e425
Filed by The Toronto-Dominion Bank
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12 under the
Securities Exchange Act of 1934
Subject Company: The South Financial Group, Inc.
Commission File No.: 0-15083
This filing, which includes a transcript containing the textual representation of the
Toronto-Dominion Banks presentation at the CIBC Eastern Institutional Investor Conference held on
September 22, 2010, may contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 and comparable safe harbour provisions of applicable
Canadian legislation, including, but not limited to, statements relating to anticipated financial
and operating results, the companies plans, objectives, expectations and intentions, cost savings
and other statements, including words such as anticipate, believe, plan, estimate,
expect, intend, will, should, may, and other similar expressions. Such statements are
based upon the current beliefs and expectations of our management and involve a number of
significant risks and uncertainties. Actual results may differ materially from the results
anticipated in these forward-looking statements. The following factors, among others, could cause
or contribute to such material differences: the ability to obtain the approval of the transaction
by The South Financial Group, Inc. shareholders; the ability to realize the expected synergies
resulting from the transaction in the amounts or in the timeframe anticipated; the ability to
integrate The South Financial Group, Inc.s businesses into those of The Toronto-Dominion Bank in a
timely and cost-efficient manner; and the ability to obtain governmental approvals of the
transaction or to satisfy other conditions to the transaction on the proposed terms and timeframe.
Additional factors that could cause The Toronto-Dominion Banks and The South Financial Group,
Inc.s results to differ materially from those described in the forward-looking statements can be
found in the 2009 Annual Report on Form 40-F for The Toronto-Dominion Bank and the 2009 Annual
Report on Form 10-K of The South Financial Group, Inc. filed with the Securities and Exchange
Commission and available at the Securities and Exchange Commissions Internet site
(http://www.sec.gov).
The proposed merger transaction involving The Toronto-Dominion Bank and The South Financial
Group, Inc. will be submitted to The South Financial Group, Inc.s shareholders for their
consideration. The Toronto-Dominion Bank has filed with the SEC a Registration Statement on Form
F-4 and a definitive proxy statement/prospectus and each of The Toronto-Dominion Bank and The South
Financial Group, Inc. may file with the SEC other documents regarding the proposed transaction.
Shareholders are encouraged to read the definitive proxy statement/prospectus regarding the
proposed transaction, as well as other documents filed with the SEC because they contain important
information. Shareholders may obtain a free copy of the definitive proxy statement/prospectus, as
well as other filings containing information about The Toronto-Dominion Bank and The South
Financial Group, Inc., without charge, at the SECs Internet site (http://www.sec.gov). Copies of
the definitive proxy statement/prospectus and the filings with the SEC that will be incorporated by
reference in the definitive proxy statement/prospectus can also be obtained, without charge, by
directing a request to The Toronto-Dominion Bank, 15th Floor, 66 Wellington Street West,
Toronto, ON M5K 1A2, Attention: Investor Relations, 1-866-486-4826, or to The South Financial
Group, Inc., Investor Relations, 104 South Main Street, Poinsett Plaza, 6th Floor,
Greenville, South Carolina 29601, 1-888-592-3001.
The Toronto-Dominion Bank, The South Financial Group, Inc., 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 The Toronto-Dominion Banks
directors and executive officers is available in its Annual Report on Form 40-F for the year ended
October 31, 2009, which was filed with the Securities and Exchange Commission on December 03, 2009,
its notice of annual meeting and proxy circular for its 2010 annual meeting, which was filed with
the Securities and Exchange Commission on February 25, 2010, and the above-referenced Registration
Statement on Form F-4, which was filed with the SEC on August 24, 2010. Information regarding The
South Financial Group, Inc.s directors and executive officers is available in The South Financial
Group, Inc.s proxy statement for its 2010 annual meeting, which was filed with the Securities and
Exchange Commission on April 07, 2010. Other information regarding the participants in the proxy
solicitation and a description of their direct and indirect interests, by security holdings or
otherwise, is contained in the definitive proxy statement/prospectus and other relevant materials
filed with the SEC.
THE
FOLLOWING IS A TRANSCRIPT CONTAINING THE TEXTUAL REPRESENTATION OF
THE
TORONTO-DOMINION BANKS PRESENTATION AT THE CIBC EASTERN
INSTITUTIONAL INVESTOR
CONFERENCE HELD ON SEPTEMBER 22, 2010.
