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Ed Clark's Remarks
TD Bank Annual General Meeting
March 25, 2004
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View the slides referred to in the presentation (PDF, 177 KB)
Thank you John.
- I personally have great affection for the west as my father was born and raised in Alberta on my
grandfather’s farm. I have fond memories of my visits here. I am also delighted to be in
Edmonton and I want to congratulate the city on your centennial year. We’re proud that the TD Bank has been in Edmonton almost as long as Edmonton has been a city. The Bank of Toronto
opened its first branch at what was then Howard and Jasper in 1906. As the city has grown,
we’ve had the good fortune to grow with you. This is a great province with two fantastic cities
that are setting the pace for the rest of Canada.
- This is my second annual report to shareholders and the first for a full year as CEO. And what
a year it has been!
- This time last year, we were optimistic about our future but we knew we had a steep hill to
climb. We had stumbled and we needed to prove to our shareholders, customers and
employees that we had the capacity not only to recover, but to grow and once again be the
best-run bank in Canada.
- We took some important strategic steps and at the same time set out to build a culture that
would prevent the recurrence of the mistakes that surfaced in 2002. We are creating an
environment where we expect and encourage employees to bring problems and mistakes
forward without fear of repercussions. Transparency matters. Tell it like it is. Don’t round
corners. Deal with issues.
- But you can’t have greater openness inside the company if you don’t have it in the way you
communicate outside. So in our reporting on results we talk about issues early and address
challenges quickly. We’re realistic about potential impediments to future earnings. This should
also mean that when we have good news, we are just as upfront about it. And that’s hard for us
because we don’t tend to blow our own horn. We want to be the best, but never act like we
think we’re the best.
- But today I am going to blow our horn. Because when you look back on the last year, even with
the harshest lens, the only word you can use to describe what our employees have
accomplished is spectacular. So, I’m not going to do a formal report on our last quarter or our
year-end where I typically point out all the things I’m worried about. I simply want to look at the
bigger picture and give you a sense of what we have accomplished and what lies ahead.
- So how did we do? We told shareholders we would reduce our risk profile, restore our capital
and deliver sustainable earnings in each of our businesses. And that’s what we did.
Reduced Risk Profile
- Our first promise was to reduce our risk profile. Since we repositioned the company in 2002
you have to go back to 2001 to get a meaningful sense of what we’ve achieved. When you do
that you see that in 2001 our business mix was almost evenly split between wholesale and
retail. By the end of fiscal 2003, retail was contributing almost three-quarters of our earnings.
Our retail businesses have strong, enduring franchises and consistent, higher ROE earnings.
While a lower proportion of our earnings came from wholesale they were higher quality
earnings because we had less risk and were using less capital to produce them.
- We shifted our strategy in wholesale to focus on Canada and our global capital markets group,
and in doing so to grow economic profit. We exited wholesale businesses where we didn’t
believe we had a strategic advantage. This was the case for much of our non-Canadian
corporate lending.
- We segregated our non-core corporate loans and, at that time, said we’d eliminate the portfolio
in three years by restructuring, collecting and selling off the loans. By the end of the first quarter
of 2004 the portfolio had just $3.3 billion in assets – just over a third of its original $11.2 billion
base. Clearly we will beat our original goal.
- Our actions reduced our risk weighted assets from $127 billion in 2001 to $110 billion at the
end of the first quarter this year. What’s more, we’ve achieved a better rate of return on risk
weighted assets than the other big Canadian banks. In simple terms we earn more for every
dollar of risk we take. That’s what shareholders want and what the market will ultimately
reward.
Capital
- Our second promise was to restore our capital. At the end of fiscal 2002 our Tier 1 capital was
8.1% - a level which, while strong, gave us less flexibility than our competition. That’s because
we had stretched the capital structures with acquisitions and had to deal with tough corporate
loan problems. Excellent earnings and more efficient use of capital raised our Tier 1 capital to
10.5% by the end of fiscal 2003– a phenomenal recovery. Conceptually that’s like adding $2
billion of common equity over the year.
- Our third promise was to deliver sustainable earnings in each of our businesses. Growing
businesses will add shareholder value. This means growing economic profit, and adding new
customers to increase the long-term value of the franchise. Let me talk about what we have
accomplished in each business and how we will continue the momentum for future growth.
Personal and Commercial Bank
- In our personal and commercial bank we have a great brand in TD Canada Trust, a fantastic
distribution system and a focus on providing superior customer service that delivers a
noticeably different, more comfortable experience. Despite a tough revenue environment, in
2003 we increased our net income by 14.6% and kept our earnings promise of double-digit
growth. Growing this business doesn’t require hundreds of new ideas. Quite the opposite –
keep it simple, remove errors, improve processes. We expect this to result in superior customer
retention, superior customer attraction, and a greater ability to do more business with our huge
customer base.
