currencies of those jurisdictions; the degree of competition in the markets in which the Bank
operates, both from established competitors and new entrants; legislative and regulatory
developments; the accuracy and completeness of information the Bank receives on customers and
counterparties; the development and introduction of new products and services in markets;
developing new distribution channels and realizing increased revenue from these channels; the
Bank’s ability to execute its integration, growth and acquisition strategies, including those of
its subsidiaries, particularly in the U.S.; the ability to obtain the
approval of TD Banknorth Inc. (“TD Banknorth”)
stockholders, or any required governmental approvals, of the proposed merger between TD Banknorth
and a wholly owned subsidiary of the Bank and the ability to satisfy other conditions to such
transaction on the proposed terms and schedule; the impact of the factors enumerated above on TD
Banknorth’s financial results, businesses, financial condition or liquidity; changes in accounting
policies and methods the Bank uses to report its financial condition, including uncertainties
associated with critical accounting assumptions and estimates; the effect of applying future
accounting changes; global capital market activity; the Bank’s ability to attract and retain key
executives; reliance on third parties to provide components of the Bank’s business infrastructure;
the failure of third parties to comply with their obligations to the Bank or its affiliates as such
obligations relate to the handling of personal information; technological changes; the use of new
technologies in unprecedented ways to defraud the Bank or its customers; change in tax laws;
unexpected judicial or regulatory proceedings; continued negative impact of the U.S. securities
litigation environment; unexpected changes in consumer spending and saving habits; the possible
impact on the Bank’s businesses of international conflicts and terrorism; acts of God, such as
earthquakes; the effects of disease or illness on local, national or international economies; the
effects of disruptions to public infrastructure, such as transportation, communication, power or
water supply; and management’s ability to anticipate and manage the risks associated with these
factors and execute the Bank’s strategies. A substantial amount of the Bank’s business involves
making loans or otherwise committing resources to specific companies, industries or countries.
Unforeseen events affecting such borrowers, industries or countries could have a material adverse
effect on the Bank’s financial results, businesses, financial condition or liquidity. The preceding
list is not exhaustive of all possible factors. Other factors could also adversely affect the
Bank’s results. For more information, see the discussion starting on page 56 of the Bank’s 2006
Annual Report. All such factors should be considered carefully when making decisions with respect
to the Bank, and undue reliance should not be placed on the Bank’s forward-looking statements. The
Bank does not undertake to update any forward-looking statements, whether written or oral, that may
be made from time to time by or on its behalf. Additional factors that could cause TD Bank
Financial Group’s and TD Banknorth’s results to differ materially from those described in the
forward looking statements can be found in the 2006 Annual Report on Form 40-F for TD Bank
Financial Group and the 2005
Annual Report on Form 10-K of TD Banknorth filed with the Securities and Exchange Commission and
available at the Securities and Exchange Commission’s Internet site (http://www.sec.gov).
ADDITIONAL INFORMATION
In connection with the proposed merger between TD Banknorth and a wholly-owned subsidiary of
The Toronto-Dominion Bank, TD Banknorth filed a revised preliminary proxy statement with the
Securities and Exchange Commission on February 13, 2007. TD Banknorth will also file a definitive
proxy statement with the Securities and Exchange Commission in connection with the proposed merger.
Stockholders of TD Banknorth are urged to read the definitive proxy statement regarding the
proposed merger when it becomes available, because it will contain important information.
Stockholders will be able to obtain a free copy of the definitive proxy statement as well as other
filings containing information about TD Bank Financial Group and TD Banknorth, when available,
without charge, at the Securities and Exchange Commission’s Internet site (http://www.sec.gov). In
addition, copies of the definitive proxy statement can be obtained, when available, without charge,
by directing a request to TD Bank Financial Group, 66 Wellington Street West, Toronto, ON M5K 1A2,
Attention: Investor Relations, (416) 308-9030, or to TD Banknorth Inc., Two Portland Square, P.O.
Box 9540, Portland, ME 04112-9540, Attention: Investor Relations, (207) 761-8517.
TD Bank Financial Group, TD Banknorth, their respective directors and executive officers and other
persons may be deemed to be participants in the solicitation of proxies in respect of the proposed
transaction. Information regarding TD Bank Financial Group’s directors and executive officers is
available in its Annual Report on Form 40-F for the year ended October 31, 2006, which was filed
with the Securities and Exchange Commission on December 11, 2006, and its notice of annual meeting
and proxy circular for its 2007 annual meeting, which was filed with the Securities and
Exchange Commission on February 23, 2007. Information regarding TD Banknorth’s directors and
executive officers is available in TD Banknorth’s proxy statement for its most recent annual
meeting, which was filed with the Securities and Exchange Commission on March 30, 2006. Other
information regarding the participants in the proxy solicitation and a description of their direct
and indirect interests, by security holdings or otherwise, are contained in the revised preliminary
proxy statement and Amendment No.1 to the Schedule 13E-3 transaction statement filed with the
Securities and Exchange Commission on February 13, 2007.
CORPORATE PARTICIPANTS
Ed Clark
|
President & CEO, TD Bank Financial Group | |
Colleen Johnston
|
EVP & CFO, TD Bank Financial Group | |
Bob Dorrance
|
Chairman & CEO, TD Securities | |
Tim Hockey
|
Co-Chair, TD Canada Trust | |
Bernie Dorval
|
Co-Chair, TD Canada Trust | |
Bill Hatanaka
|
Chairman & CEO, TD Wealth Management | |
Mark Chauvin
|
EVP & Chief Risk Officer |
CONFERENCE CALL PARTICIPANTS
Michael Goldberg
|
Desjardins Securities — Analyst | |
Darko Mihelic
|
CIBC World Market— Analyst | |
Ian DeVerteuil
|
BMO Nesbitt Burns — Analyst | |
Mario Mendonca
|
Genuity Capital Markets — Analyst | |
Jim Bantis
|
Credit Suisse First Boston — Analyst | |
Brad Smith
|
Blackmont Capital — Analyst | |
Shannon Cowherd
|
Citigroup — Analyst | |
Andre Hardy
|
Merrill Lynch — Analyst |
2
PRESENTATION
Colleen Johnston — Toronto Dominion Bank — CFO
Slides 1& 2
Good afternoon and welcome to TD Bank’s first quarter 2007 investor presentation. I am Colleen Johnston, and I’m the CFO of the bank. We will begin today’s presentation with strategic remarks from Ed Clark, the bank CEO, after which I will present the bank’s first quarter operating performance. We will then entertain questions from those present as well as pre-qualified analysts and investors on the phone. Also present today to answer your questions are Bob Dorrance, Chairman and CEO of TD Securities, Tim Hockey and Bernie Dorval, cochairs of TD Canada Trust, Bill Hatanaka, Chairman and CEO of TD Waterhouse, and Mark Chauvin, Chief Risk Officer.
