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May 22, 2003

2nd Quarter Results Remarks

Remarks by Ed Clark
May 22, 2003

Check against delivery


Thanks Dan. Good afternoon everyone.

Before I get into a discussion of the quarter, I would like to say a few words about the reorganization announcement that was also in this morning's press release.

As you know, in light of our credit issues last year, we made the commitment to strengthen our risk and credit infrastructure and address the challenges in our corporate loan portfolio.

We have made significant headway in enhancing our credit framework and our risk management and credit processes. We have also developed a new risk management strategy that we are now implementing.

With the implementation underway, Tom Spencer, Vice Chair Risk Management, has made the decision to leave the Bank at the end of this fiscal year. Tom has played a critical role in developing and implementing our enhanced risk management strategy. Over the past few months he has worked very hard to ensure that an enhanced strategy is in place and his work will ultimately strengthen the Bank going forward.

With Tom's decision to leave, Bharat Masrani, Executive Vice President of Credit Risk Management will take on the leadership of our risk management area. He will be responsible for overseeing all aspects of risk management for the Bank and our internal audit group. He will also continue to oversee the non-core bank.

To ensure a smooth transition for this critical area, Bharat will take on his new responsibilities immediately and Tom will act as an advisor to me and to Bharat on a full time basis for the next 6 months and part-time for the following year.

With Bharat's expanded role, Paul Douglas, SVP TDBFG, will become the executive leader of the non-core bank.

Looking at our second quarter, while it was not quite as "uneventful" as our first quarter, the restructuring and consequent write downs of Waterhouse International and our equity options business that we announced previously, were driven by our commitment to execute what we say we are going to do.

The consensus estimate for our earnings this quarter was around 71-72 cents per share and clearly excludes the impact of the restructuring and write-downs. On a comparable basis we earned 69 cents this quarter and to ensure comparability, the balance of my comments will refer to our underlying earnings and not include the impact of the restructuring and write-downs.

I would say consensus was fundamentally right about EPS. However, we had higher taxes this quarter than you may have been expecting, resulting from a non-recurring tax item.

When you look at this quarter, you will see that the Bank's tax rate is likely higher than expectations -- around 35%. Going forward, we are expecting a lower normalized tax rate.

The higher tax rate is a fall out from the Air Canada bankruptcy and relates to our exposure to Air Canada through two aircraft leases that Canada Trust entered into in the late 1980's. Because of the accounting method for leases, the bankruptcy of Air Canada results in a tax adjustment this quarter of approximately $30MM, or about 4.5 cents per share. These leases were in the non-core-book and have been written down to an appropriate amount.

You will also note that we did not have any PCL or PCL-like expense in our core portfolio this quarter. We have had success reducing the risk in this portfolio, as evidenced by the decline in RWA of $1.4B this quarter, and did not feel the need to spend money to reduce it further. Going forward, it would be realistic to assume that we would spend $100MM annually in PCL or PCL-like expenses, which equates to about 2.5 cents per quarter.

The combined effect of these two factors - the adjustment in taxes offset by the lack of corporate PCLs - was to reduce EPS this quarter by about 2 cents.

Let me now briefly review the operations and give you my perspective on the quarter and where we are heading.

From my point of view, it was a good quarter - solid, quality operating earnings, and excellent progress in executing our business strategy.

Business Review: Personal and Commercial Banking

Our retail and commercial banking results were excellent. We continued to face intense price competition, and saw spreads narrow, partly offsetting good volume growth, but were able to deliver excellent profit growth numbers through lower PCLs and lower expenses.

Net Income

Despite three less days in Q2, net income this quarter is basically even with Q1, while year over year net income is up 16%, consistent with our goal of double-digit earnings growth this year.


If we adjust for the fewer number of days in the quarter (3 less days = $34MM), revenue growth is basically flat over last quarter and up 2% over last year.

While volume increases have been good, as I said, this is being partially offset by margin compression. Margin declined 2 basis points from last quarter and 6 basis points from last year. We expect margin pressure to continue into next quarter as competition for market share continues. Somewhat offsetting this, the effect of lower interest rates should abate as rates have moved up.

Core account volume, while up year over year, is virtually flat from last quarter. We have also seen slow growth in core accounts. We are not happy with this result but are confident we can produce higher account growth in the future. Most of the share movement in core volume is due to savings customers shifting to competitors offering quite high rates. We are reviewing our competitive response.


Expenses declined 1.4% over last quarter. After adjusting for days impact (3 less days = $10MM), expenses were virtually flat over last quarter.

We delivered this quarter's results in a manner consistent with our straightforward strategy to keep expense growth less than revenue growth. We continue to invest in process improvements that increase customer satisfaction and permanently lower costs.

And, as an aside, our CSI was up this quarter to 86% from 85% last quarter.


