RNS Number:3167A
Toronto-Dominion Bank
22 August 2002
TD Bank Financial Group Announces Third Quarter 2002 Results
Third Quarter Highlights
* On an operating cash basis(1), diluted loss per share for the third quarter
was $.46, compared with diluted earnings per share of $.79 in the same
period last year. On a reported basis(2), diluted loss per share for the
third quarter was $.67 compared with diluted earnings per share of $.51 for
the same period last year.
* On an operating cash basis, return on common equity for the quarter was
(9.5)%, compared with 17.1% for the same quarter last year. On a reported
basis, return on common equity for the quarter was (13.9)%, compared with
10.9% for the same quarter last year.
* Operating cash basis net loss for the quarter was $271 million, compared
with operating cash basis net income of $522 million for the same quarter
last year. Reported net loss applicable to common shares was $428 million
for the quarter, compared with reported net income of $321 million for the
same quarter last year.
(For financial results, which include both operating cash and reported earnings,
please see table in Review of Operating Performance section.)
TORONTO - TD Bank Financial Group today announced results for the third quarter
of fiscal 2002, reporting an operating cash basis net loss of $271 million or
diluted loss per common share of $.46. This compares with an operating cash
basis net income of $522 million or diluted earnings per common share of $.79 in
the same quarter last year.
"TD's third quarter results, while very disappointing, are reflective of the
difficult capital markets and our serious commitment to dealing with the
challenges in our corporate lending portfolio," said TD Chairman and Chief
Executive Officer A. Charles Baillie.
"Our revised strategy in TD Securities, coupled with encouraging earnings
performance from TD Canada Trust and the successful launch of our Canadian
integrated wealth management platform under the TD Waterhouse brand, should form
the foundation for improvement going forward," he added.
(1) Operating cash basis and reported results referenced in this news release
are explained in detail under the "How the Bank Reports" section. The Third
Quarter Report to Shareholders, which will be posted on the Bank's website,
www.td.com, on August 22, 2002, consists of both operating cash and reported
results.
(2) Reported results are prepared in accordance with Canadian generally accepted
accounting principles (GAAP).
Sectoral Provisions
During the quarter, TDBFG announced that it would take a $600 million sectoral
loan loss provision against potential problems in its performing corporate
telecommunication loan portfolio. TDBFG also announced it would take a $250
million sectoral loan loss provision to address concerns in certain performing
corporate loans in its U.S. portfolio. TDBFG today indicated that it would be
taking a $20 million sectoral loan loss provision as part of its previously
announced guidance of $1.3 billion in loan loss provisions for fiscal 2002, to
address potential problems in its agricultural loan portfolio. The move brings
the total for sectoral loan loss provisions in the third quarter to $870
million. With the $870 million in sectoral provisions, the company's expected
loan loss total for 2002 remains at the previously announced $2.15 billion, of
which $1.25 billion was recorded in the quarter.
TDBFG's Tier 1 capital ratio is 7.7% as of July 31, 2002. TDBFG will proceed to
issue non-common Tier 1 capital in the fourth quarter and anticipates a Tier 1
capital ratio of 8.0% by October 31, 2002.
Business Segment Quarterly Highlights
Personal and Commercial Banking
Third quarter earnings at TD Canada Trust are up from both the second quarter
and from the previous year. At the same time, TD Canada Trust continues to
improve customer satisfaction levels. The Customer Satisfaction Index (CSI)
increased to 84.0% this quarter, above the pre-conversion level of 83.4%.
Core chequing and savings account balances remain strong and the mortgage
business is showing stronger growth as a result of increased new mortgage
volume. Expenses have improved year-over-year with a reduction of 2% from the
same quarter last year. During the quarter, a 2% increase in revenues resulted
in a 2.2 percentage point improvement in the operating cash basis efficiency
ratio to 58.5%. Going forward, TD Canada Trust will remain focused on
initiatives that reduce expenses while enhancing the customer experience and
growing revenues.
Wealth Management
As a result of weak capital markets, assets under management declined to $122
billion during the third quarter, down from $123 billion the previous quarter.