Good afternoon and welcome to TD Bank’s first quarter 2007 investor presentation. I am Colleen Johnston, and I’m the CFO of the bank. We will begin today’s presentation with strategic remarks from Ed Clark, the bank CEO, after which I will present the bank’s first quarter operating performance. We will then entertain questions from those present as well as pre-qualified analysts and investors on the phone. Also present today to answer your questions are Bob Dorrance, Chairman and CEO of TD Securities, Tim Hockey and Bernie Dorval, cochairs of TD Canada Trust, Bill Hatanaka, Chairman and CEO of TD Waterhouse, and Mark Chauvin, Chief Risk Officer.
I know that this presentation contains forward-looking statements and actual results could differ
materially from what is discussed. Certain material factors or assumptions were applied in making
these statements. For additional information, we refer to you our annual report. This document
includes a description of factors that could cause actual results to differ and can be found on our
website at TD.com. Ed, over to you.
Thanks, Colleen, and thank you for joining us this afternoon. As Colleen indicates, she is going to
give you the details of the quarter, but what I would like to do, is share my perspective on where
we are today and why we feel pretty optimistic about the future. Obviously it was out an
outstanding quarter for us. All of our businesses made an excellent contribution, and it does feel
good to start off the year with this kind of performance. We delivered adjusted earnings per share
growth of 20%, and as you know, our longer-term goal is EPS growth of 7% to 10%. But it is clear
over the last couple of years we’ve been able to grow earnings and dividends by more than that. Our
confidence in our earnings is reflected in today’s announcement of a $0.05 or 10% increase in our
quarterly dividend. This underscores our philosophy, to out perform on dividends you should out
perform on earnings. Next quarter our dividend rate will be 20% higher than it was in the same
quarter in 2006, which is in line with our year-over-year earnings growth.
We posted record earnings again in our Canadian personal and commercial banks and wealth management
in Canada up 15% year-over-year. [sic — see press release] In TDCT it is a remarkable story that
our business has managed to continue to have its 11% revenue growth coupled with a continuing 3%
gap over expense growth, earnings grew 14%. Today in wealth management also continues to have a
remarkable story. Rapid revenue growth, continuing investment in the future, and 16% profit growth.
We continue to have a view that as the year progresses there will be a slowdown in revenue growth.
With that in mind, all of our businesses are managing expense growth in line with that assumption
while ensuring ongoing investments in customer-facing areas. We’re definitely not letting up on
those investments where we’re making investments for the future. This quarter we added more
client-facing advisors in wealth, more commercial bankers and small business advisors, more sales
staff in merchant services and we opened up more new branches.
Turning to wholesale, they delivered a very strong results in the first quarter. This was
wholesale’s second strongest quarter in terms of trading revenue out of the last ten quarters. In
addition, the strength we’re building in TD Securities domestic core businesses is becoming more
and more evident. We continue to focus on our goal of being a top three dealer in Canada. We’re
very pleased with wholesale’s strong start to the year, but we clearly recognize that the first
quarter has historically the wholesale’s strongest quarter. We expect this year to be no exception.
In terms of our U.S. operations, TD Ameritrade delivered its best quarter ever and contributed $64
million in the first quarter to TD’s bottom line. And as you heard from Joe Moglia on his earnings
call, TD Ameritrade remains focused on growing assets through each of its client segments while
executing this year on the smooth integration of TD Waterhouse.
TD Banknorth continues to face a tough banking environment. Bharat Masrani and his team are working
hard to improve organic growth and reduce TD Banknorth’s operating expenses in the 5% to 8% range.
As Bharat has said, his initiatives will likely result in a restructuring charge, but it is still
too early in the process of TD Banknorth considering its options to have a view on its order of
magnitude. On the subject
3
of privatization, the process continues as expected. We hope soon to be setting the date for the
shareholders meeting. If the vote is successful, we would expect to close before the end of April
as previously announced.
To sum up, we had a terrific first quarter, launching us into a year where we have every reason to
believe we’ll continue to be very successful. A year to go, this extremely strong first quarter
will be hard act to follow. Looking forward, there are a number of moving parts to bear in mind.
First, as you know, there are fewer days in the second quarter. And clearly with our focus on TD —
on retail banking, TD will be impacted likely more than others by that fact. Second, past
experience tells us that the wholesale bank results typically dip in the second half of the year.
And we expect that the corporate segment should return to our stated range of a loss of $20 to $40
million per quarter. In addition, we remain of the view that the economy is going slow, and with it
our revenues. So as I said, we’re managing the business today to prepare for that eventuality later
in the year. Finally, however, it is obvious we continue to have very strong momentum in our
Canadian retail businesses. We also expect TD Ameritrade to have a strong fourth quarter as a
result of the economies of conversion, and provided that the TD Banknorth shareholders vote for
privatization, we will have additional Banknorth earnings. All in all I believe our first quarter
results are consistent with our view that we continue to be positioned to out perform this year.
With EPS growth expected to well exceed our 7% to 10% range. With that, I will turn things over to
Colleen.
Slide 4
Thanks, Ed. Let me take you through the first quarter. Please turn to slide four. Let’s start with the highlights. We had a great quarter. Total bank adjusted net income was just over a billion dollars, up 21% from last year. The first time adjusted earnings have exceeded the $1 billion mark. This translated to adjusted earnings per share of $1.38, up 20% from last year. Our reported earnings of $1.26 were down from $3.20 last year. Our reported results in Q1 of ‘06 included $2.32 per share or $1.067 billion from the dilution gain on the Ameritrade transaction.
Thanks, Ed. Let me take you through the first quarter. Please turn to slide four. Let’s start with the highlights. We had a great quarter. Total bank adjusted net income was just over a billion dollars, up 21% from last year. The first time adjusted earnings have exceeded the $1 billion mark. This translated to adjusted earnings per share of $1.38, up 20% from last year. Our reported earnings of $1.26 were down from $3.20 last year. Our reported results in Q1 of ‘06 included $2.32 per share or $1.067 billion from the dilution gain on the Ameritrade transaction.
We had another great performance from our Canadian retail businesses. $666 million for the quarter
up 15% year over year. Net income from the U.S. retail businesses, TD Banknorth and TD Ameritrade,
was $128 million, up 31% from last year on an adjusted basis. Our wholesale net income of $197 was
flat with a very strong first quarter last year but up strongly from the fourth quarter of 2006.
The corporate segment posted a gain of $18 million on an adjusted basis versus a loss of $43
million last year. The increase over last year is attributable to higher income from securitization
activities and favorable tax and other items. We expect the corporate segment to return to our
stated range of minus $20 to minus $40 million per quarter going forward. Our capital ratios remain
strong post-close of interchange in the U.S. with our tier 1 ratio at 11.9% and the tangible common
equity ratio at 9%. We increased our dividend by $0.05 it is or 10% from the current level to $0.53
payable in Q2 of ‘07.
Slide 5
On page five we see reported net income with $921 million or $1.26 per share, and adjusted net income was a $1.9 billion, or $1.38 per share. We have two items of note this quarter. First, amortization of intangibles was $83 million this quarter or $0.11 per share, and second, changes in fair value of credit default swap hedging the corporate loan book which was previously called ACG-13. This amounted to a loss of $5 million or $0.01 per share in the quarter. As part of our adoption of the new financial instruments standards, ACG-13 and has been replaced. The implementation of the new standards had little effect on our results as we were able to adapt our system and processes ahead of the change.
