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The Real Estate Market TD CEO voices understanding of Flaherty’s mortgage moves

TD CEO Ed Clark, right, with in-coming CEO Bharat Masrani, who started at the bank in 1987 as a loans officer.

Dave Chan/The Globe and Mail

The head of Canada's second-largest bank isn't bothered by Jim Flaherty's recent interventions in the mortgage market, saying he understands why the federal Finance Minister took such unusual and controversial steps to prevent a price war among lenders.

Toronto-Dominion Bank chief executive officer Ed Clark said Mr. Flaherty's efforts to keep banks from undercutting each other on mortgage rates were reasonable given the government's worries over a potential housing bubble.

"I think we understand his concern, we've been an advocate all along" for the need to keep household debt under control, Mr. Clark said in an interview Thursday after the bank's annual shareholder meeting in Ottawa.

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"The short and long is, we understand why he's doing it, we've been concerned about household debt, we continue to be … and I think he's just trying to highlight the issue."

Mr. Flaherty surprised the banking sector in March when he issued a not-so-subtle public criticism of Bank of Montreal, after that lender began a splashy campaign promoting five-year fixed-rate mortgages for 2.99 per cent, which was below the posted rates of other banks. BMO, which has been trying to increase its loan books during the spring house-buying season, introduced the same deal a year ago and drew the ire of Ottawa, which was concerned about the housing market overheating.

Though he did not publicly chastise BMO, Mr. Flaherty publicly praised its competitors for not following suit in a "race to the bottom" that would encourage consumers to take on more debt in a time of record household leverage in Canada.

A few weeks later, when Manulife Bank introduced similarly aggressive mortgage prices, an official from Mr. Flaherty's office called the company to voice his displeasure, prompting Manulife to pull the promotion.

While many lenders are still offering such low rates – or lower – through their branches, many have kept their posted rates higher as a result. It was an unusual step for the minister to wade into the debate. A host of critics, including bank analysts and NDP Leader Thomas Mulcair, suggested that the Finance Minister telling banks not to lower rates bordered on being anti-competitive.

Though Mr. Clark's comments weren't a full endorsement of Mr. Flaherty's moves, the CEO said he understood his motivation. Ottawa had taken numerous steps, including tweaking mortgage rules to limit the length of insured loans, in order to keep house prices from escalating too fast and to engineer a soft landing in the market.

Mr. Clark's comments came after TD formally introduced its new CEO to shareholders at the meeting. Mr. Clark, 67, announced this week that he will retire in November, 2014. Bharat Masrani, 56, who headed the bank's U.S. expansion over the past seven years, will take over as the new CEO at that time.

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Mr. Clark is one of the longest-serving Canadian bank CEOs, having run TD since 2002, following several years running Canada Trust. He told the meeting he was "quite jazzed" about the changeover, adding that Mr. Masrani has systematically worked in nearly all areas of the bank to learn the business.

TD's shares have slipped following the CEO announcement, and were down about 2 per cent Thursday.

Mr. Masrani, who started at TD in 1987 as a loans officer, has also held top positions at the bank including chief risk officer. "It's fantastic," Mr. Clark said, noting that he will be around for the next 18 months to work with Mr. Masrani on the transition.

Mr. Clark highlighted the bank's strong performance compared to its Canadian and U.S. peers over the past decade, but cautioned "it's going to be tougher" to meet the bank's target of 7 to 10 per cent adjusted earnings growth a year due to the gathering economic and demographic storm clouds facing the global economy and, in particular, Canada. "We remain in a slow-growth, low-interest-rate environment. That's hard for a deposit-based business like TD."

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