TD BANK FINANCIAL GROUP
CIBC EASTERN INSTITUTIONAL INVESTOR CONFERENCE
SEPTEMBER 22, 2010
THE INFORMATION CONTAINED IN THIS TRANSCRIPT IS A TEXTUAL REPRESENTATION OF THE
TORONTO-DOMINION BANKS (TD) PRESENTATION AT THE CIBC EASTERN INSTITUTIONAL INVESTOR CONFERENCE
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 PRESENTATION. IN NO WAY DOES TD
ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION
PROVIDED ON TDS WEB SITE OR IN THIS TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE WEBCAST (AVAILABLE
AT TD.COM/INVESTOR) ITSELF AND TDS REGULATORY 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 presentation, in other filings with Canadian regulators or the U.S. Securities and Exchange
Commission, and in other communications. In addition, representatives of the Bank may make
forward-looking statements orally to analysts, investors, the media and others. All such statements
are made pursuant to the safe harbour provisions of applicable Canadian and U.S. securities
legislation, including the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking
statements include, among others, statements regarding the Banks objectives and priorities for
2010 and beyond and strategies to achieve them, and the Banks anticipated financial performance.
Forward-looking statements are typically identified by words such as will, should, 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. Especially in light of the uncertainty
related to the financial, economic and regulatory environments, such risks and uncertainties
many of which are beyond the Banks control and the effects of which can be difficult to predict
may cause actual results to differ materially from the expectations expressed in the
forward-looking statements. Risk factors that could cause such differences include: credit, market
(including equity, commodity, foreign exchange and interest rate), liquidity, operational,
reputational, insurance, strategic, regulatory, legal and other risks, all of which are discussed
in the Managements Discussion and Analysis (MD&A) in the Banks 2009 Annual Report. Additional
risk factors include the impact of recent U.S. legislative developments, as discussed under
Significant Events in 2010 in the How We Performed section of the Third Quarter 2010 Report to
Shareholders; changes to and new interpretations of risk-based capital guidelines and reporting
instructions; increased funding costs for credit due to market illiquidity and competition for
funding; the failure of third parties to comply with their obligations to the Bank or its
affiliates relating to the care and control of information; the use of new technologies in
unprecedented ways to defraud the Bank or its customers and the organized efforts of increasingly
sophisticated parties who direct their attempts to defraud the Bank or its customers through many
channels; the ability to obtain the approval of the proposed transaction with The South Financial
Group, Inc. by its shareholders; the ability to realize the expected synergies resulting from the
transaction in the amounts or in the timeframe anticipated; the ability to integrate The South
Financial Group, Inc.s businesses into those of The Toronto-Dominion Bank in a timely and
cost-efficient manner; and the ability to obtain governmental approvals of the transaction or to
satisfy other conditions to the transaction on the proposed terms and timeframe. We caution that
the preceding list is not exhaustive of all possible risk factors and other factors could also
adversely affect the Banks results. For more detailed information, please see the Risk Factors and
Management section of the MD&A, starting on page 65 of the Banks 2009 Annual Report. All such
factors should be considered carefully, as well as other uncertainties and potential events, and
the inherent uncertainty of forward-looking statements, when making decisions with respect to the
Bank and undue reliance should not be placed on the Banks forward-looking statements.
Material economic assumptions underlying the forward-looking statements contained in this
presentation are set out in the Banks 2009 Annual Report under the heading Economic Summary and
Outlook, as updated in the Third Quarter 2010 Report to Shareholders; and for each of the business segments, under the headings
Business Outlook and Focus for 2010, as updated in the Third Quarter 2010 Report to Shareholders
under the headings Business Outlook; and for the Corporate segment in the report under the
heading Outlook.
Any forward-looking statements contained in this presentation represent the views of management
only as of the date hereof and are presented for the purpose of assisting the Banks shareholders
and analysts in understanding the Banks financial position, objectives and priorities and
anticipated financial performance as at and for the periods ended on the dates presented, and may
not be appropriate for other purposes. 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, except
as required under applicable securities legislation.
The proposed merger transaction involving The Toronto-Dominion Bank and The South Financial Group,
Inc. will be submitted to The South Financial Group, Inc.s shareholders for their consideration.
