Business Context and Reporting Period
Company: The Toronto-Dominion Bank (TD Bank Financial Group)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Third Quarter ended July 31, 2005 (Nine months ended July 31, 2005)
Filing Date: August 25, 2005
Overview: TD Bank Financial Group reported strong underlying operating results for the third quarter, driven by growth in Canadian Personal and Commercial Banking and the first full quarter of consolidated results from the TD Banknorth acquisition. The Bank announced a 5% increase in its quarterly dividend to 42 cents per share.
Key Financial Metrics
| Metric (CAD) | Q3 2005 | Q3 2004 | 9M 2005 | 9M 2004 |
|---|---|---|---|---|
| Net Income (Reported) | $411 million | $565 million | $1,640 million | $1,637 million |
| Net Income (Excl. Amortization) | $502 million | $664 million | $1,908 million | $2,022 million |
| Diluted EPS (Reported) | $0.58 | $0.86 | $2.38 | $2.48 |
| Diluted EPS (Excl. Amortization) | $0.70 | $1.01 | $2.76 | $3.06 |
| Return on Common Equity (Reported) | 10.4% | 18.4% | 15.4% | 18.3% |
| Return on Invested Capital | 10.5% | 17.5% | 14.6% | 18.3% |
| Total Assets | $368.4 billion | $309.2 billion | - | - |
| Total Deposits | $251.4 billion | $206.9 billion | - | - |
| Tier 1 Capital Ratio | 10.0% | 12.6% | - | - |
Note: All dollar amounts are in Canadian dollars unless otherwise noted. The decline in reported earnings is primarily due to non-recurring charges and amortization of intangibles.
Material Changes vs. Prior Period
- Enron Litigation Reserve: The Bank increased its contingent litigation reserve by U.S.$300 million (CAD$365 million), resulting in an after-tax charge of $238 million (33 cents per share). This was the primary driver of the decline in reported net income.
- TD Banknorth Acquisition: The third quarter included the first full three months of TD Banknorth results. This acquisition contributed $34 billion to total assets and $28 billion to total deposits. It drove a $111 million increase in net interest income for the quarter.
- Restructuring Charges: The Bank recorded a $10 million after-tax restructuring charge and a $30 million after-tax loss on exiting a portfolio within the global structured products business as part of repositioning its Wholesale Banking segment.
- Accounting Guideline Impact: A $12 million after-tax charge was recorded due to the impact of the hedging relationships accounting guideline (AcG-13).
- Segment Performance:
- Canadian Personal & Commercial Banking: Earnings before amortization increased 17% year-over-year, driven by real estate secured lending and business banking growth.
- Wealth Management: Earnings before amortization increased 30% year-over-year, despite soft capital markets, due to strong mutual fund sales and advice-based business growth.
- Wholesale Banking: Earnings declined due to restructuring charges and a loss on exiting structured products, though domestic franchise results remained solid.
Guidance, Outlook, and Risks
- Dividend Increase: The Board raised the quarterly dividend by 2 cents to 42 cents per share, effective for the quarter ending October 31, 2005.
- Strategic Transactions:
- Ameritrade: Agreed to sell TD Waterhouse U.S.A. to Ameritrade Holding Corporation in exchange for a 32% interest (increasing to 39.9% post-tender). Expected to close early fiscal 2006.
- Hudson United: TD Banknorth agreed to acquire Hudson United Bancorp for approximately U.S.$1.9 billion. Expected to close early calendar 2006.
- Outlook: Management expects revenue growth to remain strong in Canadian banking products. Wholesale Banking aims to achieve a return on invested capital of 15% to 22% for the remainder of the year. Wealth Management expects trade volumes to strengthen in the fourth quarter.
- Risks and Contingencies:
- Enron Litigation: While the reserve was increased to $665 million, the Bank noted that additional reserves could be required. Subsequent to the quarter, the Bank agreed to settle bankruptcy court claims for approximately $160 million.
- Market Risk: Value at Risk (VaR) limits were exceeded on two days in the quarter due to the exit of a structured products portfolio and unfavorable moves in structured credit markets.
- Accounting Changes: New CICA standards regarding financial instruments and comprehensive income will be effective in fiscal 2007, potentially impacting future reporting.
Investor Verification Checklist
- Enron Settlement Status: Verify the final settlement amount and any potential for further litigation costs beyond the $665 million reserve.
- TD Banknorth Integration: Monitor the realization of synergies and the impact of the Hudson United acquisition on the U.S. segment's profitability.
- Wholesale Banking Restructuring: Track the progress of the global structured products repositioning and the achievement of the 15-22% ROIC target.
- Ameritrade Transaction: Confirm the closing of the TD Waterhouse U.S.A. sale and the valuation of the resulting 39.9% stake in TD Ameritrade.
- Capital Ratios: Review the impact of the TD Banknorth acquisition on risk-weighted assets and the sustainability of the 10.0% Tier 1 capital ratio.