Domestically, TDBFG's wealth management platform remains focused on increasing
revenues. In July, TDBFG launched a new integrated approach to wealth management
in Canada bringing together financial planning, discount brokerage and
investment advice under the TD Waterhouse brand. Initial reports show promising
results for the key element of this strategy, with referral flow from TD Canada
Trust to the wealth management platform gaining momentum. In particular, TDBFG's
high net worth Private Client Group has seen a consistent inflow of funds over
the quarter, largely as a result of an increase in referrals.
Globally, TDBFG's emphasis lies in reducing the expenses of TD Waterhouse, to
reflect challenging market conditions. In addition, TDBFG announced a joint
venture during the quarter with The Royal Bank of Scotland Group and its NatWest
Stockbrokers subsidiary, allowing TD Waterhouse to quickly add scale in its
European operations. The joint venture will allow TD Waterhouse U.K. to reduce
its own cost structure, while also generating a revenue stream from NatWest
Stockbrokers. The move positions TD Waterhouse well to extract greater
efficiency from its U.K. platform in today's environment of low trading volumes.
Wholesale Bank
TD Securities posted weak returns in the quarter amid continued difficult market
conditions characterized by reduced corporate activity and depressed investor
confidence. Quarterly results were severely impacted as TD Securities
significantly increased provisions for credit losses. As previously announced,
TD Securities will reduce the capital associated with the corporate lending
portfolio by approximately $750 million over the next three years and
significantly reduce its exposure to the higher risk areas of the
telecommunications sector. TD Securities will focus its lending activities on
providing credit to core accounts that generate total relationship returns in
excess of hurdle rates. Furthermore, TD Securities' recently formed Credit
Portfolio Management Group will help to actively manage credit risk.
"While this quarter has been especially difficult for TD Bank Financial Group,
clear and decisive action was necessary to resolve the telecom issue and put it
behind us," said Baillie. "Going forward, our individual business strategies
reflect the reality that we must deliver sustained earnings growth even in
extremely challenging markets. I am confident TDBFG is poised for stronger
earnings performance."
This news release may contain forward-looking statements, including statements
regarding the business and anticipated financial performance of TD. These
statements are subject to a number of risks and uncertainties that may cause
actual results to differ materially from those contemplated by the
forward-looking statements. Some of the factors that could cause such
differences include legislative or regulatory developments, competition,
technological change, global capital market activity, interest rates, changes in
government and economic policy, inflation and general economic conditions in
geographic areas where TD operates. These and other factors should be considered
carefully and undue reliance should not be placed on TD's forward-looking
statements. TD does not undertake to update any forward-looking statements.
REVIEW OF OPERATING PERFORMANCE
How the Bank Reports
The Bank prepares its financial statements in accordance with Canadian generally
accepted accounting principles (GAAP), which are presented on pages 10 to 15 of
the Bank's Third Quarter Report to Shareholders and are available at www.td.com.
The Bank refers to results prepared in accordance with GAAP as the "reported
basis".
In addition to presenting the Bank's results on a reported basis, the Bank also
utilizes the "operating cash basis" to assess each of its businesses and to
measure overall Bank performance against targeted goals. The definition of
operating cash basis begins with the reported GAAP results and then excludes the
impact of the special gain on the sale of the mutual fund record keeping and
custody business in the first and the third quarter 2002, restructuring costs
related to acquisitions and significant business restructuring initiatives (TD
Securities in the fourth quarter 2001, TD Waterhouse in the third quarter 2001
and Newcrest in the first quarter 2001), the effects of future tax rate
reductions on future tax balances in the first and the third quarter 2001, and
the effect of real estate gains and general allowance increases in the first and
the second quarter 2001. The Bank views these restructuring costs and special
items as transactions that are not part of the Bank's normal daily business
operations and are therefore not indicative of trends. In addition, the Bank
also excludes non-cash charges related to goodwill and identified intangible
amortization from business combinations. Consequently, the Bank believes that
the operating cash basis provides the reader with an understanding of the Bank's
results that can be consistently tracked from period to period.
