TD continued to make progress in the first quarter of 1998, with a particularly strong performance by our retail banking businesses in Canada where we saw strong year-over-year gains in revenues, earnings and market share in key areas. We are pleased to report solid earnings despite substantially higher taxes, higher loan loss provisions, and the economic and currency problems in a number of Asian economies which have had a negative impact on worldwide capital markets.
Net income for the quarter of $293 million was up by 11% from the previous year; taxes and levies climbed 16% to $293 million, and loan loss provisions
were $63 million, compared to $40 million in the first quarter of 1997. The provisions were increased to comply with the new regulatory initiative to set loan loss provisions at the annual average expected over an entire economic cycle, and reflect an estimate for the year of $250 million. However, actual loan losses for 1998 are not expected to be materially
different from $160 million in 1997 and the higher level of annual provision will be reflected in a corresponding increase in the general reserves.
Focus on credit quality
To help keep shareholders informed about TD's credit quality, we disclosed our total credit exposure to the troubled economies of Indonesia, Malaysia, the Phillippines, South Korea and Thailand during the quarter; our exposure in these countries totals $915 million, or less than 1% of assets.
Helping to make it easier
Our advances in retail banking are due largely to our staff's efforts to help make it easier for customers through the expansion of TD Access distribution channels and our ongoing focus on excellence in customer service and sales. As well as being reflected in the bottom line, our success in quality service delivery has been confirmed by independent customer surveys.
We are very proud to report that, during the quarter:
- for the third year in a row, TD branches were ranked number one among 12 major financial institutions in investment advice and service for mutual funds.
- TD Visa was ranked highest in customer satisfaction in a Canadian credit cardholder study which included eight of the major credit card issuers in Canada.
Significant achievements
In other operating highlights during the quarter:
- We divested our payroll services business to Ceridian Corporation, a global leader. Payroll services represent a high-volume, low-margin business where economies of
scale are required to compete effectively, and we could not foresee becoming a large enough player to generate satisfactory returns for shareholders. In line with our
strategies for profitable growth, we decided to divest the business to a provider that is well positioned to add value for our customers and we shall continue to make payroll services available through representing Ceridian.
- We maintained share in the competitive mutual fund market and launched five new specialty funds during the quarter, expanding choice for individual investors and bringing the number of Green Line No-Load Mutual Funds to 39.
- In retail brokerage, we integrated the operations of Pont Securities and Rivkin Croll Smith in Australia – creating the market leader in discount brokerage in
that country.
- Waterhouse Investor Services completed the acquisition of Kennedy, Cabot & Co. in California and achieved outstanding growth during the quarter. Daily trading was up by almost 100% year over year, and electronic delivery now accounts for over 60%
of total trades.
- TD Securities was named one of two firms of the year in the Financial Post’s annual "Dealmakers" report – and was cited for its integrated approach and its strong growth in market share, research quality and retail distribution.
Recognizing the people of TD
We are very proud of the efforts of staff throughout
Québec, Eastern Ontario and Atlantic Canada – and
the support of our people across the country – who
worked to minimize service interruptions and to
provide assistance and relief during the devastating
ice storms in January. As part of these efforts, TD
made a corporate donation of $200,000 to the relief
fund, TD employees donated $40,000 and customers
donated over $120,000 through our branch network.
The special efforts continue throughout the ice storm
regions, as our people work with customers to help
them get back to business as usual.
Outlook: The Asian currency crisis and its aftermath
have dampened projections for global growth in 1998. In
Canada, low commodity prices and somewhat higher interest
rates have tempered the forecasts to a degree. Although
growth will slow from last year’s rapid pace – especially in
British Columbia – we still anticipate healthy growth of
about 3% in Canada and over 2% in the United States this
year. In this environment, we expect our businesses to make
further progress in the months ahead.
Debate on the future of banking
The announcement of the proposed merger of two of
Canada’s major banks during the quarter has presented
a significant market opportunity for us. Our success
in gaining share in our core businesses indicates that
we are well positioned to continue to outperform the
competition. While the impact of bank mergers
warrants full review and public debate in Canada, we
hope this issue does not overshadow other important
areas of financial services reform such as bank entry
into insurance and leasing businesses where we can
enhance competition and better meet the needs of
Canadian consumers.
|
A. Charles Baillie
Chairman and Chief Executive Officer |
Toronto, February 26, 1998
On February 1, 1998, A. Charles Baillie, President
and Chief Executive Officer since February of 1997, became Chairman
of the Board on the retirement of Richard M. Thomson. Mr. Thomson
will continue to serve TD as a member of the Board of Directors.