- We measure customer satisfaction every day and reward everyone, including all our top
management, on how well our customers think we’re doing. We delivered on our promise to
improve customer satisfaction with an increase of 130 basis points year over year at the end of
2003. A great improvement, but we are far from declaring victory. We are committed to building
a better bank and we know we have a lot more work to do.
- We believe that measures to lower our breakeven point on costs also improve customer
satisfaction, by reducing errors and allowing our employees to focus on our customer. Great
expense management also allows us to continue to deliver double-digit growth, despite
declining margins. In fact in the first quarter of 2004 the personal and commercial bank
earnings were up 16% year over year.
- We also have great growth opportunities in small business, commercial banking and insurance.
These are targeted growth areas where we intend to profitably grow our client base.
- In small business we have a market share of almost 24% in Alberta. Our overall market share
in this important sector in Canada has grown 65 basis points in the last two years.
- We have always been great commercial lenders, and want to grow lending volumes as we
attract new customers. But we also want to take advantage of our best in class cash
management services to grow deposits. Last year this focus helped us grow deposits 18%. We
know small business and commercial customers judge us - not by whether we are there for
them in good times - but by what we do in hard times. In Alberta we have a long history of
lending to the agricultural sector through times of drought, disease and other disasters. We are
doing what we can to help our agri-business clients endure the hardships created by BSE. We
have asked our employees to be patient, sensitive and accommodating to the needs of
impacted customers. We are working with each affected client on a case by case basis and are
committed to being flexible in developing solutions.
- Our third growth business in TD Canada Trust is insurance. One part of this business is our
property and casualty group, TD Meloche Monnex, a good example of a market leader. It is the
number one direct response insurer in Canada. In Alberta we have almost quadrupled our
client base since 1993 and are one of the top four insurers of cars and homes in the province.
Wealth Management
- In our wealth management business, we have a great franchise around the world.
- In Canada we are #1 in discount brokerage and in private investment counsel. We are #1 in
index and quantitative management. We are a leader in mutual funds. Last year we had the
second best net sales in long-term funds of all mutual fund companies. We continued our lead
as the bank with the best investment management group. Indeed, in the last three years we
have consistently been the bank with the highest percentage of 4 and 5 star Morningstar rated
funds.
- A year ago, we said we’d grow earnings while investing to build a better advice base. Well, the
market came back and we blew the lights out. Wealth Management earnings doubled year over
year in 2003. In the first quarter of 2004 alone, we earned almost as much as we did in all of
2002.
- That’s a great achievement, but we still have areas that need attention. We’re not as strong as
we need to be in advice, so we’re getting the infrastructure in place to give the right advice
through the right channel to our customers. We have a simple test – would you send a relative
to each of our advice channels? Do we have the right decision making tree to get her to the
right channels, the right advice packages when she gets there, and the best advisors to help
her make decisions in an informed way? With this in place, we will grow this business. The
opportunity is there.
- In the United States we have a real jewel in TD Waterhouse. It occupies a sweet spot in the US
discount brokerage industry with its combination of direct brokerage, branches, mutual funds
and support to independent financial advisers. Our better model brings us higher assets per
customer and a more consistent profit stream. We are improving our active trader platform. We
are increasing our marketing spend and adding to our sales force.
- Early in 2003 we restructured our under-performing international wealth management
operations business and promised it would break even by 2004. It is now profitable.
Wholesale Bank
- Let me turn now to the wholesale bank. As we restructured the wholesale bank, we said we
wouldn’t lose focus on the areas where we thought we had a competitive advantage. We have
a leading full-service domestic franchise, and it can be even better. We have the strongest
global capital markets group of any of the Canadian banks. Together these businesses
outperformed our expectations in 2003 providing earnings of $549 million versus our target of
$500 million. More importantly, they delivered in excess of their target 20% Return on Invested
Capital. In the first quarter this year their earnings were up 15% year over year and their rate of
return was 28%. This may not be a sustainable number for the rest of the year but it does
confirm that – managed our way – this can be a great business.
- We’re creating a unique asset. A wholesale bank run by bank shareholders, focused on
economic profit, building a franchise by providing great support to our franchise clients.
- We will leverage our competencies in equities and advice and in lending domestically to
expand our client base and do more with each client. We expect to successfully take market
share in Canada. Look what we just did here in Alberta. We successfully led a $1.5 billion
financing for OPTI and are following this up with a $280 million initial public offering. This is one
of the largest non-recourse financings ever for a start up commodity project and one of the
largest private equity deals ever in Canada.
- We have shifted our global capital markets group to focus on the investor market around the
world. Within this group we take a highly focused approach, centering on areas where we like
the risk/reward tradeoff. We are constantly strengthening our risk infrastructure and reviewing
each of our trading strategies to make sure they are sustainable in rapidly changing markets.
