Business Context and Reporting Period
Company: 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
The Bank reported strong underlying operating results across its four business segments: Canadian Personal and Commercial Banking, U.S. Personal and Commercial Banking (TD Banknorth), Wholesale Banking, and Wealth Management. This quarter marked the first full three months of TD Banknorth earnings being consolidated into the Bank's results.
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 | - | - |
| Tier 1 Capital Ratio | 10.0% | 12.3% | - | - |
Note: All dollar amounts are in Canadian dollars unless otherwise noted. The Bank utilizes "Net Income before amortization of intangibles" as a primary performance measure.
Material Changes vs. Prior Period
- Enron Litigation Reserve: A significant non-recurring charge of $238 million (after-tax) was recorded due to an increase in the contingent litigation reserve relating to Enron of U.S.$300 million. This reduced reported EPS by 33 cents.
- Acquisition Impact: The inclusion of TD Banknorth (acquired March 2005) contributed significantly to asset growth ($34 billion increase in total assets) and revenue. Net interest income increased by $111 million quarter-over-year, entirely due to TD Banknorth.
- 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 hedging relationships accounting guideline (AcG-13).
- Segment Performance:
- Canadian Personal & Commercial Banking: Earnings before amortization of intangibles increased 17% year-over-year, driven by real estate secured lending and business banking growth.
- Wealth Management: Earnings increased 30% year-over-year despite soft capital markets, driven by mutual fund sales and advice-based business momentum.
- 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 declared a quarterly dividend of 42 cents per share, a 5% increase from the previous quarter, reflecting confidence in ongoing earnings strength.
- 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% via 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. Wholesale Banking aims to achieve a return on invested capital of 15% to 22% for the remainder of the year. Wealth Management expects a shift toward more stable fee-based revenues.
- 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: Losses exceeded Value at Risk (VaR) 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 are expected to be adopted in fiscal 2007.
Investor Verification Checklist
- Enron Exposure: Verify the sufficiency of the $665 million litigation reserve and the impact of the subsequent $160 million settlement on future earnings.
- Intangible Amortization: Review the reconciliation between reported GAAP earnings and earnings before amortization of intangibles to understand the true operating performance.
- Acquisition Integration: Monitor the integration progress and cost synergies of the TD Banknorth acquisition and the pending Hudson United deal.
- Wholesale Banking Restructuring: Assess the long-term impact of exiting the global structured products business on revenue and risk profile.
- Capital Ratios: Confirm that the Tier 1 capital ratio of 10.0% remains adequate given the $30 billion increase in risk-weighted assets from the Banknorth acquisition.