The Canadian banking slowdown that Toronto-Dominion Bank has long expected is finally here, convincing TD's top brass to look more closely at acquiring U.S. assets while curtailing costs.
Although Canadian personal and commercial banking still bring in most of TD's profit, the growing U.S. division announced a record profit during the second quarter and chief executive officer Ed Clark assumes it has even more room to run.
TD projects that U.S. economic growth will outpace that of Canada's.
The Canadian housing market is cooling and consumers are already saddled with heavy debt burdens that limit how much more they can borrow.
Compounding the domestic problem, TD assumes that interest rates will not increase for the next two years, meaning the bank can't rely on the better returns that would stem from higher rates to boost their bottom line.
Hence the U.S. tilt. "We have a balance sheet in the United States that's long deposits and short assets," Mr. Clark said on a conference call Thursday.
Unlike in Canada, where TD has lent out more than its $221-billion in deposits, the bank's U.S. loans amount to $98-billion (U.S.), just over half of its $182-billion deposit base.
"Our return in the U.S. would be significantly higher if we can fill in that balance sheet," Mr. Clark said.
However, TD isn't looking for any large-scale acquisitions. In part, that's because Mr. Clark doesn't think there's anything attractive in the market at the present time, but also because he doesn't want to deploy too much capital. Ideally, the bank would add on a few tuck-in acquisitions, similar to the Target credit card portfolio that TD acquired last year.
Bharat Masrani, the current U.S. head who has been named as Mr. Clark's successor as CEO, said he is particularly interested in assets in the following sectors: health care, asset-based lending and dealer floor plan financing.
Still, the Canadian operation continues to hold its own.
Although its growth is slowing – personal and commercial loans grew by 5 per cent in the second quarter from the previous year while the U.S. saw 14-per-cent organic loan growth – the division's adjusted profit came in at $877-million (Canadian), a 5-per-cent rise from the same period in 2012.
Wholesale banking, largely in Canada, was also a bright spot for the bank last quarter, bringing in a profit of $220-million on the back of strong investment-grade bond performance. Underwriting and advisory fees, however, slumped to their second-lowest level in two years.
Over all, TD's profit rose to $1.72-billion or $1.78 a share during the second quarter from $1.69-billion a year earlier. Earnings per share, however, was the same in both periods because the total number of shares outstanding has increased since 2012. After stripping out one-time items, TD made $1.83-billion in the second quarter.
Although earnings came in below analysts' expectations, TD's stock fell just 39 cents in trading Thursday to $83.65. The shares are relatively flat since January, falling just 0.12 per cent.
However, analyst Peter Routledge at National Bank Financial noted that TD "has many defensive levers it can pull to bolster near-term performance, such as share repurchases and cost control."
Both tactics are being used this quarter. After raising its dividend in the first quarter, TD has decided to buy back 1.3 per cent of its outstanding shares for about $1-billion. And on the conference call Thursday, chief financial officer Colleen Johnston said the bank will do everything it can to keep expense growth under 3 per cent, particularly in the second half of the fiscal year.