As explained, operating cash basis results are different from reported results
determined in accordance with GAAP. The term "operating cash basis results" is
not a defined term under GAAP, and therefore may not be comparable to similar
terms used by other issuers. The table below provides a reconciliation between
the Bank's operating cash basis results and reported results.
Net Loss
Operating cash basis net loss for the quarter was $271 million, compared with
operating cash basis net income of $522 million for the same quarter last year.
On an operating cash basis, basic loss per share was $.46 this quarter, compared
with basic earnings per share of $.80 in the same quarter last year and diluted
loss per share was $.46 compared with diluted earnings per share of $.79 a year
ago. Operating cash basis return on total common equity was (9.5)% for the
quarter as compared with 17.1% last year.
Reported net loss applicable to common shares was $428 million for the third
quarter, compared with reported net income applicable to common shares of $321
million in the same quarter last year. Reported basic and diluted loss per share
were $.67 in the quarter compared with reported basic and diluted earnings per
share of $.51 in the same quarter last year. Reported return on total common
equity was (13.9)% for the quarter as compared with 10.9% last year.
Reconciliation of Operating Cash Basis Results to Reported Results
For the three months For the nine
months
ended July 31 ended July 31
(unaudited, millions of dollars) 2002 2001 2002
2001
Net interest income (TEB) $ 1,452 $ 1,147 $ 4,081 $
3,295
Provision for credit losses (1,250) (190) (1,975)
(430)
Other income 1,016 1,534 3,835
4,809
Non-interest expenses excluding non-cash goodwill/ (1,641) (1,726) (5,119)
(5,190)
intangible amortization and restructuring costs
-------------------------------------------
Income (loss) before provision for (benefit of) income (423) 765 822
2,484
taxes and non-controlling interest in subsidiaries
Provision for (benefit of) income taxes (TEB) (158) 233 229
806
Non-controlling interest (6) (10) (25)
(41)
-------------------------------------------
Net income (loss) - operating cash basis $ (271) $ 522 $ 568 $
1,637
Preferred dividends (21) (20) (63)
(61)
-------------------------------------------
Net income (loss) applicable to common shares $ (292) $ 502 $ 505 $
1,576
- operating cash basis
Special increase in general provision, net of tax - - -
(208)
Gain on sale of mutual fund record keeping and custody business, net of tax 18 - 32
-
Gain on sale of investment real estate, net of tax - - -
275
Restructuring costs, net of tax - (30) -
(62)
Income tax expense from income tax rate changes - (25) -
(75)
-------------------------------------------
Net income (loss) applicable to common shares (274) 447 537
1,506
- cash basis
Non-cash goodwill amortization, net of tax - (48) -
(140)
Non-cash intangible amortization, net of tax (154) (78) (478)
(269)
-------------------------------------------
Net income (loss) applicable to common shares $ (428) $ 321 $ 59 $
1,097
- reported basis
(dollars)
Basic net income (loss) per common share $ (.46) $ .80 $ .79 $
2.52
- operating cash basis
Diluted net income (loss) per common share (.46) .79 .78
2.49
- operating cash basis
Basic net income (loss) per common share (.67) .51 .09
1.75
- reported basis
Diluted net income (loss) per common share (.67) .51 .09
1.73
- reported basis
Certain comparative amounts have been reclassified to conform with current year
presentation.
Net Interest Income
Net interest income on a taxable equivalent basis (TEB) was $1,452 million this
quarter, a year-over-year increase of $305 million. The increase in net interest
income was attributable to TD Canada Trust, where personal loan volumes -
excluding securitizations - increased by approximately $4 billion from a year
ago. The TD Canada Trust net interest margin increased by 2 basis points to
3.40% as compared with a year ago. Net interest income reported by TD Securities
increased by $190 million as compared with the same quarter a year ago,
primarily relating to a higher level of interest income from trading activities.
Net interest income reported by TD Wealth Management remained unchanged at $109
million as compared with a year ago.