On page five we see reported net income with $921 million or $1.26 per share, and adjusted net income was a $1.9 billion, or $1.38 per share. We have two items of note this quarter. First, amortization of intangibles was $83 million this quarter or $0.11 per share, and second, changes in fair value of credit default swap hedging the corporate loan book which was previously called ACG-13. This amounted to a loss of $5 million or $0.01 per share in the quarter. As part of our adoption of the new financial instruments standards, ACG-13 and has been replaced. The implementation of the new standards had little effect on our results as we were able to adapt our system and processes ahead of the change.
There were two impacts on our capital. One, our total RWA moved higher by $500 million and two, we
saw an addition to our tier 2 capital. Both changes relate to balance sheet recognition of
mark-to-market gains in our marketable securities portfolio. On transition, our retained earnings
increased by $80 million. The new standard has resulted in changes to our balance sheet and a new
statement of other comprehensive income. The impact on our P&L is outlined in note 13 of the report
to shareholders, less than $1 million impact for the quarter. There is a fair amount of new detail
involved in the new standards, and I would be happy to discuss these items in more detail with you
ideally outside of this call.
4
Slide 6 & 7
Let’s take a look at our segments starting with Canadian retail. Turn to page seven, to better compare TD with the disclosure of our peers we include a basic P&L for a Canadian business which contains both Canadian P and C and Canadian Wealth results. We’re very pleased with our 15% year-over-year increase in this business. The total contribution from Canadian retail represented 67% of total bank adjusted earnings.
Let’s take a look at our segments starting with Canadian retail. Turn to page seven, to better compare TD with the disclosure of our peers we include a basic P&L for a Canadian business which contains both Canadian P and C and Canadian Wealth results. We’re very pleased with our 15% year-over-year increase in this business. The total contribution from Canadian retail represented 67% of total bank adjusted earnings.
Slide 8
Turning to page eight, we show results for the Canadian personal and commercial bank, TD Canada trust. Net income of $544 million, a new record, was up 14% from last year and 9% from Q4.
Turning to page eight, we show results for the Canadian personal and commercial bank, TD Canada trust. Net income of $544 million, a new record, was up 14% from last year and 9% from Q4.
Slide 9
On page nine we show our revenues for TDCT. We achieved record revenues of over $2 billion, up 11% from last year. The increase was broad-based as virtually all operating business lines posted higher revenues. Strong volume growth coupled with an increase in margins and the addition of VFC led to an increase in net interest revenue. In terms of volume growth, real estate secured lending was up 11%. Visa card holder was up 23%. Small business deposits were up 8%, and commercial loans and deposits were up 10%. Fee revenues were up for core banking, business banking and Visa due to higher volume and the impact of fee initiatives. Insurance revenues were up as well, driven by our TD Life business.
On page nine we show our revenues for TDCT. We achieved record revenues of over $2 billion, up 11% from last year. The increase was broad-based as virtually all operating business lines posted higher revenues. Strong volume growth coupled with an increase in margins and the addition of VFC led to an increase in net interest revenue. In terms of volume growth, real estate secured lending was up 11%. Visa card holder was up 23%. Small business deposits were up 8%, and commercial loans and deposits were up 10%. Fee revenues were up for core banking, business banking and Visa due to higher volume and the impact of fee initiatives. Insurance revenues were up as well, driven by our TD Life business.
Slide 10
On page 10 we show our net interest margin for the quarter at 303, up 2 basis points from last year but down 4 basis points versus last quarter to a level we had indicated in the fourth quarter. The increase from the prior year was attributable to higher margins on loans and the inclusion of VFC. Versus last quarter and going forward, the moves will tend to be driven by changes in product mix. We expect the margin to decline slightly from the 303 level for the remainder of the year.
On page 10 we show our net interest margin for the quarter at 303, up 2 basis points from last year but down 4 basis points versus last quarter to a level we had indicated in the fourth quarter. The increase from the prior year was attributable to higher margins on loans and the inclusion of VFC. Versus last quarter and going forward, the moves will tend to be driven by changes in product mix. We expect the margin to decline slightly from the 303 level for the remainder of the year.
Slide 11
Turning to page 11, provision for credit losses increased $39 million from last year to $138 million and $6 million from last quarter.[sic — see press release] Our personal banking provisions increased $34 million year-over-year, primarily due to the inclusion of VFC and higher credit card volume and write offs. We uncovered some operational challenges during the ramp-up of our new Visa platform, resulting in higher than expected PCL’s for Visa this quarter. Business banking PCL’s remained as historically low levels at $10 million for the quarter. The increase year-over-year was due to lower net reversals and recoveries. Quarter over quarter growth of PCL’s will slow over the rest of the year. On a dollar basis provision for credit losses and personal banking are expected to increase moderately.
Turning to page 11, provision for credit losses increased $39 million from last year to $138 million and $6 million from last quarter.[sic — see press release] Our personal banking provisions increased $34 million year-over-year, primarily due to the inclusion of VFC and higher credit card volume and write offs. We uncovered some operational challenges during the ramp-up of our new Visa platform, resulting in higher than expected PCL’s for Visa this quarter. Business banking PCL’s remained as historically low levels at $10 million for the quarter. The increase year-over-year was due to lower net reversals and recoveries. Quarter over quarter growth of PCL’s will slow over the rest of the year. On a dollar basis provision for credit losses and personal banking are expected to increase moderately.
Slide 12
Please turn to page 12, expenses of a $1.059 billion were up 8% over last year but down quarter over quarter. Our efficiency ratio improved 210 basis points to 52.7%, a new record. Our very strong top line growth, coupled with disciplined expense growth resulted in the efficiency gains you see here. Our year-over-year expense growth was due largely to volume growth and reinvestment in business initiatives. As we noted last quarter, we are committed to maintaining positive operating leverage. We are pleased with our progress in slowing down the expense growth rate from the high experienced in the second half of 2006. Year-over-year we maintained a 3% gap between revenue growth and expense growth. Going forward, we will continue to manage our expenses in line with moderated revenue growth. A moderation we expect to see in the second half of this year.
Please turn to page 12, expenses of a $1.059 billion were up 8% over last year but down quarter over quarter. Our efficiency ratio improved 210 basis points to 52.7%, a new record. Our very strong top line growth, coupled with disciplined expense growth resulted in the efficiency gains you see here. Our year-over-year expense growth was due largely to volume growth and reinvestment in business initiatives. As we noted last quarter, we are committed to maintaining positive operating leverage. We are pleased with our progress in slowing down the expense growth rate from the high experienced in the second half of 2006. Year-over-year we maintained a 3% gap between revenue growth and expense growth. Going forward, we will continue to manage our expenses in line with moderated revenue growth. A moderation we expect to see in the second half of this year.
Slide 13
Page 13, market share. We had a strong improvement on personal lending share versus last quarter while personal deposit share was down 9 basis points almost all in the term deposit category. Market share data on business loans remains the same as in the Q4 2006 presentation. Small business lending share rose an impressive 80 basis points versus last year.
Page 13, market share. We had a strong improvement on personal lending share versus last quarter while personal deposit share was down 9 basis points almost all in the term deposit category. Market share data on business loans remains the same as in the Q4 2006 presentation. Small business lending share rose an impressive 80 basis points versus last year.
