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Throughout the upheavals of the last few years, TD CEO Bharat Masrani has steered with a steady hand

Bharat Masrani, Group President and Chief Executive Officer of TD Bank Group, in Sept. 2020.Fred Lum/The Globe and Mail

A global pandemic is a tough time to be a consumer-focused bank, and for the past two years, Toronto-Dominion Bank TD-T has been hit harder than many of its competitors.

Large banks have come through COVID-19 mostly unscathed so far, thanks to massive government support and surging revenues from trading and investment banking as the pandemic upended global markets. But retail-focused banks such as TD have been knocked back on their heels as abruptly as the consumers and businesses whose everyday banking and borrowing forms the bread and butter of their revenues.

Throughout the upheavals, TD CEO Bharat Masrani has steered with a steady hand. Rather than risk overreacting to global forces beyond TD’s control, he has held fast to a well-worn strategy, even when the bank underperformed relative to rival banks.

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Interest rates declined to rock-bottom levels. Banks charge higher interest on loans than they pay on deposits, and TD is the most sensitive to rates among Canada’s banks, so it suffered the largest decline in profit margins on loans over the past two years.

Consumers also cut back on spending, stayed home and used government assistance to pay down debt, causing revenues to decline in TD’s large credit card portfolio, which is weighted toward hard-hit spending categories such as travel and luxury goods. And lockdowns interrupted the rhythms of branch banking, where TD is still a leader with 1,061 branches in Canada and 1,148 across the eastern United States.

TD’s stock price performance was no better than average last year, and the bank’s price-to-earnings ratio – which is typically among the highest of Canada’s big banks – fell to the back of the pack before a recent rebound. The bank’s financial results for the industry’s fourth quarter ended Oct. 31 also bounced back from underwhelming earnings earlier in 2021.

In a crisis, Mr. Masrani’s skill set – he is a consummate risk manager with an unflappable demeanour – can be a major asset. But as he works to position TD for a turnaround, critics are raising a key concern: TD has become too conservative, and Mr. Masrani’s measured approach to risk taking is so ingrained that the bank often seems to be trying not to lose, rather than fighting to win.

“It doesn’t come across that they’re playing enough offence. And you want them to play offence,” Ebrahim Poonawala, an analyst at Bank of America Corp., said in an interview. “They are coming at this from a position of strength – in the balance sheet, in capital, stability. The frustration is they’re not monetizing it to the fullest.”

Mr. Masrani, who assumed the top job in 2014, disputes the critics. “We ought to manage risk appropriately, that’s what we get paid for,” he said in a recent interview. But as he enters what are likely the final years of his tenure as CEO, and the last chance to define his legacy, TD is at an inflection point.

With interest rates poised to rise and economies reopening, TD’s prospects and its stock price have rebounded. In the midst of pressures and opportunities, Mr. Masrani has also just overhauled his senior executive team, installing new heads for each of the bank’s four key business units.

Masrani has steered TD though the COVID-19 pandemic with a steady hand, holding fast to a well-worn strategy, even when the bank underperformed relative to rival banks.Fred Lum/The Globe and Mail

And TD is unusually flush with excess cash, with an estimated $18-billion available to invest in its businesses, pursue acquisitions or buy back shares – more than any other large Canadian bank.

“TD is purpose-built for this recovery that is about to be upon us,” Mr. Masrani said.

Yet for investors, a nagging question remains: Will TD be bold enough to make the most of an economic recovery and meet longer-term challenges to retail banking head on?

Major shifts in strategy aren’t part of Mr. Masrani’s playbook. When asked what makes TD stand out from rivals, he replies: “We deliver consistent, predictable earnings within a particular risk discipline. That’s what we do.”

That approach has helped the bank consolidate a series of flashier moves made by his charismatic predecessor, Ed Clark, who was CEO from 2002 to 2014. TD leapfrogged past other Big Six Canadian banks when it acquired Canada Trust in 2000, and Mr. Clark integrated the operations. He also expanded TD’s U.S. business with major deals such as the US$8.5-billion acquisition of Commerce Bank in 2008, and gave TD a reputation for superior customer service.

Since Mr. Masrani took over, TD has not made a transformative U.S. acquisition. The way the bank serves customers has also evolved, as its signature comfy green arm chairs at branches open late have given way to increasingly popular digital banking platforms as the first point of contact.

“It feels like over the last five to seven years, they’ve been a little bit more in maintenance mode as opposed to growth mode,” Mr. Poonawala said.