Personal and Commercial Banking
Net income for Personal and Commercial Banking
was up $23 million or 21% over the first quarter
of last year. Net interest income grew $21 million
or 4% primarily due to higher average earning
assets. Strong growth continued in residential
mortgages with average volumes, including
securitizations, increasing 9% and personal loans
increasing 8%. Margins were relatively stable. The
yield curve was flatter and short term interest rates
were 117 basis points higher this quarter than last
year. These factors led to an improvement in margins
on core deposits, offset by reduced earnings on the
interest rate gap position and a decline in loan
margins. Other income increased $25 million or
14% driven by higher commercial lending activity
and higher credit card, mortgage servicing and
insurance revenues.
The efficiency ratio improved to 63% from 67% a
year ago as expenses declined 1%. The increase in
provision for credit losses was caused by additions
to the general provision reflecting the estimated
average annual experience over a credit cycle.
Strong revenue growth coupled with expense
containment resulted in return on equity increasing
from 21% last year to 26%.
Wealth Management Services
Wealth Management net income remained at
the same level as last year after adjusting for the
$25 million cost of acquiring Rivkin Croll Smith in
Australia, which was expensed in full during the
quarter. Brokerage commissions and mutual fund
management fees grew 20% over last year despite
slower market activity in Canada.
Assets under management at our full service broker,
Evergreen, climbed above $10 billion, an increase of
54% from a year ago. The Asian situation, declining
Canadian dollar and rising interest rates sidelined
Canadian retail investors and left trading volume flat
from prior year levels at Green Line and Evergreen.
Compared with a year ago, Waterhouse active
customer accounts have grown 71% while trading
volume increased by almost 100%. Increased activity
is in part attributable to Web trading, and the
addition of Kennedy Cabot in California. TD Asset
Management enjoyed continued growth in retail
mutual fund volumes, showing an increase of 22%.
Net income before the Rivkin Croll Smith
acquisition expense was down $13 million from
the prior quarter reflecting lower trading volumes
throughout North America and higher expenses
in preparation for RSP season in brokerage and
mutual funds.
Investment Banking
Investment Banking improved its net income by
$9 million over last year.
Foreign exchange, money market and funding,
capitalizing on market volatility, have all experienced
revenue growth in excess of 50% from last year.
Domestic fixed income, Eurobonds and high yield
businesses have also had impressive underwriting and
trading results.
Compared to the fourth quarter of 1997, net income
improved by $19 million after adjusting for the
impact of $200 million in special securities gains
realized that quarter.
Corporate Banking
Corporate Banking earned a 13% return on equity
this quarter after excluding the $29 million after-tax
gain on the sale of TD’s payroll services business.
Net interest income was up 14% from the first
quarter of 1997. The increase resulted from
improved margins in Canada and improved volume
in the U.S. The segment’s net income was also
aided by a provision for credit loss that was down
substantially from last quarter, when general
provisions were increased.
Net income in the first quarter of 1998 was $293 million. This
is an increase of $29 million or 11% from the first quarter of
1997. Net interest income reached a recorded $810 million, 13%
better than the first quarter last year, with other income of $707
million ahead 31% from last year.
Earnings per share in the quarter were $.95, which is
an increase of $.10 or 12% from last year and equal
to last quarter’s performance. Return on common
equity was 16.3% in the quarter compared to 16.4%
last year.
There is increasing focus on the impact of different
accounting treatments between Canada and the
United States, with respect to acquisitions, on
earnings and return on equity. Excluding goodwill
from both net income and equity allows for a more
meaningful comparison. On a goodwill-adjusted
basis, earnings per share and return on equity would
be $1.07 and 20.6% respectively this quarter
compared to $.87 and 18.3% last year.
Our performance in the first quarter of fiscal 1998
represents an encouraging start to the new year.
Net Interest Income
Net interest income on a tax equivalent basis
increased $90 million or 13% from last year to
$810 million this quarter. This growth in net interest
income was a result of a 25% increase in average
earning assets, which grew to $145.8 billion from
$116.7 billion last year. The majority of this strong
asset growth continues to be trading securities and
securities purchased under resale agreements. These
assets, which support our increased investment
banking activities, have minimal credit risk and
contribute to net income but earn a lower margin
than other intermediation products. This change in
the mix toward lower margin assets as well as lower
margins resulting from a flatter yield curve
contributed to a 24 basis point decline in margin
from the first quarter last year.
Credit Quality and Provision for
Credit Losses
Credit quality continues to be high, notwithstanding
the turmoil experienced by the Asian economies
during the quarter. Net impaired loans were
$84 million at the end of the first quarter –
$430 million lower than first quarter last year.
Net impaired loans increased from last quarter
primarily due to the reclassification of our exposure
to a single corporate borrower in the United States.
At the end of this quarter net impaired loans were
only .1% of total loans compared to .5% last year.