Slide 14
Let’s turn to Canadian Wealth Management on page 14, which excludes TD Ameritrade and TD Waterhouse USA. This business generated net income of $122 million, up 16% from last year, another very strong quarter.
Let’s turn to Canadian Wealth Management on page 14, which excludes TD Ameritrade and TD Waterhouse USA. This business generated net income of $122 million, up 16% from last year, another very strong quarter.
5
Slide 15
Page 15. Total revenues of $551 million were up 12% from last year. Increases were broad-based as the advice channel, discount brokerage and mutual funds all posted higher results. Mutual fund revenues increased driven by 16% growth in assets under management. The business continues to gain market share and holds a number four market position industry wide in assets under management. Revenue from advice channels was up on strong asset growth as well as an increase in client-facing advisors. Our goal in 2007 is to increase client-facing advisors by 130, and we have added 20 so far this year. Discount brokerage revenue was also up. The success of our new Active Trader platform has contributed to a significant increase in volume, new clients, and new assets, offsetting a continuing decline in the price per transaction. Our position as the market leader, the premier service provider, and low cost producer bodes well for our continuing success. Expenses of $364 million increased 10% from last year which was due to volume growth and due to investments to support future growth, including growth in the sales force. Canadian Wealth second quarter is traditionally strong on a seasonal basis. However, this year we expect our Q2 year-over-year growth to be muted by the Active Trader repricing which has taken effect.
Page 15. Total revenues of $551 million were up 12% from last year. Increases were broad-based as the advice channel, discount brokerage and mutual funds all posted higher results. Mutual fund revenues increased driven by 16% growth in assets under management. The business continues to gain market share and holds a number four market position industry wide in assets under management. Revenue from advice channels was up on strong asset growth as well as an increase in client-facing advisors. Our goal in 2007 is to increase client-facing advisors by 130, and we have added 20 so far this year. Discount brokerage revenue was also up. The success of our new Active Trader platform has contributed to a significant increase in volume, new clients, and new assets, offsetting a continuing decline in the price per transaction. Our position as the market leader, the premier service provider, and low cost producer bodes well for our continuing success. Expenses of $364 million increased 10% from last year which was due to volume growth and due to investments to support future growth, including growth in the sales force. Canadian Wealth second quarter is traditionally strong on a seasonal basis. However, this year we expect our Q2 year-over-year growth to be muted by the Active Trader repricing which has taken effect.
Slide 16
On page 16 we provide a breakdown of the TD Mutual Fund business as a percentage of both the bank and is the larger industry group. Market share for mutual funds continues to improve with a 4 basis point increase in long-term fund bank shares this quarter. Year-to-date TD Asset Management is second overall in long-term fund net sales at $1.2 billion.
On page 16 we provide a breakdown of the TD Mutual Fund business as a percentage of both the bank and is the larger industry group. Market share for mutual funds continues to improve with a 4 basis point increase in long-term fund bank shares this quarter. Year-to-date TD Asset Management is second overall in long-term fund net sales at $1.2 billion.
Slide 17 & 18
Page 18 shows our U.S. retail business, which consists of TD Banknorth and TD Ameritrade. Net income was up 31% from last year on an adjusted basis. We pre-announced both numbers in January following the release of their respective results.
Page 18 shows our U.S. retail business, which consists of TD Banknorth and TD Ameritrade. Net income was up 31% from last year on an adjusted basis. We pre-announced both numbers in January following the release of their respective results.
Slide 19
Page 19. Our U.S. personal and commercial banking net income was $64 million compared to $65 last year on an adjusted basis and $63 last quarter.
Page 19. Our U.S. personal and commercial banking net income was $64 million compared to $65 last year on an adjusted basis and $63 last quarter.
Slide 20
Page 20 shows some operating highlights from TD Banknorth’s latest quarter. Last month TD Banknorth reported adjusted earnings for their third quarter of US$118 million up from US$108 million in the prior year. The earnings addition of Hudson United was partially offset by lower earnings in the rest of TD Banknorth. TD Banknorth’s adjusted operating earnings exclude restructuring charges, but those charges are included in our earnings. In the most recent quarter the after-tax impact of restructuring charges was US$10 million compared with US$3 million in the same quarter a year ago. Banking in the northeastern United States remains challenging due to the rate environment and intense competition for volumes. We have included a few of TD Banknorth’s operating highlights from their latest quarter. The slower U.S. economy has affected the commercial and residential parts of the lending market in particular. As a consequence, TD Banknorth expects to see further growth in impaired loans. TD Banknorth continues to carefully monitor their lending portfolios.
Page 20 shows some operating highlights from TD Banknorth’s latest quarter. Last month TD Banknorth reported adjusted earnings for their third quarter of US$118 million up from US$108 million in the prior year. The earnings addition of Hudson United was partially offset by lower earnings in the rest of TD Banknorth. TD Banknorth’s adjusted operating earnings exclude restructuring charges, but those charges are included in our earnings. In the most recent quarter the after-tax impact of restructuring charges was US$10 million compared with US$3 million in the same quarter a year ago. Banking in the northeastern United States remains challenging due to the rate environment and intense competition for volumes. We have included a few of TD Banknorth’s operating highlights from their latest quarter. The slower U.S. economy has affected the commercial and residential parts of the lending market in particular. As a consequence, TD Banknorth expects to see further growth in impaired loans. TD Banknorth continues to carefully monitor their lending portfolios.
Slide 21
Please turn to page 21. TD Ameritrade reported first-quarter earnings of US$146 million. TD’s investment in TD Ameritrade generated $64 million of net income for the quarter, up 21% from last quarter due to record earnings at TD Ameritrade, an increase of TD’s average direct ownership and reported investment and a weaker Canadian dollar. The contribution is almost double TD Waterhouse USA’s contribution of $33 million in the first quarter of last year. TD’s average direct ownership and reported investment in TD Ameritrade increased 370 basis points quarter over quarter to 43.2% and as of December 31 was up to 44.6%.
Please turn to page 21. TD Ameritrade reported first-quarter earnings of US$146 million. TD’s investment in TD Ameritrade generated $64 million of net income for the quarter, up 21% from last quarter due to record earnings at TD Ameritrade, an increase of TD’s average direct ownership and reported investment and a weaker Canadian dollar. The contribution is almost double TD Waterhouse USA’s contribution of $33 million in the first quarter of last year. TD’s average direct ownership and reported investment in TD Ameritrade increased 370 basis points quarter over quarter to 43.2% and as of December 31 was up to 44.6%.
Slide 22 & 23
Let’s now turn our focus to our wholesale business on page 22. Wholesale generated net income of $197 million up 35% from last quarter on an adjusted basis. This is a strong start for the year for this business in what is traditionally a strong quarter.
Let’s now turn our focus to our wholesale business on page 22. Wholesale generated net income of $197 million up 35% from last quarter on an adjusted basis. This is a strong start for the year for this business in what is traditionally a strong quarter.