The Toronto-Dominion Bank has filed with the SEC a Registration Statement on Form F-4 and a
definitive proxy statement/prospectus and each of The Toronto-Dominion Bank and The South Financial
Group, Inc. may file with the SEC other documents regarding the proposed transaction. Shareholders
are encouraged to read the definitive proxy statement/prospectus regarding the proposed
transaction, as well as other documents filed with the SEC because they contain important
information. Shareholders may obtain a free copy of the definitive proxy statement/prospectus, as
well as other filings containing information about The Toronto-Dominion Bank and The South
Financial Group, Inc., without charge, at the SECs Internet site (http://www.sec.gov). Copies of
the definitive proxy statement/prospectus and the filings with the SEC that will be incorporated by
reference in the definitive proxy statement/prospectus can also be obtained, without charge, by
directing a request to The Toronto-Dominion Bank, 15th Floor, 66 Wellington Street West,
Toronto, ON M5K 1A2, Attention: Investor Relations, 1-866-486-4826, or to The South Financial
Group, Inc., Investor Relations, 104 South Main Street, Poinsett Plaza, 6th Floor,
Greenville, South Carolina 29601, 1-888-592-3001.
The Toronto-Dominion Bank, The South Financial Group, Inc., 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 The Toronto-Dominion Banks
directors and executive officers is available in its Annual Report on Form 40-F for the year ended
October 31, 2009, which was filed with the Securities and Exchange Commission on December 03, 2009,
its notice of annual meeting and proxy circular for its 2010 annual meeting, which was filed with
the Securities and Exchange Commission on February 25, 2010, and the above-referenced Registration
Statement on Form F-4, which was filed with the SEC on August 24, 2010. Information regarding The
South Financial Group, Inc.s directors and executive officers is available in The South Financial
Group, Inc.s proxy statement for its 2010 annual meeting, which was filed with the Securities and
Exchange Commission on April 07, 2010. Other information regarding the participants in the proxy
solicitation and a description of their direct and indirect interests, by security holdings or
otherwise, is contained in the definitive proxy statement/prospectus and other relevant materials
filed with the SEC.
2
CORPORATE PARTICIPANTS
Tim Hockey
TD Bank Financial Group Group Head, Canadian Banking
Robert Sedran
CIBC World Markets Analyst
PRESENTATION
Robert Sedran - CIBC World Markets Analyst
Okay, so welcome back, everyone. I am very, very pleased to welcome Tim Hockey, who is the Group
Head, Canadian Banking for TD Bank. I think its President and CEO of TD Canada Trust, too, right?
Tims a company man. Hes been with TD for 26 years in various roles.
Again, I believe beginning in the branch, with most of that time spent in retail banking. He is
always very insightful when it comes to retail banking in Canada, so Im thinking were all going
to know a whole lot more in 30 minutes than we do right now. So, Tim, welcome to Montreal.
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
Great. Thanks, Rob.
Robert Sedran - CIBC World Markets Analyst
Just to get started, how about you give us a sense of what youre seeing business condition-wise
for your business right now.
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
Well, on the one hand, if you look back to Q3 and this year its been a spectacular year for us. We
didnt expect it, honestly, to be as good as it is. Its always a very pleasant surprise, but we
were expecting I think all of us in the industry were expecting this year to be tougher in terms
of the recovery was not going to be as fast, if you will, from what recession we did have in
Canada, and Im talking only Canada now.
So in Q3, you would have all seen, we announced record earnings, record efficiency ratio, record
customer satisfaction. We just won the two national awards for customer satisfaction. So, all of
that is great and were feeling very good about that.
But in the spirit of what have you done for me lately, its always about looking forward. It
doesnt look as obviously rosy if we think about the economic conditions. Weve all read, Im sure,
just as much as I have, the economic outlook that is slower loan growth.
And so as a result, were planning on the revenue growth rate that weve had, which is high single
digits sort of territory for the last little while to be coming down in the next little while,
slower asset growth. Not sure yet whether at some point there wont be some deleveraging in the
Canadian consumer household debt rates, if you will, but thats something that we worry about a
little bit.
3
And so, it just feels to us like its time to start getting a little bit tighter and making sure
that were making the right investments in the areas that we can be continuing to boost our revenue
growth, but it wont be at sort of the torrid pace weve had over the last little while.
Robert Sedran - CIBC World Markets Analyst
When you think about the Canadian consumer, we hear a lot about how highly levered that consumer
is. So I guess, when you think about and youre obviously a very big Canadian consumer bank, so
when you think about the potential growth . I guess were more concerned about growth than we are
loan losses. Is that a fair comment?
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
Yes. If you remember, through the recession the revenue growth rate we had, combined with some,
obviously, degree of operating leverage, allowed us to climb over about a 50% increase in PCL
rates, or PCL dollars. And so, in the world going forward, were not going to have those loss rates
to climb over, loss gains to climb over from an earnings growth point of view.
