Slides 1 & 2
I would like to start by reviewing briefly where we got to last year.
We're very pleased with where we got to and I think we've ended up focusing the company on its three main core businesses. Each of those contributed significantly to our performance in 2003.
As you know, I like to look at what kind of return you are getting for what kind of risk you're taking and we managed to move from the bottom of the pack to the top of the pack. We did that by both improving returns and dramatically lowering the risk profile. I also wanted to establish a pretty clear way of leadership by admitting we've got problems and we're not perfect. We talk about our problems, and we do that, not just externally, it's good to do it externally, but it's more importantly to do it internally, so that you create an open and transparent culture in which people talk about what the issues are and deal with them bluntly.
And finally, in this day and age I think it is important to establish a leadership position in corporate governance. Now, having done that, I think our challenge next year is to grow these three core businesses.
In the personal and commercial business, we inherited a great brand with the CT merger. I think we inherited an opportunity now to continue to improve our expenses. There are still things to be done on that front and, of course, we have the great goal that all of us have and that is to exploit our cross-sell opportunities.
In the case of our wealth management area in Canada, we're trying to build and integrate our offering. This is an area where we're weaker than our competitors, but we have all the right attributes and we have great upside potential because have one of the largest customer bases to exploit.
On the wholesale side, we're really trying to do something different from everyone else. We're trying to run a unique shareholder-driven approach to maximizing economic profit.
As I indicated, I think today it's very important to lead in corporate governance and, in the end, corporate governance revolves around how you reward people. How you reward people tells them very explicitly what in fact they should do, what gets rewarded, and what gets you fired.
And so that's why at the end of the year we amended our compensation to put a much greater emphasis on share ownership and not share ownership where we're going to lend people a bunch of money so they can buy shares. I mean share ownership where people take money from their pockets and put it into shares, or defer compensation they would normally receive as cash bonuses and say they want that money held in shares in the bank. I mean ownership that commits you to staying with the bank and commits you to do what will in fact add value to the bank.
As you know, we also have a culture in which our key goal is to provide superior customer service. We measure customer satisfaction every day. We make sure that everyone in every part of the organization has part of their bonus tied to how we do in customer satisfaction.
And finally, because capital management, in our view, is so critical when you're running a financial institution, we wanted to shift the metrics in the organization away from just maximizing revenue or maximizing income, to maximizing economic profit. As a result, we have tied our restrictive share units for the top management team to growth in economic profit.
Let me now turn to each of our businesses and talk a little bit about our long-term strategy and our short-term goals for each of those businesses.
In the case of the personal and commercial bank, you start with the huge focus we have on providing a superior brand experience. That superior brand experience should result in better retention of customers, better attraction of customers, and better ability to cross-sell customers.
Coming out of the CT merger, we have, I think, core competency, both in expense management and process re-engineering and we intend to exploit that core competency. We're going to get better and better at how to leverage that with our huge customer bases, not just for the retail bank, also for our wealth management area. It's critical to take advantage of that key asset if we are to narrow the gap we have on the wealth management side.
And finally we have a series of under-penetrated businesses that we want to grow faster than average. All in, when we do these things, the personal and commercial bank has to deliver better than 10% earnings growth. And that's what it will do.
Let me turn to customer service, the heart of our franchise. Not only is it built around actually providing better day-to-day customer service, but also offering an offering that's superior to our competitors. On average, we offer 40% more branch hours to our customers than do the major banks with which we compete.
We're spending significant amount of dollars to improve technology. We came out of the CT merger with some key technology gaps. We're working at those and we're going to drive that investment over the next two or three years to significantly improve our platform.
And, as well, we came out of the CT merger with some key issues around market share, particularly in connection with commodity products. We suffered significant loss of market share over the last couple of years, but that market share loss towards the end of last year has basically trailed off, but we haven't turned this engine. It is a superior engine and it ought to produce superior market share growth. We haven't yet turned it around and we're determined to do so.
As I indicated, we came out of the merger with a core competency in expense management. Now what is that core competency? Well, fundamentally it starts with just tough day-to-day management of costs. You can't have a culture of cost management without having that. But as you've heard me say before, you can't ultimately permanently lower the cost structure of an organization if that's all you do. You also have to constantly re-think how in fact you can re-engineer processes and how you can invest to change the way you do businesses. You have to have an organization where everyone is constantly asking: how can we just systematically take the break-even point for every product down from where it is today?
We also are going through the organization, and trying to make life simpler for our people. All of our organizations tend to multiply the things they do, add products, add new ideas, and in the end they make life complicated. Complicated is expensive and delivers poor customer service. And that's the point I keep re-emphasizing both inside and outside the organization. The drive towards improving costs is a drive towards improving customer satisfaction. It's almost impossible to sensibly cut costs without inadvertently raising customer satisfaction, because the things you have to do to raise customer satisfaction are the same things you have to do to in fact lower costs.