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Slide 24
Let’s look at details on page 24. Wholesale revenue of $635 million was down $26 million or 4% from last year. The current quarter was supported by higher syndication and lending revenues and strong equity derivatives revenue while overall trading related revenue was down $46 million from last year due to lower revenue from credit and interest rate products and equity options. Provision for credit losses of $23 million was down from last year and reflects a single corporate lending exposure in addition to the cost of credit protection. Expenses of $332 million were down 4% from last year on an adjusted basis, due mainly to lower variable compensation. We continue to focus on our goals of being a top three dealer in Canada.
Let’s look at details on page 24. Wholesale revenue of $635 million was down $26 million or 4% from last year. The current quarter was supported by higher syndication and lending revenues and strong equity derivatives revenue while overall trading related revenue was down $46 million from last year due to lower revenue from credit and interest rate products and equity options. Provision for credit losses of $23 million was down from last year and reflects a single corporate lending exposure in addition to the cost of credit protection. Expenses of $332 million were down 4% from last year on an adjusted basis, due mainly to lower variable compensation. We continue to focus on our goals of being a top three dealer in Canada.
In conclusion, we are very pleased. This was a terrific quarter and a great start to the year. The
quarter was marked by very strong growth in our Canadian P&C business and in our Wealth Management
business including TD Ameritrade. The wholesale bank posted robust results. TD Banknorth’s
contribution was steady in a tough operating environment. And we’ve increased our dividend by $0.05
which indicates our confidence in the strength and sustainability of our earnings. So, with that, I
will open the floor to questions.
QUESTION AND ANSWER
Ed Clark — Toronto-Dominion Bank — CEO
Michael?
Thank you. Ed, could you give us some of the thinking that went into the $0.05 dividend increase?
Yes. It is the same thinking that went into all the other dividend increases, so you know we have a
philosophical view that the way to increase dividends is to increase your earnings and that you try
to set your dividend rate off what you see as a sustainable earnings that you have, and that we’re
trying to target for a 40% payout ratio, and so if we, we increase sustainable earnings and keep
that payout ratio then we ought to have increases in dividends, and if we outperform in the growth
of our sustainable earnings we’ll outgrow our contribution in terms of dividends. Ian?
Tim, the great numbers out of the domestic bank. The — one of the things that does seem to be
tracking higher is the loan losses, and Colleen mentioned there was some specific things on Visa.
Can you talk to those?
Sure. Last quarter we mentioned with all the initiatives we were doing one of the major conversions
was to a new back office platform. So we want from three operating platforms with Visa to one,
being — the outsource provider being TSYS. The great news is that the conversion was pretty much
seamless from a customer point of view. But what it caused was a few operational glitches in things
like account management and our recovery areas. So part of what you see in terms of the gross was
not just the strong growth in our lending business overall, the market share, but also was the
spill over effect of that transition. So we’re working through the operational issues now, and we
actually expect they will be starting to come down probably be in effect to some degree in this
quarter as well, but that’s going to be a
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counter force to a PCL rate that we, or PCL increase we get as we grow our lending business, so
there is sort of two forces that play in this number.
When you look at your personal loans, about $110 billion of personal loans, that’s still on the
books, how much of that is real estate secured?
We’ve got about 85% of our portfolio being secured. It is the highest percentage I think of the
banks. So one of the ways to think about that is relative to the rate, because what’s happened
obviously with PCL’s is that we moved into a higher growth phase from where we’ve been the last few
years I think it is important to look at rates. So go back a couple years. Our overall PCL rate was
a little north of 30 basis points. In 2006 that number was even lower, 27 basis points, and that’s
because we hadn’t grown for quite a while, and our growth — mentor, our portfolio had actually
matured. As we started to step up our growth rate and to skew towards higher-margin products that
also have higher PCL rates, notably Visa, then our basis points start to go back up again. We don’t
expect it to go much north of the normalized rate in the 2005 time frame. But it does seem like a
step up over 2006.
Because when I think of the real estate secured, I mean is it safe to say that zero loan loss
on —
Very small.
So if of $110 billion, $85 is real estate secured, you got $25 billion dollars book that’s at risk.
I mean $128 million of loan losses is a huge loss rate, you know. It is 150 basis points plus. All
I am doing is taking out the 85 that’s relative to go to zero.
Yes. And so, depending on the portfolio that you talk about credit cards, for example, you should
be seeing a number north of that, 300 basis points let’s say is a Canadian industry average. That’s
quite low compared to the U.S. for example. So it all depends on your mix of business. And as we
grow our higher margin but higher loss rate business, as long as we’re profitable on the face of
the cohort that we’re booking, we’re quite happy to actually have an absolute level of PCL rate.
Because you have to remember, you know, it obviously drives our revenue growth rate as well.
Can we go to the phones?
Your next question is from Brad Smith from Blackmont Capital. Please go ahead.
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Thank you very much. I had a couple of quick questions. The — Just with respect to the TEB
adjustment this quarter, it is up, well, it’s almost double last year’s quarterly rate. And I was
just wondering if there was something specific that led to that? Was that client driven or did tax
advantaged or preferred dividend or dividend stream investments become a lot more attractive during
the quarter relative to bond interest products?
Bob, do you want to comment on that?
Sure. I think we will just say overall that there were a number of factors that came to play in the
quarter that were positive in that element of trading revenue. You know, I’d look at it overall,
Brad, and say that the components of the trading revenue are quite volatile as you can see in the
chart, and I would expect that that will continue. I think that the trading revenue itself, you
know, in the $1 billion to a $1.2 billion feeling relatively confident. The make up thereof much
harder forecast and also much harder to be granular about.
And, Bob, while I’ve got you there, I think this might be your area. The off-shore profitability
seems to have shifted in the quarter as well as based on the shift in the effective tax rate note,
and I was just wondering is that coming out of your group, Bob?
Why don’t I have Colleen answer that.
Yes, Brad, that does tend to be a mix issue within TD securities depending on the booking point. So
you will see that in your geographic distribution of income as well. So that was a little bit
higher this quarter.
Okay. Great. And then, Ed, I think you mentioned the corporate run rate $20 to $40 million loss.
Should we be considering that with reference to the $18 million profit in the first quarter or is
that something — is that a looking-forward sort of guidance that you’re giving us? In other words,
should we be adjusting for the profit in the first quarter?
I would be the last person in the world to tell you what you should or shouldn’t be adjusting for,
but I think we’re saying I will give you two data points. I think looking forward we’re saying the
X or amount of money we earned at the center in the first quarter is all sort of ordinary income,
but it is not ordinary income that we can control the timing of, and as it happened more of it came
this quarter than it would have some
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other — it would have come some point during the year, it just happened to come into this quarter.
And so we’re saying when you look forward, look to the $20 to $40 million, but I think if you go
back to my answer to Michael’s question, if you look at the dividend rate that we’re paying and
look at, you know, the kind of numbers we’re saying is the running rate for the, I think you can
come to a view of what we think the area of sustainable earnings are.
Terrific. Thanks so much.
Your next question comes from Andre Hardy from Merrill Lynch. Please go ahead with your question.
Thank you. Both questions are probably for Tim Hockey, and can you tell us how much these ATNC that
could theoretically be at risk represent, as a percent of TD Canada Trust revenue? And also talk
about expense growth, and are you still confident that that number will come down in upcoming
quarters?