So it will be less of a hurdle, but at the same time, we do think that the 20-year secular trend
that weve had in consumer leverage in the U.S. and in Canada will certainly slow, if not top out.
If you think about it, in 1980 the average household debt to household income in Canada was about
80%. And now, as of last quarter, its 146%.
And everybodys probably seen the famous chart that says the U.S. peaked at about 164% when the
crisis hit and now is at about 146%. So, theyre about to cross, other things being equal, where
the Canadian household debt crosses over the current U.S. debt. Now, if you talk to the average
economist, theyll say, We dont know what the peak is. Well, we do have one data point, and that
was the United States, and we know how that movie ended.
And so on the one hand you could say that that trend will continue for some time, but on the other
hand you could say that and if we do believe that we have fairly low interest rates going out
the next year or two, then the shock to the Canadian consumer will be small when interest rates
start to rise, and we have a couple of years to get ready for that. So when we look at that, we
say, okay, then that means its likely that loan growth is going to be less than weve all been
able to take advantage over the last decade or so.
So, what are the other revenue streams? And in TDs case, weve been preparing for that eventuality
by filling in white spaces and making sure we have other opportunities for revenue growth that
arent your sort of traditional mortgage business. So, it could be your Visa card business; it can
be your insurance business; it can be business banking; it can be the Province of Quebec. In our
case, we have a relatively low share, so weve been investing there to make sure that we have
opportunities for better-than-average growth because of our sheer underrepresented businesses.
Robert Sedran - CIBC World Markets Analyst
So when were thinking then in a world where its appropriate then to consider a world where the
Canadian consumer may be peaking out, the housing market is stalling a little bit. These are
amortizing assets. So, is zero growth, is negative growth possible on the balance sheet? What
should we be thinking about for ?
4
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
We dont think so. Again, if you go back and look at 30-year charts of the growth rates in consumer
loans, real estate loans, and commercial loans. The real estate loans dont fluctuate as much;
consumer loans fluctuate more in terms of year-over-year growth rate; and business loans fluctuate
dramatically.
If you see where we are in the cycle right now versus the previous 20 or 30 years, it would
indicate that youve got a snap-back coming, believe it or not, in asset growth rates. So, I think
that is a cyclical force that will counteract, to some degree, the deleveraging were talking
about. We dont believe I dont currently believe that were going to be looking at a shrinking
balance sheet from an asset point of view, given those factors.
Robert Sedran - CIBC World Markets Analyst
Weve been talking for some time that the growth rates the Canadian retail banks have been putting
up are unsustainably high. Is it the fact that we went from that 80% ratio you talked about to
146%? Is that ultimately what was driving these growth rates and now, at the very least, seem close
to a peak, were going to get back to a more normal growth rate in this business?
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
Yes. Thats what we .
Robert Sedran - CIBC World Markets Analyst
What is this more normal growth rate?
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
If you look back at TD Canada Trust from the time of the merger to just post the merger, 2001,
2002, so eight years or so, the compound annual growth rate and earnings from then until now was
14%. In fact, interestingly in the last quarter in Q3, TD Canada Trust made $843 million and
Ill be off by onesies and twosies and thats the exact same amount of money that we made in all
of the first year after the merger.
And so in 10 years, we basically had a four-bagger, if you just multiplied Q3 by four, so thats a
spectacular growth rate. And were very happy with it and very proud of it, but we didnt plan on
that being the case, either. If you go back to that same timeframe 2002 or thereabouts we
said target growth rate should be essentially 7 to 10%. GDP growth plus some efficiency gains plus
the market share gains, and you get that sort of range of earnings growth and then we ended up
doing double the bottom end of the range.
So as I look forward and we think about where we are currently positioned, then it should moderate
back to that same sort of range that we should be quite happy with, but not the outsized levels of
14%.
So, back to the earlier point. We think our strategy is and probably everybody in this room has
heard it before its dead simple. It is you win on service convenience. We think in retail
banking, and to a large degree in commercial banking, that you have to choose whether youre going
to compete on price, on product innovation, or service convenience. And if you choose one of the
three, you will actually have a
5
compelling opportunity if you hold it long enough and you get your entire team working towards
delivering on that.
We now have 10 years of experience in getting our service and convenience model right, and so we
think were strategically quite sound. And what that does is it gets you just more than your fair
share of customers being attracted to you for your convenience and, frankly, you lose just less
than your fair share of customers who tend to leave their banks because of bad service if you have
the best service in the industry.
