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A Toronto-Dominion Bank branch in Ottawa in 2016.Chris Wattie/Reuters

Toronto-Dominion Bank (TD-T) expects to reap about $169-million in profit from its first full quarter as the largest shareholder in U.S. brokerage giant Charles Schwab Corp. (SCHW-N), a lower level of returns compared to past earnings as TD embarks on a new alliance with a powerhouse of low-cost stock trading.

The profit will be booked in TD’s first-quarter financial results due to be released on Feb. 25, after Charles Schwab closed a US$26-billion deal to acquire rival TD Ameritrade Holding Corp. last October. Excluding $37-million of after-tax charges from the transaction and other costs for amortization of assets, TD said its share of profit from Schwab’s most recent quarterly earnings was $241-million.

The deal merged two of the largest players in the U.S. online brokerage business amid a pricing war, as several large firms had slashed online trading commissions to zero. In voting to approve the deal, TD swapped a 43-per-cent stake in TD Ameritrade for 13.5 per cent of the bulked-up Charles Schwab. And it replaced a deposit agreement that generated $275-million in annual fees for TD, which managed cash in TD Ameritrade client accounts, with a less lucrative contract with Charles Schwab that was extended until 2031.

Before the race to zero-commission trading put a dent in returns from online trading in the United States, TD had booked more than $300-million in profit from its stake in TD Ameritrade in three of four fiscal quarters in 2019. Even after the change, TD still made $205-million from TD Ameritrade in the first fiscal quarter of 2020, $247-million in the second quarter, and $328-million in the third quarter as trading volumes surged amid market turmoil caused by the coronavirus pandemic.

The new cash management deal with Schwab is expected to gradually erode some of those returns. But TD is hoping for an offsetting boost as Schwab integrates TD Ameritrade with its own business and looks to make the combined entity more efficient by cutting about US$3-billion in annual costs.

TD’s chief executive officer, Bharat Masrani, also recently said that TD is “in discussions now on expanding our strategic relationship” with Schwab. In his comments, at a virtual conference hosted by Royal Bank of Canada in early January, he did not say what is being negotiated, but added: “I think there are good opportunities for both companies. So this is a core investment for us.”

A TD spokesperson confirmed that the bank is exploring commercial opportunities with Schwab, but declined to give further details.

TD has already enjoyed some benefits from its investment in Schwab. In the quarter that ended Oct. 31, TD recorded a $2.3-billion one-time gain from the sale of its TD Ameritrade shares, based on Schwab’s share price at the time. And since the deal closed on Oct. 6, Charles Schwab’s share price has surged 60 per cent higher, to Wednesday’s close of US$58.60 on the New York Stock Exchange.

That has significantly boosted the value of TD’s stake in Schwab and, added to TD being flush with capital, has helped fuel speculation that the bank may be looking to make acquisitions of its own. Last week, TD bought Wells Fargo & Co.’s Canadian equipment financing business, and Mr. Masrani has said he would like to increase TD’s market share in the Southeastern U.S., or acquire a branded credit-card business in partnership with a retailer.

“I think our shareholders should be pretty happy,” Mr. Masrani said. “The returns [from the Schwab investment] are fine. You have the earnings ... and you also have the deposit arrangements, and you also have other relationships – some of them are already in place and others that I’m sure will be put in place in the future.”

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