I said here I think I’ll take the ABM/ATN question. I think from our point of view this is
obviously an area where there’s going to be lots of discussion and debate over the, the next few
weeks, or next few months and it is probably not a sensible thing in an investor forum to get into
speculation about what the ATM fees are or aren’t going to be or how much they’re worth to us, so
we prefer not to answer that question. But I will let you talk about expenses because I am always
interested to hear what the answer to that question is.
Well, on the expense front I think again in the fourth quarter we told you that as we saw our
revenue growth curtail then we would make sure our expense growth also curtailed, because our
paradigm has been consistent to have about a 3-point gap. That 3 point gap was a little narrower
last quarter, and it’s, it was a little thicker this particular quarter, but our, we’re right on
target in that as our revenue growth dropped a little bit from last quarter, it dropped a little
bit this quarter, and so therefore we brought our expenses down. We’re actually quite confident, as
Ed and Colleen said we have focus on initiatives to make sure that we continue to grow our expenses
less than our revenue growth rate.
Is that something you track quarterly or yearly?
Quarterly.
Okay. Thank you.
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Your next question comes from Mario Mendonca from Genuity Capital Markets. Please go ahead with
your question.
Good afternoon. You made several references both in answers to questions and your opening comments
about declining revenue growth in the second half. What specifically are you seeing, are you
projecting, that would drive revenues down. Given that loan growth remained pretty solid, you’re
not necessarily — we’re not seeing material [inaudible] compression. What specifically makes you a
little bearish in that respect?
It is Ed here. You know, and I, to be honest, you know, you worry that you cry wolf and we tend to
cry wolf probably more than other people, and so there is a risk we’re being too conservative here.
I guess in terms, though, of running an institution from our point of view, I would rather get this
wrong it and turns out the economy keeps on rolling as stronger than to get it wrong that I bet on
it keeping on rolling stronger and turned out that it didn’t. And so I think what we’re saying is,
you know, you look at the U.S. economy, you look at the role and effects on Canada particularly,
you know, in Ontario and Quebec, but we’re heavily concentrated in Ontario, and you say — and you
look at, you know, it is not as if TDC has had one good quarter. TDC has been — TDCT has had year
after year of pretty spectacular performance here, and with very, very strong revenue growth, and I
think what we’re saying internally and that’s all really what we’re saying externally is what I’m
saying internally is, you know, start to prepare that you’re not going to be able to continue to
have 11% revenue growth forever. And since we live in a strict paradigm that expenses have to grow
less than revenue, then start to, you know, gently touch the brake to say how do you get the
expense growth to slow down without, and I think we equally emphasize this, without stopping the
investments in building new branches and is adding client facing people and billing out the
infrastructure you need to out perform, and so that’s really what we’re seeing. But it could be, I
mean, I have to admit to being amazed how strong the economy stays with all of the body blows that
it’s taken, so I could be wrong, but I prefer to be wrong on that way than wrong in the other way.
So if it is the economy and you referred to that now as well, the economy you must be talking about
things like loan growth, then, presumably? That would be one area where — or is there more?
Tim is going to help me out here. He doesn’t think I answered it right, so he’s going to help me
out here.
There is one additional item which is, when we talk about revenue growth rate, we’ve had the
benefit that we closed our VFC purchase in the third quarter of last year, so as a result and in
the third quarter of this year, for example, our absolute margin will be less. We won’t get the
benefit of the VFC bump year-over-year. That will just have worked its way through the system. So
that will actually drive our revenue percentage growth rate down just mathematically.
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Mike, appreciate it. So VFC is part of this story of declining revenue growth. Now, assuming let’s
take like a positive perspective here. If you’re touching the brake on expense growth, and revenue
growth sort of continues unabated, does just that fall to the bottom line or does TD have enough of
a gauge on things that you can crank up the expense growth again for future initiatives?
We like to think that we have a scalpel on this. I would say it might be an axe. And so what that
means is that as you see revenue growth continue to be strong, we would like to see out as far as
we possibly can, but the collective decision we make is that the revenue continues to be strong,
we’ll try to continue to up our spend on initiatives that grow out what customers care about, and
so we’ll try to keep as consistently aligned with that 3% operational leverage paradigm that we’ve
talked about for years now.
And on the Banknorth we see that you’re obviously giving us some idea here that a restructuring
charge is coming. We see the number of employees was down from 8, 9, ‘07 to 8,672? Now, you’ve also
referred 5% to 8% reduction in operating costs. Could you just talk about when that plays out and
what base are you using when you refer to 5% to 8% reduction? What NIE base are you talking about?
I think we’re taking — you can take the running base with all in probably I’d exclude interchange.
But if you take the running base in the last few quarters, Banknorth is just — I think that’s what
last year I think that’s what I would take as my running base. I think these things don’t all as
you know they don’t come all in a single day, so we’ll be rolling this out, and I think there it’s
emphasized that unfortunately this is not all just additive to the results, but they have to do a
number of these things in order to deliver the business plan which is flattish earnings, and so I
don’t think you’re going to see a spectacular turnaround in Banknorth’s earnings here in the short
run.
And I think as we’re also signaling to you, we are concerned by the rise in the NPA’s, and so I
think that represents another negative on the Banknorth performance. On the other hand, I would be
remiss if I didn’t say that in terms of our mood as to, you know, is this going to turn out to be a
good bet or a bad bet, our mood is extremely positive and Bharat’s mood is extremely positive. I
think that he’s been touring the organization and trying to meet as many of the employees, and he
has literally met thousands of the employees now. I think they’re enthusiastically embracing the
things that have to get done to make Banknorth a better competitor, and for us to earn a better
return on our investment in it. And to deal not only with the short-term issues that you’re facing
in banking but how you have to position the institution to be a high performing institution. And he
continues to be impressed by the actual core operational skills that can be mobilized to that end.
So I would say in terms of how we’re feeling, we’re feeling like it does look like a tough
short-term environment, and we’re feeling — but on the other hand we’re feeling quite up, that
this, despite everyone’s worried about this investment, we’re going to turn out this will have been
the right move and a good investment and will be a performing asset.
And just to make sure I don’t mischaracterize you, you say the 5% to 8% reduction operating costs,
that’s mostly just to sort of stand still, keep things where they are now in terms of earnings?
12
I would hope that some of it would be additive, but I wouldn’t — your assumption is probably a
better assumption than the opposite, and so I think that start with there and hope that we don’t —
that we actually get some of it additive. But I think just a lot of this has to be done in order to
deal with the environment that we’re facing.
Thanks very much.
Your next question comes from Shannon Cowherd from Citigroup. Please go ahead with your question.
Hi. Understanding that you’re on hold with acquisitions in the U.S., what indicators should we look
for to know when the bank might be interested again? And then I have a quick little follow-up for
Colleen. I know you said that you would explain more in detail about the ACG 13, the accounting
change. But just quickly, the change in fair value for CDS that you reported as an adjustment for
this quarter, should I expect that that sort of a change would not happen go forward? Meaning there
were only two adjustments this quarter, the amortization of intangibles and the effectively ACG 13
go forward we should just only see the change for the amortization of intangibles?