So, you tend to grow a little bit faster than marketplace as a result of that model, and its
mostly important in the bank account business. And why thats so important to the bank account
business and why its so, therefore, the anchor product for retail banks is because once youve got
a bank account with someone, you have their first rate of approval on pretty much every other
product.
And everybody in Canada needs a bank account, so having a dominant share in that space means that
youve got the ability to cross-sell that customer base on all other products. So, that in and of
itself is a great opportunity for growth.
Robert Sedran - CIBC World Markets Analyst
I would encourage anybody whos got a question, please just to throw up your hand. But when you
talk about dominant market share in the bank account business, thats what? About 45, 40%? Am I in
the right ballpark?
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
No. In the bank account business, if you think about sort of total personal deposits, were about
21 share 21% of the total deposit market.
Robert Sedran - CIBC World Markets Analyst
Oh
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
So we have about 40% of Canadians. One of the stats Ive seen is we have about 40% of bankable
Canadians that have one product with us.
Robert Sedran - CIBC World Markets Analyst
Okay.
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
But 21% share in the actual dollars amongst the chartered banks.
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Robert Sedran - CIBC World Markets Analyst
And is that above where you would consider your natural share to be?
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
Yes. I think were growing out branches to the tune of north of 20 in any given year, and have been
for quite some time. I think weve done about 50% more than the average of the industry in terms of
percentage growth rate in branches, and we continue to do that for the foreseeable future.
But it feels like with that were also making some big investments on the direct channels. One of
the things weve done in the last year is weve said it doesnt make any sense for TD in Canada to
invest in our direct channels independently of Bharats business in the U.S.
And so weve taken our direct channels, essentially in North America, and combined them together
and said lets get the skill, scale, and scope to actually really double-down on that platform
across all of North America. We think thats a great growth opportunity for us going forward as
well.
But from a bank account point of view, we sort of think about that as being small market share
gains in that business as opposed to having great opportunities, unlike what we have in some of our
underrepresented business where weve got single-digit share.
Robert Sedran - CIBC World Markets Analyst
I guess where Im going with this is that you have a top share, generally, in some of these
products. You talk about your strategy being simple. Clearly, some of your competitors have been
trying to mimic at least parts of the strategy. Is that having any impact? Are they having an
impact? Is it getting hard to keep customers? Is it getting harder to acquire customers, as
everyone has kind of figured out that if we stop annoying them theyll tend to stay with us longer?
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
As strange as this might sound, its incredibly hard for banks to stop annoying their customers.
Weve been at it for a long time and I still get lots of customer unfortunately, lots of
customer complaints. I also get lots of customer kudos. I think its a mindset in the organization
that you have to get all in our case, all 30,000 of our employees realizing that that is job
one.
And, therefore, its all of our responsibilities, but we still have accidents. We still have to
recover with flair. We still have to really make sure that were on the ball, but its a complex
world and its a complex system to provide banking services to Canadians. And inevitably, there are
reasons why the service levels arent great.
Robert Sedran - CIBC World Markets Analyst
But is it getting hard to differentiate yourself in service?
7
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
Yes. If you look at the most recent the only thing we have to go on is internal and external
data points. And the internal data points are our own customer experience indexes, and so heres a
few things we do. One of the things we do is we call literally a half million customers a year and
we ask them how were doing and they give us a feedback loop on that score. That is reaching
every quarter it has reached record levels. So, thats one point, but that doesnt tell me on a
relative basis how were doing.
If I look at the external scores, then one of the things that we look at is the theres two
national benchmarks the Synovate Survey as well as the J.D. Power Survey. Weve won Synovate for
six years running and weve won J.D. Power for five years running, which is every year theyve been
in Canada.
If we look at the individual scores on all the individual categories on the Synovate Survey
theres 11 categories, we swept all 11, tied in some categories with one or the other of the major
banks, and our gain on the competition is bigger this year. So, weve moved away, if you will, from
the competition.
Now, thats sort of objective data, survey data that the customers say, Okay, youve made some
progress. But I think your point is right, which is there is more attention being paid to retail
banking and as strategies become more similar, it can crowd the space.
But heres an exercise we did, I think, about five years ago not even five months ago, but five
years ago. We took all of the operating or the mission, vision, value statements, if you will, of
all of the banks in Canada and we took all the logos off and we just put the words up on a wall
pretty difficult to tell who was who. Thats the point. Theres a very big difference between a
stated mission statement and actual delivered mission statement.