- Sometimes when you shift strategy in one part of the bank it has an unintended impact on other
businesses. We worried that stopping lending to clients who had only a peripheral relationship
with us would be interpreted that we wanted to stop all corporate and commercial lending in
Canada -- even to long-standing franchise clients. That was never our intention. Our results say
this worry has not come to pass. But I want my message to be clear. We are in the corporate
and commercial lending business and we want to grow our client base.
- Yes, we have shifted our earnings mix. And we will use our excess capital predominantly on
the retail side to further that shift. But we have committed to our wholesale and commercial
businesses that we will grow their capital bases, and therefore lending capacities, in line with
our organic base earnings target.
- All three of our businesses continued their growth momentum into 2004. We’ve returned to our
position as the well-run high performing bank that TD has consistently been. Now we’re driving
on to build on our momentum and deliver consistent, growing earnings.
Shareholder Value
- Clearly the markets like what they are seeing. Our share price closed yesterday at $45.91
compared with $29.35 at the end of Q4 2002. We haven’t yet got the premium P/E our risk
profile and consistent earnings capability we deserve, but we have returned our P/E to the
middle of the pack and are determined to gain that premium status.
- Shareholders benefited from a total shareholder return of 53% in 2003 compared to an average
of 38% for our bank peers. We also increased dividends twice in the last 12 months –
endorsement from our Board of Directors that we are on a sustainable earnings path. Our
compound annual dividend growth rate was 13.4% over the last 51/2 years – despite the pause
in 2002.
Deployment of Excess Capital
- As I said earlier, we’ve had a remarkable capital improvement this year, and our three core
businesses continue to create excess capital. In considering how to deploy the excess, we aim
to find the optimum balance between making investments that truly add immediate shareholder
value; giving capital back to shareholders to reallocate where appropriate; and continuing to
grow the bank so we don’t become strategically vulnerable. There are no simple answers to
what is the right balance. Transactions like the acquisitions of 57 Laurentian Bank branches
and the Liberty Mutual Group operations in Canada are good examples of investments that
truly add immediate shareholder value, strengthen us strategically, and give us immediate
growth.
- In the short term, we have initiated a share buy back program to offset the dilution of the
dividend reinvestment and options programs. We don’t intend to be rushed into making major
capital decisions until we have fully explored our strategic options. You can rest assured that
we won’t lean excessively in one direction or another. As you are aware, last year, we went to
the Board with fairly extensive compensation changes. These were designed to ensure that all
our executives are focused on building long-term shareholder value and are fully aligned with
our strategy.
- As we move forward, our strategy is very simple. We will occupy sustainable positions where
we have competencies and where there are growth opportunities.
- Figure out what you do well. Figure out where the market will reward you. And occupy that
space by just doing it better. Nothing fancy. Keep it simple. Worry about operational excellence.
Correct your mistakes. Think about the customer. Add new customers or clients every day. And
thank your people.
Importance of People
- In the end, people are all that matter and we need to know how they feel. So just as we do with
customers, we ask them. Our TD Pulse survey in 2003 showed that satisfaction levels continue
to improve.
- We are well aware that great people are a scarce commodity and we are fortunate to have an
exceptional executive team and many strong potential successors coming up through the
organization. We have put in place an extensive executive resource planning process that will
help us identify high potential employees, find ways to help them grow and ensure their careers
with us are personally satisfying. We also celebrate people who simply do a great job year in
and year out. Great organizations are built on people who just get it done. Less talk, more do.
- We also want our shareholders to know that we have a tough performance-driven culture. We
expect a lot. We deal with non-performers. We demand that promotions and compensation be
based on merit, not politics. But we also believe strongly that a performance culture can be a
respectful culture. Treat people as you would like to be treated. It’s as simple as that. Equally
importantly, do what’s right. A performance culture must be balanced by a no-compromise
policy on personal ethics. If it’s wrong, don’t do it, whether it’s legal or not, or whether it will help
your results. Just do the right thing.
- What does this all add up to?
- 2003 was a great year for TD Bank Financial Group. On all fronts we’ve made a phenomenal
recovery in a very short time. Importantly, our accomplishments show that we can readjust
quickly, and that the strategy we set in place in 2002 is working.
- 2004 is shaping up to be another great year. We are a company on the move and I am
confident that we will continue to build on our solid foundations and deliver sustainable results
for our shareholders. We are working to become, once again, one of the best-run banks in
North America.
- Before I sit down I’d like to thank our Board of Directors for their counsel and support over the
last year. Some might assume from some corporate governance discussions that
managements prefer to have weak boards of directors and only grudgingly agree to strengthen
their corporate governance. In fact, the opposite is true.
- Good executive management teams want a strong and questioning board. We know we’re not
perfect and it is a tremendous comfort to know that our board is focusing on the bigger issues
that we could miss because we’re too close to the business, too immersed in operational
details or too tied to existing strategies.
- I’d also like to thank our customers for their business and their loyalty, our shareholders for
their faith in us, and our employees for their hard work and determination. Our employees are
incredibly loyal and they think like shareholders. They are a big part of my optimism about our
future.
Thank you.
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