Mr. Masrani’s understated style has also quietly reshaped TD’s culture, emphasizing unglamorous but essential compliance functions and controls that keep the bank from going astray. And as digitization is reshaping banking, TD has responded but often has not driven emerging trends.

“TD doesn’t position itself as a first-mover, but I would characterize them as being a pretty good fast-adapter,” John Aiken, an analyst at Barclays Capital Canada Inc., said in an interview.

A common theme emerged in conversations with a dozen sources, including investors, analysts, and current and former banking executives: That aversion to taking risks has caused TD to lose some of its edge in areas that made it stand out, and it isn’t growing or taking market share the way it used to.

The Globe and Mail is not identifying most of those sources because they were not authorized to speak by their employers, or they feared it would damage their relationships with TD.

“I don’t agree,” Mr. Masrani said, “And I think our record speaks for itself as to how we managed through different cycles.”

Reports suggest TD was outbid in the auction for Bank of the West by Bank of Montreal. The California-based Bank of the West was sold to BMO for a total purchase price of $20.9-billion.David Milstead/The Globe and Mail

He cites the bank’s early entry into direct investing and online brokerages in the 1980s and 1990s, which boomed in popularity during the pandemic, as examples of its willingness to be an early adopter. And he points to TD pulling out of structured products – which are often tied to derivatives – prior to the 2008-09 financial crisis. That helped protect the bank from losses and positioned it to grab a greater share of the U.S. market while rivals reeled.

But under Mr. Masrani’s tenure, rival Big Six banks have made bolder foreign deals. Royal Bank of Canada bought California-based City National Bank for US$5.4-billion in 2015, and Canadian Imperial Bank of Commerce acquired Chicago-based PrivateBancorp Inc. for US$5-billion in 2017, re-establishing CIBC in the U.S. market. And Bank of Nova Scotia overhauled its overseas operations with $7-billion of acquisitions and divested from several other businesses.

Most recently, TD had a chance to make a splash late last year when Bank of the West, a California-based bank with more than 500 branches run by former TD executive Nandita Bakhshi, went up for sale. Instead, Bank of Montreal prevailed with a cash offer worth a total of $20.9-billion, and reports suggest TD was outbid in the auction.

TD declined to comment on Bank of the West. The question of whether TD was outgunned because it was too conservative, or whether its discipline kept it from overpaying for a bank that generates low returns, may take years to answer.

Rather than reach for a big deal he doesn’t think makes sense, Mr. Masrani has made smaller acquisitions, most recently buying Wells Fargo & Co.’s Canadian equipment-financing business for an undisclosed sum a year ago. TD also sold its stake in online brokerage TD Ameritrade Holding Corp. to rival Charles Schwab Corp. in 2019 as part of a US$26-billion deal. But the impression around the industry was that TD was cornered into selling after large competitors slashed online trading commissions to zero.

With few large U.S. regional banks left that could be obvious acquisition targets, TD may have to continue hunting for more modest deals, perhaps in wealth management, to bolster its franchise.

“From the outside, it appears to be more of a holding pattern than anything else, and I think that definitely speaks to investor frustration,” Mr. Aiken said. “But I would make the argument that [Mr. Masrani] has been very prudent in not making acquisitions just for the sake of making an acquisition.”

Investors have also noticed TD trailing behind other banks in key categories of lending.

Mortgages were a bright spot for banks during the pandemic, with demand for home loans exploding as housing supply tightened, prices soared and remote work became widespread. In Canada, TD’s residential mortgage portfolio increased by nearly 15 per cent, but its two largest rivals, RBC and Bank of Nova Scotia, increased mortgage balances by 24 per cent and 20 per cent, respectively.

In the United States, lending balances have declined in key categories that are typically strengths for TD, such as credit cards and auto loans – as consumers paid down debt and tapped government stimulus – as well as business loans. Other banks, such as RBC and CIBC, focus more on serving high-net-worth customers with commercial loans, wealth management and private banking, which were less severely affected in the pandemic.

“They’ve lost on the U.S. side and we’ve seen that some of the peers ... and most notably Bank of Montreal, have better trends than what TD has in terms of loan volumes and margin,” Mr. Aiken said.

But now, some of key economic trends during the pandemic are poised to reverse, as public-health restrictions ease and central banks shift to fighting high inflation. “I feel good the way we’re set up for this,” Mr. Masrani said.

Some investors and banking analysts agree that TD looks like a coiled spring waiting to be released.

