Review of financial performance for the year
Financial results for the year were adversely affected by weak credit conditions and a strained operating environment resulting from heightened investor concerns over corporate governance issues and lingering geopolitical risks. On a cash basis, TD Securities reported a net loss of $663 million in fiscal 2002 compared with net income of $914 million in the prior year. The decline was due primarily to an increase in provisions for credit losses, which had an after-tax impact of approximately $1,400 million.
Significant declines in trading volumes, deterioration in equity markets, widening credit spreads and weak corporate activity led to lower revenues in 2002. Total revenue was $2,655 million, a decline of $482 million or 15% from revenues of $3,137 million in 2001.
Provisions for credit losses rose sharply to $2,490 million in 2002, a $2,163 million increase from $327 million in 2001. The increase was mainly related to significant credit deterioration in the telecommunications and utility sectors, exposures to companies impacted by malfeasance and the fallout from the political instability in Argentina. During the year, we established $1,450 million of sectoral provisions related to loans in the non-core portfolio. At year end, we had drawn down $185 million of the sectoral allowance to establish specific allowances.
Cash basis expenses of $1,232 million were $136 million below 2001 expenses of $1,368 million. The decline in expenses was driven by lower variable compensation, offset partially by additional investment in technology and risk management.
Fiscal 2002 was a very disappointing year for TD Securities. While revenues proved to be relatively resilient in what was arguably the most challenging environment in the past 10 years, we experienced record credit losses. We are taking decisive steps to better manage our credit exposures.
Our announcement in November 2002 to separate the corporate lending business into core and non-core components signaled a sharpened focus in extending credit. Core lending will be used strategically to support broad-based relationships which can meet or exceed our hurdle rates of return. This approach is consistent with our strategy to continue to grow our strong, full-service franchise in Canada and to build relationships outside of Canada by leveraging our industry expertise as well as our strength in product structuring, trade execution and distribution.
The separation of our corporate lending business also allows for focused management of the non-core portfolio. Non-core loans and bankers acceptances of approximately $11 billion represent over half of TD Securities’ corporate lending portfolio. The exposures are almost exclusively outside of Canada and a majority of the exposures are in the communications and utilities sectors. Approximately 40% of the non-core portfolio is investment grade. We hold specific, sectoral and general allowances against the non-core portfolio of loans. The non-core portfolio strategy is to proactively manage down the portfolio as quickly as possible in a manner which optimizes shareholder returns. We expect the portfolio exit to be substantially completed over the next three years leading to the eventual redeployment of approximately $1.2 billion in Tier 1 capital.
We will complement these actions with three additional steps to increase the effectiveness of credit management. First, we will implement stricter limits around credit exposure and industry concentrations. Secondly, we will use proactive portfolio management to identify, monitor and mitigate credit exposures on a more comprehensive and timely basis. Finally, we will increase our relationship managers’ accountability in extending credit. We are confident that these actions and the actions we have already taken, will lead to significantly lower credit losses in 2003.