Another area of challenge for us in the personal and commercial bank is on the risk management side. Our risk management tools need improving. The current situation that we have is inhibiting our performance in two respects. One, directly, we have higher PCLs than we ought to have. And secondly, we, in order not to have our PCLs grow, we've been very conservative in growing our unsecured lending, and therefore that's inhibiting us both on the revenue line and the earnings line.
We have a project, which was ongoing all of last year and that will go on all of this year, to dramatically modernize the kind of portfolio management tools we need in order to turn that situation around. You should start to see the impact of that in 2005.
Next, of course, you have the holy grail that all the North American banks love to talk about: cross-selling. We have over 10 million customers in Canada. How can we exploit that large base and take advantage of this huge attribute? Up to this point, we haven't spent a lot of energy on that. We had developed some tools and techniques at Canada Trust, but we put those aside in order to make the merger happen. Cross-selling has now moved up in terms of our hierarchy of focus and is something we want now to be best in class.
I think everywhere in North America banks have been trying various cross-selling techniques over the last 10-15 years and the answer always comes down to how well did you actually execute. There are lots of bright ideas and lots of attempts here, but the question is always: can you actually systematically execute in a way that produces profitable cross-sell? It's easy to get your system to cross-sell like crazy, but can you get your system to cross-sell profitably so you actually add to the bottom line?
So we're doing some of the same things everyone else is doing. Our referral system is working well. We basically take customers, screen them in the branches, and then figure out what wealth management channel they should be sent to. We ensure our compensation is lined up so that the person in the branch is indifferent to where the customer goes. All they want to do is figure out what's best for the customer.
We've got an events trigger and radar system where we identify and pre-identify customer needs, prompt the people in the front lines to ask customers about their needs, record their responses, and then remodel the customer.
The key to this in the end though is to get internal metrics that make sure this activity is actually adding value to the enterprise. You need to ensure you're getting the customer in the right place, you're actually addressing the right customer with the right questions, and that you're doing so in a profitable fashion.
So far, I would say whenever I look at all our competitors everyone has anecdotal evidence. None of us have solid data on a comparable basis that we can see who is actually winning this game.
Finally, in terms of the personal and commercial bank, we have under-penetrated businesses, which we've isolated before. First we have small business where we're driving down and improving our sales system. We've gained significant market share; all through the merger we gained significant market share in small business. We want to continue to do that.
In commercial banking, we've stepped back and tried to segment the market, because the reality is that the commercial bank consists of very different segments and we're now reshaping our sales force to have a more segmented drive approach to commercial banking.
And finally in insurance, there's really two parts. One, the life insurance side, where Canada Trust at one point ranked number one in terms of penetration rates. We lost that position in the merger. We're now back up to leading in penetration rates in creditor life and we are the leading player in terms of living benefits types of products.
And then we have property and casualty insurance in TD Meloche Monnex where we're in a unique position in the Canadian banking industry as a major player in the property, casualty business.
We reinforced that yesterday in making the acquisition of Liberty Mutual Group's operations here in Canada. This will now give us a growth premium on an insurance base of $1.4 billion. When you put that in bank accounting the revenue number will be a little less than $400 million in revenue, but it will make TD Meloche Monnex the number four player in the property and casualty business in Canada, and the number one direct insurer.
TD Meloche Monnex knows how to make money in the property and casualty business and knows how to consistently take market share in that business every year.
Turning now to wealth management, as I've indicated before in other presentations, you really want to think about our business geographically. We have to build out our domestic operations in Canada. We have to continue to exploit and grow what we have in the U.S. with TD Waterhouse, and then we want to continue to improve the returns from our international operations now that we have brought TD Waterhouse International from a loss to a break-even position. Now we want to make some money internationally. All in, these three opportunities offer us high growth in terms of earnings opportunity in 2004.
Turning to Canada, what you basically have is one of everything. We have a full-service retail brokerage. We have financial planners. We have a very strong mutual fund. We have the best investment management group among the Canadian banks and, of course, we have TD Waterhouse. What we're trying to do is bring all of this into an integrated offering under the TD Waterhouse umbrella and learn how to exploit the huge customer base we have in retail and get them into the right wealth management offering.
The key weakness we have in the organization is the size of our advisory force. Obviously, we're dominant in the self-directed brokerage business, but we don't have a large full-service brokerage and we don't have as many financial planners as we need. We want to grow that force, but we don't want to grow it until we actually have a full product offering and the necessary support system. We don't want to bring people in and start them down the wrong path. We want to make sure that we have the right path and resources in place.
So 2004 is a building year for our wealth management operations. We took out expenses in 2003 to pay for the growth in 2004. The good news is that TD Waterhouse, because of high trading activity in the marketplace, will still be very profitable for us in 2004, while we're building the advice offering we need to have sustainable high growth in this area.