And so our simple strategy is you have to start with a simple strategy, but you have to stick
with it for long enough so that every single person in your organization knows that thats your
raison dêtre and that youre serious about it, and thats how they get paid, incented, rewarded,
promoted or fired, if they dont deliver on that mission, vision, value.
8
QUESTION AND ANSWER
Unidentified Audience Member
You talked about some growth in the residential book. How do you see the residential book given
their originations are probably down 25%? And what do you expect housing and housing prices in the
overall book?
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
Weve been growing our residential book, it seems, for the last little while about consistently 12
-13%. So, when we look forward on that, even with the market conditions that you were talking
about, we expect that number to still be in the mid to high single digits, which would be the short
answer to your question I think.
Unidentified Audience Member
Given that the overall originations are down, and it sounds like youre going to grow something
better than the marketplace, is the mortgage market becoming more competitive, and whats that do
to the profitability?
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
We think its quite competitive. The margins are still fairly healthy on some products; theyre a
little squeezed on others. There clearly was a significant drop year-over-year post sort of July
timeframe. Everything we expected to have I think everybodys been using the same phrase all
the pull-forwards of the real estate lending into the spring, there was a little bit of a
bounce-back in August; still too early to tell on the September numbers.
But yes, as growth gets more scarce, there tends to be a little bit more price competition, but we
havent really seen it just yet.
Robert Sedran - CIBC World Markets Analyst
Just to that end, some of the things that happened through the downturn when prime fell 50 basis
points and the bank lowered their rate to 75, and prime minus became prime plus, there was some
effort to inflate margins, even on the retail side.
Given the competition, given that originations are down, is the marketplace behaving reasonably
rationally? And if we are in a slower growing world for a while, even to 2011, is that pricing
pressure going to start to increase to the point where we need to be nervous about margins next
year?
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
Ive been asked . In fact, if you look mathematically at a world of rising interest rates, you
think that margins should go up. And generally, thats correct from a mathematical point of view.
But to your point, what we assume is that the increases that we will get in margins as we bounce
off the floor on low interest rates will probably be largely competed away.
9
So, my direction to my team is dont plan on us having margin inflation to make your revenue
number. What are the businesses that were in? What are the growth opportunities of getting new
customers as opposed to planning on, Hey, I can grow my volumes by four and I can count on a 2%
margin inflation, so, therefore, I get 6% revenue so I can spend more money. Dont count on it,
because we should be planning on having a more competitive environment.
Robert Sedran - CIBC World Markets Analyst
Its flat youre planning for flat, basically?
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
Yes.
Robert Sedran - CIBC World Markets Analyst
Okay. All right. So, does that make the importance of scale then even bigger? Youve got one of the
biggest platforms at least one of the biggest asset bases in the industry. Is scale still a
defining feature in the Canadian banking market, or would you suggest that all of your competitors
have enough that its a bit of a wash?
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
I think its still fairly defining. Again, back to the journey weve been on. We started 10 years
ago with a 64%, I think, efficiency ratio and now were last quarter we were 46.2%. I get asked
the question all the time, Whats your target? And I say, Lower. We dont have a number. Its
just we dont know how low is. The industry-leading alpha banks would be in the low 40s.
And so, again, our formula, our strategy is dead simple. Its grow your revenues and your expenses
a little less than that and, therefore, you will lower your efficiency ratio. So, I think scale is
important.
One of the things we love about our model is that generally when you tend to look at a combination
of higher touch and higher degree of service and almost 60% more hours than the competition, most
analysts and investors would look at that and say, Thats a high-cost model. And yet, our
efficiency ratio is neck-and-neck with the lowest, essentially.
So, that gives us, I think, a tremendous advantage from a competitive point of view. We can afford
to take pricing actions if you wanted to, but our service and convenience model means that we dont
have to. In fact, we can extract a price premium as a result of having better service and better
convenience.
Again, remember why people decide to do their banking with you. They come for the service, or
rather convenience and they leave you for bad service. Its seldom price plays a large point,
certainly in the basic bank account business, so that gives you a price advantage, I think, from a
revenue point of view, which weve been able to achieve.
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Robert Sedran - CIBC World Markets Analyst
Lets start with the credit card business for a few minutes. Its one of those businesses that
youre not at your natural share, and I guess its still a legacy issue from the merger. How hard
is it to grow that business? Is it just cross-selling from your current customer base or are you
trying to acquire new customers through the credit card channel?