We experienced lower loan losses in the personal & commercial bank this quarter. Our efforts to improve processes in adjudication have been working and we have been seeing delinquencies trend down. Small business and Commercial PCLs remain stable, but we are cognizant of the fact that a higher dollar will impact some of our clients dramatically. We do not, however, see an immediate impact.

Also in the quarter, we made the decision to end our in-store relationship with Wal-Mart. The CT acquisition significantly increased TD's distribution system altering the importance of an in-store strategy. The details and timing of the exit have not been finalized and any one-time costs associated with our exit will be absorbed in normal course.

Business Review: Wealth Management

Wealth management's earnings were down 6% year-over-year and 24% quarter-over-quarter to $29MM. Revenue of $487MM was down 10% from Q1 2003 and 12% from the same quarter last year.

Results were negatively impacted as trading volumes declined 15% over Q1 2003 and 24% over Q2 2002 as weak capital markets prevailed.

This was an unusual quarter, particularly for TD Waterhouse USA, in that in February we had the threat of war, in March we were in the middle of a war, and by April the war had ended. We noticed that trades per day were extremely low in February and have been trending up since. We are also noticing a rebound in trades from our existing customers due to pent up demand.

However, we are only cautiously optimistic on the trades per day as investors remain cautious and seasonally the summer tends to be slower.

There has been a sharp focus on expenses in our domestic wealth management as we seek to realize the benefits of our integrated strategy. At the same time, you often have to spend money to get costs out, and we want to build a better customer proposition so that the TD Waterhouse brand really delivers a distinct experience. This means you are unlikely to see the benefits of our actions until late 2004.

There has been a certain amount of newspaper speculation about our position on TD Waterhouse USA. TD Waterhouse USA remains an integral part of our wealth management strategy. The team has done a great job in lowering costs. It is a profitable business and provides us with an excellent U.S. platform. We have faith in this business.

The loss from TD Waterhouse International was $17.5MM. We are committed to this business breaking even in 2004, and with the restructuring plan we have initiated, remain confident we will do so.

The other goal I set out was to stop the decline in our mutual fund market share. TD finished first in the industry in both total net sales and long-term fund net sales and gained market share during the RSP season. April saw an increase in money market redemptions but sales of long-term mutual funds remained strong.

Business Review: TD Securities


TD Securities is on track to meet its earnings target of $500-550MM this year despite challenging capital markets.

Earnings were $156MM this quarter, flat over Q1. Year-to-date and adjusting for $50MM in pre-tax PCL charges leaves YTD net income at about $275MM, at the upper end of our range. Revenues in the quarter were down across the board from last year and last quarter, reflecting the weak markets; so too, were expenses. The tax rate was significantly lower because of earnings mix. Together these offset the lower revenue picture.

Absent the restructuring charges, the equity options business lost $15MM this quarter, about the same as last quarter. Again, as in the case of TD Waterhouse International, we expect to achieve breakeven by 2004.

I continue to be pleased with the performance of TD Securities as it focuses on its two key businesses - a strong domestic wholesale franchise with strengths in corporate lending, fixed income, equities and investment banking, and a global capital markets group.

The group has made progress in reducing its risks while continuing to aggressively support its client base. The earnings are quite strong relative to the tough environment in which we are operating.


I am extremely pleased with the progress we are making as we continue to strategically manage down the non-core portfolio in a way that provides for a self-funded exit and supports our commitment to shareholder value.

We started out with a total drawn amount of $11.2B at the end of last year, saw it decrease to $9.3B at the end of Q1 and to $7.2B this quarter. The decrease this quarter is due to loan repayments, and repayments associated with workouts and sales. Cost of sales was minimal as most were done close to par.

Although this run rate of decline will not continue, the signs for a self-funded exit from the non-core portfolio remain positive. While we have seen a number of successful restructurings, there are a number of concerned accounts remaining and we are not yet in a position to declare victory.

Additions to impaired loans in the non-core portfolio were down this quarter, from $458MM in Q1 to $122MM in Q2.

Business Review: Capital

Finally, I would like to just comment on our strengthening capital position. As you know, a priority for us this year is to demonstrate our capacity to grow free capital and to treat capital in all parts of our business as a scarce commodity. I am very pleased with our results.

At April 30th, our Tier 1 capital ratio was 8.8 percent, up 30 basis points from January 31st. We remain on target to have a capital plan at the end of the year.

Our issue, as you know, is not capital, but a demonstrated capability to deliver sustained accident-free earnings. Despite the write-offs, this quarter was another positive step in the journey towards restoring our credibility.


In short, a good quarter, quality earnings, a clear demonstration that we have a team that knows where it is going and is getting the job done.

For more information on the Bank or this presentation, please contact Investor Relations:
Scott Lamb (416) 982-5075
Kelly Milroy (416) 944-5422
Trish Moran (416) 308-6677