Other Income
Other income was $1,016 million, a decrease of $518 million or 34% from the same
quarter last year, after excluding special gains from the sale of the Bank's
custody business in the current quarter. During the quarter, the Bank completed
the sale of its custody business for a pre-tax gain of $22 million. The Bank has
excluded this special gain in analyzing its performance given that the sale of
the custody business is not a recurring event. Reported other income was $1,038
million for the current quarter, a decrease of $496 million from the same
quarter last year.
While trading income reported in other income decreased by $446 million, trading
related income generated by TD Securities - which is the total of trading income
reported in other income and the net interest income on trading positions
reported in net interest income - was $218 million for the quarter, a decrease
of $214 million or 50% as compared with a year ago. The decrease in trading
related income reflected widespread corporate credit downgrades and a
significant slowdown in corporate activity. The net investment securities losses
amounted to $8 million in the current quarter as compared with net investment
securities gains of $26 million in the same quarter last year. The market value
surplus over book value of our equity investment securities portfolio was $186
million at the end of the quarter, compared with $330 million at October 31,
2001. Underwriting fees decreased by $15 million or 23% as compared with a year
ago, reflecting reduced debt underwriting activities. Revenues from mergers and
acquisitions decreased by $13 million or 42% and equity sales and trading
revenues decreased by $7 million or 29% as compared with a year ago, as a result
of weaker capital markets in the third quarter of 2002. Somewhat offsetting the
decline in other income was a year-over-year increase in corporate credit fees
of $18 million or 38% and a year-over-year increase in insurance revenues of $6
million or 7%.
Non-Interest Expenses
Total operating cash expenses decreased by $85 million from a year ago to $1,641
million, primarily as a result of lower compensation expenses. Operating cash
expenses exclude non-cash goodwill and purchase-related intangible amortization
and restructuring costs related to acquisitions and significant business
restructuring initiatives. During the third quarter 2001, the Bank recorded a
pre-tax restructuring charge of $54 million related to business restructuring
initiatives at TD Waterhouse. On a reported basis, expenses decreased by $260
million from a year ago to $1,882 million. In the third quarter 2002, the impact
of non-cash goodwill and purchase-related intangible amortization on the Bank's
reported expenses was $241 million compared with $362 million in the same
quarter a year ago. Beginning in fiscal 2002, the Bank discontinued the
amortization of goodwill as a result of the adoption of a new accounting
standard on goodwill and intangible assets.
On an operating cash basis, the Bank's overall efficiency ratio weakened to
66.5% in the current quarter from 64.4% the same quarter a year ago. The Bank's
consolidated efficiency ratio is impacted by shifts in its business mix. The
efficiency ratio is viewed as a more relevant measure for TD Canada Trust, which
had an efficiency ratio of 58.5% this quarter as compared with 60.7% a year ago,
after excluding non-cash items and funding costs for the acquisition of Canada
Trust.
The Bank's operating cash effective tax rate, on a taxable equivalent basis, was
37.4% for the quarter compared to 30.4% in the same quarter a year ago. The
increase in the effective tax rate reflected a shift in the Bank's business mix.
Managing Risk and Balance Sheet
Credit Risk and Provision for Credit Losses
During the quarter, the Bank expensed $1,250 million through the provision for
credit losses compared with $190 million in the same quarter last year. Of the
$1,250 million in provision for credit losses for the third quarter 2002, $870
million related to sectoral allowances and the remaining $380 million related to
specific provisions on impaired loans. The $870 million of sectoral allowances
consisted of $600 million that related to potential problems in the performing
corporate telecommunication loan portfolio, $250 million related to concerns in
certain performing loans in the U.S. portfolio, and $20 million related to the
performing agricultural portfolio in Western Canada.
The estimate for the 2002 full-year provision for credit losses is $2,150
million, up from the $620 million recorded last year (excluding special
additions to general allowances in the first and second quarter 2001 amounting
to $300 million in total). The estimated full-year provision for credit losses
is $850 million higher than the Bank's estimate in the second quarter due to the
sectoral loan loss provisions noted above.