No. So you can expect that item. So the ACG 13 adjustment has now been re-characterized with new
language because ACG 13 doesn’t really exist any more. Because it’s really been replaced by the new
financial instrument standards. So we looked then at items of note to say, should this be a
continuing item or not, and concluded a couple of things. We continue to feel that we would like to
— in some respects highlight a strategy which is somewhat different for us in terms of managing
the risk in our corporate lending portfolio, and protecting some of those exposures, and as well
there is really an asymmetry in term of the fact that the corporate loans are on an accrual basis
versus the mark-to-market on the credit protection. So that will continue to be an item of note
going forward. We have just renamed it in effect.
Okay. And the acquisition piece?
On the acquisition front, you know, I think what we’re seeing is our preference is for 2007 to be a
year where we work through how to improve this business model, that we do believe that the flat
yield curve in the United States has had more implications than just that you have a flat yield
curve or you don’t have a carry trade, because frankly for us that’s not a big deal. We’ve always
had a flat yield curve as far as we’re concerned, because we don’t play the carry trade. But the
flat yield curve has changed the business mix and had implications for where customers now want to
move their money and the kind of product set that you have to have in order to capture your share
of the wallet and make money in that environment, and so I think there is things that have to be
done to widen out the product set in Banknorth, and as I’ve said on other occasions, I think there
is lots of things getting done to improve the sales and service
13
environment, to get better measurement tools, to optimize the brand system. There is a number of
things we think we can do to make this a better performing asset. And in general it is hard to do
those things and do acquisitions at the same time, and that there is real competition for the
psychic energy space in an organization trying to do the two simultaneously, so our preference is,
has been, to have a pause.
The good news has been what has been bad news is that the asking price for assets in the United
States that we’re interested in hasn’t adjusted to what we think is the underlying earnings
potential of those assets, and so we’re uninterested in those assets at the price that people want
to achieve for those assets. I have always said that, you know, that the strategic dilemma we would
face is someone came along and said I will actually offer to you a price that does make business
sense to you. Then, and we would genuinely be on dilemma as to do you pass on a target that would
be interesting to you just because you don’t want to interrupt the changes — the operational
changes you’re trying to make in TD Banknorth. As I say thankfully, that turns out not to be a
dilemma that I have been faced with, and I suspect for a while given the prices that we see in the
odd transactions that are done across the United States, is that sellers remain convinced that,
there, someone will come along and pay these prices. And so as long as that’s the case, then I
don’t think we’re interested. But we remain actively — we actively talk to all the target
institutions that would fit into our space. We’re in constant dialog with them. So we’re in the
game in the tension of being involved in it. It is just I don’t think for the moment we see in this
year much of an opportunity.
Thank you.
Your next question comes from Jim Bantis from Credit Suisse. Please go ahead with your question.
Thank you. You’ve been suggesting that the insurance revenue would plateau because of obviously the
operations has grown to a sizable market share, but this quarter there was a significant pickup
quarter over quarter, and I wondered if maybe Bernie can chat about some of the reasons for that,
whether it is product related or volumes related, and also I wanted to just flesh out a little bit
about the 100 and some odd, 130 brokers or UIA’s that looking to add in 2007? Just within the past
couple weeks a independent broker that had reasonable sized distribution was sold, and I am just
wondering if there is still any opportunities for acquisitions of distribution? I do recognize that
whether these independents actually want to be sold to a bank is a different issue, but is there
any opportunities to pick up brokers on the acquisition side as well? Sorry, I’ll let you know, I
am not hearing a thing to be honest.
Ladies and gentlemen, please stand by.
That’s a good way to get rid of a tough question.
I didn’t think it was that tough. [crosstalk]
14
Can you hear me now?
I think we all can.
Okay. So as I was saying, there is a little bit of noise in that, in the number for entrance
revenue, I guess you’re referring to line 10, page 11 of the supplemental exhibit. Noise is coming
from $9 million of reserve discounting gain that parallels the fair value accounting option loss
that is in the other income, and that’s just a result of the change, similar change that what
Colleen was referring to that I would be happy to take you through outside of this meeting. That
being said, the entrance revenue grew quite robustly over both last year, about 10% and 14% over
the last quarter. As I’ve told you before, although we’re seeing and we’ve been predicting and
we’re seeing our P&C our home and auto insurance revenue growth slow down. We’re now getting the
benefits of our investments on the life insurance and reinsurance side of the business who has been
having some very good results this quarter. A little bit of seasonal fluctuation in that, both in
terms of the last quarter was a little bit lower and this quarter is a little bit high, but other
than that, still quite robust revenue growth from the insurance business. Now primarily driven from
our life insurance and reinsurance business. Was your second question [crosstalk]
Jim, it is Bill speaking. Can you hear me okay?
I certainly can.
Okay. Just to clarify our goal of adding 130 net new client facing advisors breaks down into 65 net
new financial planners and another 65 net new investment advisors, so that’s been our goal over the
last three years. We’ve been successful in achieving that goal over the last couple of years, and I
think we’ll be successful again this year, so that’s — our goal is split between the two client
facing advisory groups.
With regard to acquisitions, I would say it is probably not appropriate for me it comment on
someone else’s M&A activity, but what I can say is that we’re very much committed to our organic
growth strategy within TD Waterhouse. We think that there continue to be excellent opportunities to
grow our client-facing advisory groups through basically hiring of high quality men and women who
are successful in other fields, and training them as new advisors and new planners and also pulling
in our fair share of high quality competitive recruits from other organizations. So at this
particular time we’re very committed to organic growth strategy. I wouldn’t comment on
opportunities going forward, but in any of our businesses I think our platform is in good shape
right now and any time we see an opportunity that would be on strategy, shareholder friendly, and
wouldn’t disrupt our operating methodology, I think we would be willing to have a look.
15
Got it. Thank you both.
Your next question comes from Brad Smith from Blackmont Capital. Please go ahead with your
question.
Yes, thanks very much. Ed, I just wanted to follow up. You were talking about the U.S. carry trade
and just reiterating the fact that your organization doesn’t follow that. I am just curious, you
know, with the flat yield curve in the U.S., I guess competitively you’re on a similar plain with
the carry trade participants down there. When the curve starts to resume its upward slope, does
that not put your organization at a competitive disadvantage if that upward slope is used to fuel
competition on both the deposit and the lending side? And how do you plan to deal with that?
Well, I will probably deal with it when I get there as opposed to before I get there. But I would
say within Canada I am not sure that all the Canadian banks historically have hedged to the same
extent for us, and I wouldn’t say when you look at our results over the last three or four years,
when two or three years ago you certainly had very good conditions for that trade. I think we did
all right. I have a — I guess we have a philosophical view that says it is very important that
your operational people really understand whether they’re making money in the real senses, and that
we force them to look at economic profit adjusted for all the costs, including the capital costs
and the capital costs reflects the risk costs, and we think one of the reasons why we get this
repetitive good performance is that we don’t let operators ride on things like the carry trade.
They have got to make real money for the shareholders, and so if I want to play interest rate
games, I have got a securities dealer that knows a lot more about interest rates trading strategies
than what I will do in my retail business and I like to keep those two things well separated and I
think you get better long-term results from that.
