U.S. banks will start to look a lot more like Canada's once the United States completes its makeover of the banking system, Toronto Dominion Bank chief executive officer Ed Clark believes.
But the regulatory changes for banks being implemented by the Obama administration, which include clampdowns on overdraft fees, may cause revenue to slow at TD's operations in the United States.
"There is a clear shift in how banking will be paid for in the United States. We're seeing less reliance on overdraft fees and we're heading to a more packaged approach. This is similar to Canada's model, and it's one we know well," Mr. Clark told analysts Thursday.
"However, with this shift, it's likely that we're going to see slower revenue growth for the next few quarters as we absorb the impact of these changes, and we reposition our product suite to offset the lost revenue."
His comments came as TD, Canada's second-largest bank, reported a 29-per-cent increase in third-quarter profit, driven by lower loan losses and higher earnings from its Canadian and U.S. branch operations.
TD made $1.18-billion in the quarter, or $1.29 a share, compared with profit of $912-million, or $1.01 a share, last year. Revenue rose slightly to $4.7-billion. Not including several one-time items, TD's adjusted earnings were equal to $1.43 a share, which was slightly back of the $1.44 a share analysts were expecting on average. TD took a $117-million amortization charge in the quarter, the largest of the one-time items it reported.
TD's Canadian banking division made $841-million, up 24 per cent, as revenue rose 8 per cent. The U.S. retail banking division, where TD operates from New England to Florida, made $282-million in the quarter, up from $172-million a year ago, as the bank added more branches through acquisitions.
Provisions for credit losses, or the amount of money banks set aside to cover bad loans, improved to $339-million in the quarter from $557-million a year ago. When the provisions are reduced, the improvement is recorded as an increase in a bank's profit.
Reflecting a trend seen across the banking sector this summer, TD saw a slump in earnings at its wholesale banking division. TD's wholesale banking operations made $179-million, a drop of 45 per cent from last year, when banks were reporting strong trading activity as the markets rebounded following the financial crisis. However, the sovereign debt problems that hit European countries such as Italy, Portugal and Greece in May led to lower fixed-income, credit and currency trading, along with lower underwriting fees.
Profit in the wealth management division rose 23 per cent to $117-million, while the corporate segment of the balance sheet recorded a loss of $304-million due to tax adjustments and hedging losses.
The bank's Tier 1 capital ratio, which is capital used to backstop its lending operations, was 12.5 per cent. About 75 per cent of that is tangible common equity, TD said, which is expected to count toward the amount of capital banks must keep on hand when global regulatory reforms are completed later this year.
Mr. Clark was careful not to commit to a decision, but said it is likely that TD will determine in early 2011 how it will deploy surplus capital, including whether to increase its dividend, once the new requirements are known in late November.
"The question of how much capital gets liberated - and when - is certainly something that I think only a brave CEO would talk about. And I'm not that brave," he said. "We don't want to get drawn into too detailed of a discussion of how the capital rules are going to get implicated because … we're halfway through this process."