The total allowance for credit losses (specific, general and sectoral
allowances) exceeded gross impaired loans by $799 million at the end of the
quarter, compared with a $53 million excess at October 31, 2001. The Bank's
total accumulated general allowance for credit losses amounted to $1,193 million
at quarter end, relatively unchanged from October 31, 2001. General allowances
are maintained at a level adequate to absorb all credit-related losses not yet
identified in the Bank's portfolio relating to both loans and off-balance sheet
instruments and qualify as Tier 2 capital - to an amount equal to 87.5 basis
points of risk-weighted assets - under guidelines issued by the Office of the
Superintendent of Financial Institutions.
Market Risk
The Bank manages market risk in its trading books by using several key controls.
The Bank's market risk policy sets out detailed limits for each trading
business, including Value at Risk (VaR), stress test, stop loss, and limits on
profit and loss sensitivity to various market factors. There have been no
material changes in the policy during the quarter. Policy controls are augmented
by active oversight by independent market risk staff and frequent management
reporting. VaR is a statistical loss threshold which should not be exceeded on
average more than once in 100 days. It is also the basis for regulatory capital
for market risk. The table below presents average and end-of-quarter VaR usage,
as well as year-to-date and fiscal 2001 averages. The Bank backtests its VaR by
comparing it to daily net trading revenue. During the third quarter of fiscal
2002, daily net trading revenues were positive for 78% of the trading days.
Losses never exceeded the Bank's statistically predicted VaR for the total of
our trading related businesses.
Value at Risk Usage
For the three For the three For the nine For the
twelve
months ended months ended months ended months ended
(millions of dollars) July 31, 2002 July 31, 2002 July 31, 2002 Oct. 31,
2001
- Average - Average -
Average
Interest Rate Risk $ (12.4) $ (13.6) $ (14.2) $
(16.3)
Equity Risk (10.2) (9.7) (12.2)
(11.3)
Foreign Exchange Risk (2.4) (2.6) (2.6)
(1.9)
Commodity Risk (.7) (.7) (.4)
(.3)
Diversification Effect 7.9 7.7 9.8
10.6
Global Value at Risk (17.8) (18.9) (19.6)
(19.2)
Liquidity Risk
The Bank holds a sufficient amount of liquidity to fund its obligations as they
come due as measured under normal operating conditions as well as under a stress
test scenario. The Bank ensures that it has enough funds available to meet its
obligations by managing its cash flows and holding highly liquid assets in
Canadian and U.S. dollars as well as other foreign currencies that can be
readily converted into cash. The Bank manages liquidity on a global basis,
ensuring the prudent management of liquidity risk in all of its operations. In
addition to a large base of stable retail and commercial deposits, the Bank has
an active wholesale funding program including asset securitization. This funding
is highly diversified as to source, type, currency and geographical location. As
of July 31, 2002, the Bank met all of its policy requirements.
Balance Sheet
Total assets were $310 billion at the end of the third quarter, $22 billion or
8% higher than as at October 31, 2001. Higher securities volumes from securities
purchased under resale agreements contributed $8 billion of the increase in
total assets. Personal loans, including securitizations, increased by $2
billion, primarily attributable to a solid performance in the personal loan
portfolio at TD Canada Trust. At the end of the third quarter, residential
mortgages, including securitizations, increased by $2 billion from year end to
amount to $68 billion.
Personal non-term deposits grew by $5 billion from October 31, 2001 to reach $51
billion, with TD Canada Trust accounting for the majority of this increase.
Personal term deposits remained unchanged at $49 billion, while wholesale
deposits and securities sold under repurchase agreements increased by $14
billion as compared with year end.
Capital
As at July 31, 2002, the Bank's Tier 1 capital ratio was 7.7% compared with 8.4%
at October 31, 2001. Risk-weighted assets increased during the period ended July
31, 2002 by an amount of $3 billion, as compared with year end. However, Tier 1
capital declined from $10.6 billion as at year end to $10 billion. The reduction
in Tier 1 capital results from the impact of acquiring the 11% minority interest
in the TD Waterhouse Group, Inc. common shares, partially funded by the $400
million common share issuance in the first quarter, and the Stafford and LETCO
acquisitions. In the fourth quarter 2002, the Bank intends to issue non-common
Tier 1 capital in the range of $250 million to $500 million.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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