Expectations that U.S. and Canadian central banks are poised to hike interest rates multiple times in 2022 have become a competitive advantage for TD. Remember, for a bank, loans are assets, and TD has $1.7-trillion in assets on its balance sheet. Small changes in lending margins add up quickly.

Over the past two years, TD’s average lending margin shrank by 0.36 percentage points, which was more than any other Canadian bank and twice as much as RBC. Now, a single rate hike in Canada and the U.S. of 25 basis points – or one-quarter of a percentage point – would add an estimated $370-million to TD’s interest income over a year. All of Canada’s banks stand to benefit from rate hikes, but TD has the most to gain by far.

Consumer spending has also picked up and TD’s credit card balances in Canada increased by 2 per cent in the fiscal fourth quarter, compared with the previous three months, though the Omicron variant of COVID-19 has been a setback to economic reopening, particularly for travel.

Mr. Masrani’s major shakeup of TD’s top ranks, in which he’s replaced the heads of each of the bank’s four key business lines, may be the clearest signal that TD is ready to make changes. Michael Rhodes is now in charge of Canadian personal banking and Leo Salom will take over TD’s U.S. retail business, while Raymond Chun was promoted to lead wealth management and former chief financial officer Riaz Ahmed was tapped to run the bank’s investment dealer, TD Securities.

Mr. Rhodes and Mr. Salom, the new heads of TD’s core retail units, are savvy bankers with a more aggressive mindset than their predecessors, according to people who know them. The shakeup also set a clearer succession plan for the next CEO when Mr. Masrani retires, and has generally been greeted as a reason for further optimism.

From left: Raymond Chun, Michael Rhodes and Leo Salom, new members of TD's management team.TD

“You have this new revamp of the management team, which I do think should re-energize execution,” Mr. Poonawala said.

But Mr. Masrani cautioned that “this is not a signal that we are changing our strategy by any means.”

“I expect the team to carry on executing against the strategy,” he said. “Some of them might have fresh ideas because they have a new seat, and might have a different approach, which is to be expected. But I don’t see a massive change here.”

TD’s stock price and valuation have rebounded sharply since December, with the bank’s P/E ratio now neck and neck with RBC for the lead among Canada’s Bix Six banks. Mr. Poonawala of Bank of America recently upgraded TD to a “buy” rating, citing “multiple catalysts that should drive stock outperformance,” and Mr. Aiken said in a Barclays research note that TD “sets up for a big year.”

Even so, new challenges could also put renewed pressure on TD. Some of its largest U.S. rivals are throwing their weight around with massive spending. JPMorgan Chase & Co. will spend US$12-billion on technology this year, and increase new investments in its business by US$3.5-billion to US$15-billion. By comparison, TD’s total expenses in the U.S. in 2021 were US$5.1-billion.

Retail-focused banks such as TD have felt the jarring effects of a global pandemic as abruptly as the consumers and businesses whose everyday banking and borrowing forms the bread and butter of their revenues.David Dee Delgado/Getty Images

Financial technology startups and large tech giants could also pose a greater competitive threat to banks as governments work to establish open banking regulations by making it easier for customers to share financial data among institutions. And low-cost online providers of banking services could chip away at some traditional fees that have been lucrative to traditional bricks-and-mortar banks.

Most recently, in the U.S. there has been political and regulatory pressure on banks to reduce customer overdraft fees. In response, Ally Financial and Capital One Financial scrapped the fees altogether, JPMorgan promised to give customers a day to restore their account balance and Bank of America reduced its overdraft fee.

TD responded in August by introducing a new account with no overdraft fees, but also no ability to write cheques. It now makes up about 10 per cent of newly-opened accounts. But overdraft fees account for about 5 per cent of TD’s total U.S. revenue, meaning the bank has a lot to lose if the fees continue to erode.

Mr. Masrani is sanguine about the changing landscape, but not dismissive of the potential threats to TD.

“There’s always something happening, right? It’s not a new phenomenon,” he said. “In aggregate you say, well this is serious stuff and what are we doing? ... Of course, our teams are thinking about exactly what should be TD’s positioning in the marketplace. But history has shown that we do adapt to these changes that happen on a regular basis.”

How quickly TD adapts will be critical to the bank’s future.

“Where they could make their mark is around digital innovation. Consumer banking is actively being disrupted,” Mr. Poonawala said. “You want to see TD at the cutting edge of some of this innovation. To me, that’s the defining piece for TD going forward, as opposed to whether or not they end up buying a bank.”

It could also be a chance for Mr. Masrani to answer the critics and define the bank he will leave to his successor.

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