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
Yeah, Id say to some degree you hope you can acquire new, but, quite frankly, thats inefficient.
So the history, if you didnt know, is that TD and Canada Trust a decade ago, they both have credit
card portfolios one Visa, one MasterCard. But at the time, duality in Canada wasnt allowed, so
Canada Trust was forced to sell of its MasterCard portfolio. So, we ended up at the time of the
merger, when we have about a 20 share of the bank account business, we had about a 9% share of the
credit card business.
Well, theres really two ways to acquire credit cards. You can cross-sell them through the branch
system to existing customers. As I said, I have 40% of Canadians having one product with us, so
that makes it easier to cross-sell them a credit card.
The other way is what the traditional monolines do, which is to do mail drops, and weve all had 15
things in our mailbox over the last month that says, Here, get our teaser rate and get a credit
card. A remarkably expensive way to acquire customers because the response rates to those mail
drops has plummeted and you get a pretty adverse selection from a credit quality point of view.
Youre granting credit to those people that -
Robert Sedran - CIBC World Markets Analyst
A very diplomatic way of saying -
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
Yes, exactly. But to your point, weve taken that 9 share to 11.5. And to your point about easy to
grow or not, in the last year weve gained almost a full percentage point and very good growth
rates in our credit card business.
And Id say the story of the last couple of years in TD has been how weve been able to take
advantage of the recession and grow share in almost all of our businesses quite dramatically.
Probably the biggest example is business banking. We went from 13.5% share in the fall of 2008 to
one year later, 15% share, so literally 10% of our market share in one year.
And we did that because at the time of the recession, October 2008, we said, This is a fantastic
opportunity. We have a low efficiency ratio. We own service and convenience. Were a 154-year-old
institution. Weve been through the Great Depression and World Wars. It might look terrible out
there, but well get through it. And the best thing we could possibly do is stand by our customers
in the worst times.
And your commercial clients will never ever forget you for doing that, and so we picked up share at
very nice spreads during that period of time. It was a bit of a sea change from a market share
point of view in almost all products, certainly in all lending products personal and business
we picked up remarkable share. The same thing on the deposit and mutual fund side.
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Robert Sedran - CIBC World Markets Analyst
Is the easy share gone in the commercial business? It sounds like the competitive environment is
really picking up.
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
Well, as I say, if it took us one year to do 10% of our market share and about 153 years to do the
other 90% of our market share, I think the easy pickings are gone.
Robert Sedran - CIBC World Markets Analyst
Okay.
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
So, I think it will get tougher right now. In fact, the competition certainly has noticed and have
started to get back into the market more furiously. So, the margin has come down on the commercial
side, its more competitive, and I think some institutions have gone out the risk curve a little
bit. Were seeing that activity
Our philosophy on that is very simple. We will like our entire institution in the commercial
bank, we will not go out the risk curve. Our strategy is that we will have more better business
bankers sitting across the table with you understanding your business and well be there with you
through thick and thin. But we wont necessarily do the deals that the other guys will because that
means theyll have to pull back more so than we will when the recessions do hit, inevitably, in the
business cycle.
Robert Sedran - CIBC World Markets Analyst
George?
Unidentified Audience Member
What are you seeing on the credit front, commercial, personal (inaudible)?
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
On what?
Unidentified Audience Member
Do you have a lot more room for improvement? Youve had a great drive in improvement?
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
Credit quality or growth rates?
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Unidentified Audience Member
Growth.
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
Well, as I think I intimated earlier, we actually saw the PCL rates . Let me just separate the
two categories. You never have to worry about real estate secured lending credit in Canada
everybody knows that. So, to just talk about consumer credit, non-residential, and commercial
credit.
Weve always had a much lower rate on our commercial portfolio. We kept saying, if you remember,
every single quarter we kept saying, Well, we expect to see the PCLs hit on the commercial side.
Another quarter goes by, another quarter goes by, and were just not seeing it.
So, it feels like this cycle, at least, its not happening. So, that makes me wonder, therefore,
how were we feeling about the quality of the credit we were granting? Because you could say if we
never really had the levels achieving that you thought you would, even in a recession, that
probably tells you youre quite tight on the risk side.
But quite frankly, given that were gaining share with lower PCL rates in our commercial and our
business lending than the competition, that tells me and with pretty good spreads that tells
me, as Ive said, Ive got a very nice profitable model. And if Im gaining share without going out
the risk curve, why would I do that? I wouldnt. So, thats the business side.