I guess from your comments by extension you believe you can carry that same philosophy through the
U.S. expansion?
You know, as you can tell in my answer, I — that would be my going-in position, but I am a person
that is terrified of ideologues, and find that in the end I am just a business person. And so if it
turns out that’s not true, and if there is some implication for the kind of product set that you
have, as I said earlier, I think one of our learning’s is clearly the product set you need to have
in a flat yield curve turns out to be different than in a steep yield curve, and it could turn out
that I am wrong on that, but you know, and if it is I will probably then adjust, but for the moment
that would be my going-in proposition, yes.
Okay. Thanks. That’s very helpful.
To the floor again, Michael, and then Ian?
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Okay. Thanks. I want to make sure I am interpreting something correctly. You started the quarter
with 618 offices in the United States. Added 30 with Interchange and ended at 613. Did you actually
close 35 offices in the U.S. during the quarter? Are there more offices to close?
Why don’t we come back to it. Because I don’t know where that also picks — it doesn’t pick up any
of the Ameritrade offices, I guess.
So, we really don’t make all the adjustments for interchange at this point. We are still reflecting
most things on the, on the one-month lag. But we certainly have adjusted for the balances as of
January 31 in our balance sheet as well as in our —
The 16 doesn’t include anything.
Correct.
Even though there hasn’t, you know, you are not showing any numbers including Interchange, can you
comment on how the early stage the integration has actually gone with Interchange and the market
response to, you know, to Interchange becoming a Banknorth?
All, Interchange went extremely smoothly. So, this is a definitely a skill set that Banknorth has
is how to pull these off, and so the conversion went very, very well and had no customer
disruption, and we instantly got, are now in a position to get the economies out of there that we
originally forecasted, so it continues and obviously it’s made a significant difference in our
present in Bergen County. I can’t tell you that’s already translated into anything that would be,
you know, that would be to hope too much, but it is definitely we’re quite pleased with the
acquisition. Ian?
Follow-on from Michael’s earlier question on the dividend increase. I think you perceive your
dividend as driven by the earnings, so as earnings grow you [inaudible] in line with that. The
buyback has been something you did a fair big chunk of it in Q4, did none this quarter. Can you
talk to me about the buyback? Do you see buyback as one-time going into adjust tier 1 that may be
too high, or is it really sort of a process of normally buying back a certain number of shares?
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Yes. We indicated that we’ve asked filed for five million share buyback this year. I thought we
indicated publicly when we announced the TD Banknorth privatization that while our original
thinking might have been to do that immediately, the prudent thing is to get that behind us, and to
watch the growth and risk rated assets and see that in the latter half of year rather than the
former half of the year. I understand from a pure economic point of view I like to get the thing
done as fast as I can, buy the shares cheap, but I think the prudent capital management thing is
to, as we rebuild up our capital base to then proceed with that, and that number is basically
targeted, you know, as a guesstimate on our part of what the option exercise dilution is, plus even
though we turned our drip to zero, there is still a little that comes through as people do
reinvest, and so we try to offset that to prevent growth in the diluted share basis.
Thank you. It is a question for Ed. Usually when you highlight something to us, you typically as a
concern, it usually really is a concern. I am just trying to gauge or maybe understand the possible
impact of the rising NPA’s at Banknorth. There is a lot of concern in the U.S. that the roll over
of the consumer subprime credits, can you give us an idea of the possible impact here for
Banknorth?
I think Banknorth isn’t in any direct sense impacted by the subprime business because it is not a
business they’re in. As you know they moved out a number of years ago, and so we’re not into the
residential mortgage business. The residential mortgage business per se they’re laying it off onto
people taking the principal risk. The core risk that remains in Banknorth is that particularly in
Hudson United, less and really not at all in Banknorth but in Hudson United there was construction
lending and so I think that’s if there is an area of concern, it is the roll-on effect of the
subprime lending reducing housing prices, creating greater housing inventory, the roll-on effect in
to those doing construction lending.
I think the feeling within Banknorth is that all the people that we’ve lent money to that were
quite secure and were like our positions, I think Barry and I and Mark Chauvin would probably all
say unfortunately we’re too old. We’ve lived through these downturns before. At the end of the day
when you start to have them even though you think you’re, when you make the loan you’re in really,
really great shape, you end up somehow taking some pain in this. I think this is an area that we’re
on top of, but we don’t see it as a looming crisis.
We’re just being honest with you as we always are and say, obviously NPA’s were up last quarter and
we see them and we don’t believe they peaked I think is the language that Bharat’s used. And so
there is that you have to recognize that that’s the risk, and there is always a risk that the
knock-on effects of the subprime lending area in the U.S. turns out to be greater than people are
now forecasting. I think today people are fairly benign, have a fairly benign outlook for it.
Again, that could turn out to be wrong. If it is, then there will obviously be an impact on
Banknorth, but not one that we’re seeing today.
So if I may just follow up on that, I imagine that you’re also curtailing lending in this area?
Sorry?
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You’re also curtailing lending I suppose in this area, or is that not being impacted? Do you think
loan growth will get severely pulled back here?
I think we’re seeing some slowdown in lending, but I don’t think it is not that us — we probably
would have curtailed lending in any respect relative to the size of the construction loans lending
that Hudson United has. As I say, that Banknorth wasn’t doing that, and so we would trim that type
of lending in any case. I think the slowdown we definitely forecast at Banknorth today would be
that loan growth wouldn’t be as robust as it has been in previous years, but I think there are
other factors driving that. More importantly is the general economy, not us sitting there slamming
on brakes.
Okay. And if I may, one final follow-up for Tim. Can you give us a little more flavor of when you
say you have an axe, what exactly are we looking at on the expense side should revenues markedly
slow? Is this a branch possibility that you slow down the branch expansions? Can you give us just
an idea what it is that you would be cutting back?
I would say the branch expansions would be about the last thing we would slow down. Our paradigm
again is pretty simple in terms of the gap, but the subsequent follow-on decision is you slow down
what your customer cares about the most last, and so that means you cut projects that might have
research projects for something we might do. You start taking out non-customer-facing units. For
example, one of the things we talked about last quarter was the closure of a back office. We’re
constantly looking to optimize our expenses that don’t impact the customer, and so that’s the
approach we take, we always have a list of project to undertake. And as we see revenue slows, we
start to engage those projects that will take the expenses out. It’s just we’re too big an
organization to so finely articulate it that it is exactly 3% every single quarter. We’ve just been
pretty much averaging that over multiple quarters now.
Thanks.
Michael?
You’ve been booking Banknorth’s income on a one-month lag basis. Once the privatization closes, are
we going to have a period where you have a four-month quarter for Banknorth?
Some recent guidance, accounting guidance in the United States requires to you take in that
instance where you have the catch-up to actually take that adjustment to retained earnings, not to
P&L. So we’re
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still — we’re still looking at the alignment whether we go coterminus in what we do with TD
Banknorth year end, and we’ll be able to update you later on that. But you won’t see a P&L impact.
It will go to retained earnings.
So I think it looks like there are no more questions. So, thank you all for attending, and have a
good rest of the day.
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