Turning then to TD Waterhouse, as I've indicated before, 2003 and 2002 were years in which we were bringing the fundamental cost structure of this business down, and bringing it down successfully to create great operating leverage. Now we're seeing the benefits of that great operating leverage. Direct investors are clearly returning to the markets very quickly right now, surprisingly quickly from out point of view. So we're getting all the benefits going though TD Waterhouse of that great operational leverage.
Obviously, as we indicated publicly, we have been exploring opportunities of what to do with TD Waterhouse in the U.S. I think it's important to understand why we were doing this. We're in a very high fixed cost industry and I think for all the players if you can carry out a merger, there can be very significant and mutually advantageous economics in putting two companies together. I want to underscore we were not looking at a transaction because we felt vulnerable strategically. Indeed I think if you look at the discount brokerage companies, we believe that TD Waterhouse is in the sweet spot in terms of where over the long run growth is going to be in the United States in this area.
Why do I believe that? Well, because there really are two constituents of investors that discount brokerage firms are trying to attract. One is the highly active trader but that only a small percentage of the population and I don't think it's a high growth area.
The real growth in the discount brokerage market is from the refugees of full-service brokers. Full-service brokerages are focused on how many assets you have and how active you have to be in order to make their economics work. As a result, they're essentially pushing out hundreds of thousands of customers a year into the marketplace and those customers are looking for a place to go.
And there's really two places they can go. They can go to an independent financial advisor, or they can go directly to a self-directed brokerage offering that gives them the tools to do it themselves. We are the natural recipient for both of those. We play in the independent financial advisor arena, so we get those who want to go there. And in our experience, those customers tend to want to have a branch when they make their choice to go some place and we run a branch system. We also have a mutual fund offering.
Accordingly, we have the three things that tend to attract those customers and that's why we have higher assets per customer than our competitors. So in fact, this is a very good place to be.
I was looking at an opportunity to say well if I can make this even a better place to be by bringing together two organizations then that would be a good strategic move on our part and, obviously, an advantageous economic one.
But unfortunately the talks didn't work out. As Mitch Caplan said, they broke down not on the value proposition, because there is a recognition of the value of TD Waterhouse, and not on the value of the synergies, but on corporate governance. We would have ended up as a very significant shareholder and we couldn't agree on what were the rights and privileges of that shareholder.
I understood his position. We like his company. We like what we could do together. We like the management team. However, from his point of view, we were asking for too much control, and from our point of view if we were going to have that size investment, we had to protect our investment.
When you go for these opportunities, you like to make them work, but sometimes they don't work. But that doesn't mean I'm discouraged because, in fact, what came out of all this was a realization that yes, we are sitting on the right asset with the right strategy. What we intend to do is to keep this asset and to aggressively grow it. So you're going to see us go back to a good old operational game plan. As you know, I'm an operator. I like operational strategies. We will aggressively grow TD Waterhouse to take advantage of the things that it has that our competitors don't have and that allow us to exploit what we see as a great growth opportunity in the United States.
In terms of the wholesale bank, this is an area that has gone through major change, but we're very pleased with what we've ended up. We have a unique proposition in that business with the compensation of the core leadership of that group tied to the bank. They have heavy investment in the bank and when they make decisions, they think like shareholders, not like people hired today and gone tomorrow.
We have very simple strategy. Let's have a very strong offering, and let's exploit the capabilities we have. TD had a great lending franchise in Canada, but didn't have the strength on the equities and advice side. In buying Newcrest, we got those strengths. So let's exploit those strengths in Canada and leverage our strong lending side. Let's keep a niche capital market group around the world, and let's constantly run this on the basis of generating economic profit.
The good news is that it's looking, for everybody in the marketplace, like next year's going to be a very good year. There's lots of activity. Therefore, we believe we can continue, it's easier to do these transformations in positive economic environment than negative, to generate an 18% to 20% consistent rate of return on the capital employed in this business.
I'll just briefly mention the non-core bank. My mission in life is to stop talking about the non-core bank, and I hope to do that by the end of 2004. We're just going to continue to aggressively wind it down. We're adequately provided. We were able to release some sectoral reserves last year as well as some general reserves. We're obviously going to be cautious in releasing sectorals, as there's no prize for being over anxious and getting these reserves out there, but we will release reserves as we wind down this portfolio and are confident there will be no further surprises.
So in the end, what do we have? We have an organization that has three core businesses that have very clear strategies, that have high growth potential, particularly in our retail and wealth management areas, we can now exploit. We know what we want to do.
All of these businesses will contribute to significant earnings growth and throw off excess capital. As I've indicated before, we're going to take a look at what we're going to do with that excess capital. Transactions like Liberty Mutual or buying the branches from Laurentian are obviously, no-brainer, high ROE uses of capital.
In looking at any transactions, we have to compare strategic moves. What they can the transaction do for the organization and is it worth the rate of return versus should we give the money back to the shareholders either through dividends or a share repurchase?
The good news is that the people at the top and the management all are huge shareholders in this bank and think like shareholders in making those decisions.
Thank you very much.