The full year estimate for provision for credit losses
in 1998 is $250 million. This estimate is $90 million
higher than our 1997 provision for credit losses of
$160 million, excluding the special increase in
general provisions of $200 million in the fourth
quarter of that year. The increase over 1997 will
contribute to additional general provisions and is
based on establishing the total provision for credit
losses at the estimated annual average experience
over a credit cycle. One quarter or $63 million of the
full year estimated expense was taken this quarter.
Other Income
Other income had another solid quarter producing
$707 million in revenues, which is $167 million or
31% higher than the same quarter last year. Other
income includes a $46 million pre-tax gain from the
sale of our payroll services business and reflects
strong growth from our global discount brokerage
operations – specifically in the U.S. with the
inclusion of California discount broker Kennedy,
Cabot & Co. into Waterhouse Securities and in
Australia where we have combined discount brokers
Pont Securities and Rivkin Croll Smith to create
Green Line Australia. Excluding these factors from
the quarter, other income increased 17% over last
year. This performance continues to be broadly
based and reflects our strategy of investing in
wealth management businesses and expanding
TD Securities’ businesses. Within TD Securities,
underwriting, mergers and acquisitions, equity
trading and foreign exchange made strong
contributions to our performance. Revenue from
our family of 39 Green Line No-Load Mutual
Funds grew 45% over last year.
TD’s investment portfolio of securities continued to
perform well, realizing $36 million in net investment
securities gains in the quarter.
Non-Interest Expenses
Expenses grew by 21% in line with the 20% increase
in total revenues. This quarter’s expenses include
the $25 million after-tax cost of our acquisition of
Australian discount broker Rivkin Croll Smith
and this accounts for over 3 percentage points of
the growth in expenses. Of the remaining growth,
14 percentage points is attributable to revenue
growth in our TD Securities businesses and global
discount brokers and 3 percentage points is the
increase in base expenses.
Our reported efficiency ratio this quarter was 60.3%,
which is a 20 basis point deterioration over last year.
Excluding goodwill and one-time gains our efficiency
ratio is virtually flat at 59.7% versus 59.6% last year.
Balance Sheet
Total assets as at January 31, 1998 were $177 billion which is an increase of 30% or $41 billion from a
year ago. The majority of this growth continues
to be a result of higher securities purchased under
resale agreements and other trading securities
balances. However the strength of the Canadian
consumers’ confidence and increases in our market
share have allowed us also to experience strong
growth in residential mortgages and personal loans.
Compared to last year mortgages, including
$2.4 billion in securitizations during the year, grew
11% or $3.3 billion and personal loans, including
credit cards, increased 33% or $3.7 billion. The
strong personal loan growth has been assisted by
Waterhouse Securities which has experienced a
$1.7 billion increase in personal loans since the first
quarter of last year, from $.8 billion to $2.5 billion.
In addition, business and other loans increased 21%
or $6.9 billion over last year.
Personal non-term deposits increased 12% or
$2.3 billion over last year of which $1.8 billion was
from increasing activity in Waterhouse Securities
which saw deposit volume more than double from
last year. Mutual funds under management in Canada
increased 22% or $2.4 billion over last year while
term deposits declined 5% or $1.2 billion from last
year. Waterhouse also continues to experience
growth in mutual funds which increased 74% or
$3.3 billion over last year. Total mutual funds under
management at January 31, 1998 were $21.2 billion,
an increase of $5.7 billion or 37% from last year.
The surplus of market over book value of the Bank’s
securities portfolios at the end of the quarter was
$753 million. This is an increase of $322 million
from last year.
Capital
Common equity increased $258 million in the
quarter primarily due to net income after dividends
of $187 million in the quarter. Common equity
also increased $76 million from foreign currency
translation gains due to the Canadian dollar
weakening, relative to other currencies, as at
January 31, 1998.
The ratio of net common equity to risk-weighted
assets increased 10 basis points from 6.1% at
October 31, 1997 to 6.2% at January 31, 1998
reflecting both the increase in common equity
described above, partially offset by the goodwill
arising from our purchase of Kennedy, Cabot & Co.
and lower risk-weighted assets. The latter reflects a
change by the Office of the Superintendent of
Financial Institutions to the calculation of risk-weighted
assets as applied to trading securities,
and our initiatives to actively manage our capital
requirements. During the quarter we insured
$4.5 billion of conventional residential mortgages
with Canada Mortgage and Housing Corporation
and securitized $400 million in mortgages which
reduces the regulatory capital requirements for these
loans. These events more than offset the increase
in risk-weighted assets from business growth. Our
Tier 1 and total capital ratios also benefitted from
our issuing $350 million in Tier 1 preferred shares,
and increased to 7.1% and 10.8%, from 6.6% and
10.2%, respectively.