On the consumer side, if you remember going back a few years, back in the sort of 2005, 2006 level,
we invested quite a lot of money in a brand new system that we implemented and grew our unsecured
lending rates nicely; it was still contributing to that 14% compounded growth rate I was saying.
But at the same time, our PCL rates went up higher than we liked. So, I call that our own little
mini-recession before the actual one hit.
So, what youve seen in the PCL rates in our consumer book, theyve dropped they were higher
than the industry average, and as of the last quarter they dropped below the industry average, so
we had sort of a steeper downwards slope. Why? Because weve really learned how to use this engine,
and this engine is great. It just, like anything else, it had growing pains.
So, as you learn to tweak the scorecard system, champion challenger, you take a real hard look at
your cohorts, and you just learn how to use this system, you can be much more precise. I say were
now using a scalpel versus as ax in terms of making some of the credit decisions. So as a result,
were seeing that in our PCL rates and maximizing the profitability by cohorts.
So going forward, were not really expecting to see, certainly, a drop in the PCL rate on the
commercial side because its so low. On the personal side, we had expected not to see the rate
improvement weve seen this year so fast; we expected that more into next year. And it really does
depend on what you believe the unemployment rate is going to be going forward. We will get some
rate improvement. But if were able to continue to grow our assets, well likely not see as much
dollar improvement.
Unidentified Audience Member
Can you talk a bit about your branding effort in the United States?
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Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
Sure. Well, all things being equal, we should be able to close on our South Financial Group deal,
which means that when thats done well have about 1,300 branches in the US, which is more than we
have in Canada. And if you think about that from a standing start of zero five years ago, thats a
great opportunity.
Robert Sedran - CIBC World Markets Analyst
Theyre called stores, by the way.
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
They are stores, yes. TD Bank, Americas Most Convenient Bank in our 1,300 stores. Id say the
response, interestingly this is a great new story. We were worried about the switch from the
Commerce brand to the TD brand. But we, in hindsight, didnt need to be.
I guess we should have known this as long as you can convince and prove to your customers that
when you switch to a new brand, as long as theyve got the same people, the same service levels,
you dont take away their, in the U.S. case, 7-day banking. In fact, theyll be thankful for the
fact that youre a stable institution and all of those sorts of things.
And so whats happened is that we did see a little bit of a dip in our Customer Wow! index, as we
call it in the states, at the time of the merger, but the snap-back to the levels it was pre-merger
was faster than it was in Canada back at the time of TD and Canada Trust coming together. So,
thats a great, I think, testimonial to the team down there, that the branding and the customer
satisfaction levels can continue to be strong.
Our desire, of course, is that we will continue to put the TD shield in all the new stores that
weve acquired, and well continue to be filling in the spots in both organic growth and as I
think weve said, if theres some opportunities we dont feel compelled, were not strategically
imperiled in the United States. But if we feel like theres a great, financially attractive deal
that fills in our footprint, were going to take a hard look at it, obviously, in the U.S., but it
will be branded TD Bank, Americas Most Convenient Bank with all the stores.
Robert Sedran - CIBC World Markets Analyst
[Are you bringing anything north in terms of best practices? I know youre trying to put some stuff
south, but are you bringing anything north?
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
Yes, there are a few things weve one of the great, interesting learnings I was just sharing the
other day with the team is that our philosophy in Canada, for example, around customer satisfaction
was we would ask customers and say, How have you been satisfied with your service? It seems
logical. And then theyd rate us, and then we score every single branch in Canada and operating
unit on customer satisfaction based on what customers say.
In the U.S., they had a very different approach, which is they defined what the model was for
operating the business and then they did mystery shops. And they scored the branch store on how
they complied with the standards that they had said that they would deliver, but they didnt
actually ask customers.
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So, it was very interesting. We didnt mystery shop our branches in Canada, and they didnt ask
customers. So, were now doing both in both countries, and weve actually seen a remarkable lift in
Canada and the U.S. in customer satisfaction score to be more consistent in the service delivery in
Canada and, as I said, a big snap-back. So, that would be just one example.
Weve tested one of their concepts around branch opening or store opening up here and some of our
practices here were putting in place down there, so it actually is a real effort to take the best
of both worlds.
Robert Sedran - CIBC World Markets Analyst
Great. Ive got a red light. Tim, on behalf of everyone here, thanks for attending. We really
appreciate your time.
Tim Hockey - TD Bank Financial Group Group Head, Canadian Banking
Great. Thanks for having us.
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