Positioning TD for a new marketplace
While delivering a strong financial performance in the
second quarter of 1998, we pursued an opportunity to
enhance long term value for you - our shareholders - and
for employees and customers. That opportunity is the
proposed merger between TD and Canadian Imperial Bank
of Commerce (CIBC), a major long-time competitor - a
merger of equals such as that of the Bank of Toronto and the
Dominion Bank which created TD in 1955. The proposed
merger with CIBC will require approval by the Government
of Canada, regulators, and you, our shareholders.
This is a bold response to the radical transformation of our
domestic marketplace implicit in the January announcement
of the proposed merger of two of our other major
competitors. As well, we have seen the massive changes
wrought by new technologies and the impact of globalization,
including the growing presence of powerful new foreign
competitors in Canadian markets in recent years.
These changes have eroded traditional banking franchises,
particularly the banks' role in meeting the wealth
management and credit needs of Canadians.
By combining forces with CIBC, a strong institution with
compatible strategies and complementary strengths, we will
be better positioned to increase our investment in technology
and training in response to changing markets. We will also
have greater critical mass to leverage the growth of our
wealth management and corporate and investment banking
businesses in the U.S. markets and abroad.
From the creation of Green Line in the eighties to the acquisitions
of Central Guaranty and Waterhouse in the nineties,
we have never hesitated to act quickly and decisively as
attractive opportunities to generate long term growth - and
respond to changing competitive conditions - have emerged.
About the merger proposal and process
Under the terms of our agreement with CIBC, TD
shareholders will receive 1.318 common shares in the new
entity for every TD share held, while CIBC shareholders
will receive one common share for every CIBC share held –
giving TD shareholders 48.5% of the ownership of the
merged bank. We will be combining our businesses as equal
partners and the senior management team will be evenly
balanced between TD and CIBC executives (with CIBC
Chief Executive Al Flood serving as Chairman of the Board
and TD Chief Executive Charlie Baillie serving as President
and Chief Executive Officer). After extensive discussions by
both management teams, we collectively agreed that the
new bank will preserve TD's green colour (and distinctive
associated brands such as Green Line and Green Machine)
and will retain the name Canadian Imperial Bank of
Commerce, which is more broadly representative of Canada.
This merger is subject to regulatory approval by the
Canadian Competition Bureau and the Minister of Finance,
among others. The Government of Canada currently has a
task force studying the future of the financial sector. The
task force report is expected to be released this Fall, with
public hearings to follow. We do not expect a decision from
regulators until the Spring of 1999, at the earliest.
Should regulatory approval be forthcoming, we will convene
a special meeting of shareholders to vote on the proposal –
and should shareholders approve, we will embark on the
integration of the two banks. Preliminary planning is now
underway to ensure a smooth transition.
Government approval is not assured. Financial services
reform is, quite rightly, a vitally important public policy issue
that warrants full and fair debate. While we believe our
proposed merger is in the public interest as it will help
maintain a strong Canadian-based financial system, the
federal government may determine otherwise and preclude
all proposed bank mergers. We are fully prepared for such
an outcome, which would mean the continuation of the
traditional competitive relationships with our major
competitors in our marketplace – a marketplace in which
our successful strategies have given TD a competitive edge
and generated a strong financial performance.
Given the uncertainty of the outcome, our challenge – and
that of all TD people – is to remain focused on pursuing
our strategies and continuing to build our businesses,
maintaining 'business as usual'. For many years at TD,
that term has meant business as unusual. Constant evolution
of our markets and technologies has meant a constant
climate of change. TD has succeeded in this climate thanks
to the responsiveness, focus and commitment of our people.
They are our greatest strength and that strength will be a
foundation of our bank in the future – whether we merge
or continue independently.
Highlights of the second quarter
We are pleased to report that during this momentous
period, TD delivered record net income of $307 million
and earnings per share of $1.00, up 28% from the previous
year, despite substantially higher taxes. Through vigorous
pursuit of our strategies for growth, our businesses, led by
wealth management and investment banking, have achieved
solid year-over-year gains in revenues as detailed in the
Review of TD's Businesses section that follows. Of
particular note, TD gained market share in personal
deposits, personal loans, mortgages, credit cards and retail
brokerage. As well, we have seen substantial growth in
mutual funds and loan syndications.
Among the operating highlights of the second quarter:
- we agreed to acquire Jack White & Company, a leading
California discount broker – a move which will increase
the Waterhouse account base by approximately 15%.
As well, we began the roll-out of a full range of banking
services through Waterhouse National Bank, an FDIC-insured
branchless bank, in the United States.
- we opened a new call centre in Edmonton, to accommodate
growth in telephone and electronic delivery of our products
and services. We also introduced Web Banking for customers,
and TalkBroker (a voice recognition system) at Green Line
Investor Services – a first in Canada.
- we launched three new specialty index mutual funds.
- we reached an agreement to establish 'TD Store' –
in-store branches in new Wal-Mart stores in Canada,
and opened our first two in Brampton and Ajax, Ontario.
- we launched a low-cost 10-year term life insurance
product from TD Life.
- we offered our small business customers a useful new
marketing pocketbook and provided a booklet on planning
for the future to high school students.
- and for the third consecutive year, TD Evergreen scored
#1 among bank-owned firms in the annual Brokerage Report
Card in Investment Executive magazine.
Outlook
Given TD's strengths and strategies, and continued solid
economic growth in our key markets, we believe your Bank
will continue to deliver good results in the second half of
the year.
|
A. Charles Baillie
Chairman and Chief Executive Officer |
William T. Brock
Deputy Chairman |
Toronto, May 28, 1998
Personal and Commercial Banking
Net income for Personal and Commercial Banking
declined $21 million from the same quarter last year
with return on equity also falling 6 percentage points
to 18%. This decrease was due to a 23 basis point
decline in interest margins and a $42 million or 10%
increase in expenses mainly due to growth businesses.
The decline in margins resulted from increases in
short-term market interest rates causing a further
flattening of the yield curve, which largely eliminated
earnings on the interest rate gap position. As a result,
net interest income for the quarter increased only
$4 million or 1% over the prior year. Average earning
assets grew 7% as personal loans, residential
mortgages, including securitizations, and commercial
loans and bankers' acceptances continued to show
strong growth of 19%, 12% and 12% respectively.
The increased level of expenses arose from the
continued expansion of electronic banking, insurance
and asset-based financing businesses as well as
increased investments in equipment and training.
Compared to the prior quarter, net income declined
by $37 million. This was primarily due to the negative
impact on margins arising from the increased
short-term rates in the quarter, and higher operating
expenses resulting from customer activity during
the RSP season coupled with the shorter quarter and
the previously noted initiatives.
Wealth Management Services
Wealth Management net income of $43 million
increased $44 million over the prior year's level which
included $29 million acquisition expense relating to
the purchase of Pont. Retail brokerage and mutual
fund assets under administration totalled $106 billion
at April 30th, an increase of 80% from a year ago.
After adjusting for the acquisition of Pont in the same
quarter last year, return on equity remained relatively
flat at 13% as improved results were offset by
additional capital allocated to support both the
addition of Kennedy Cabot and strong growth in
margin balances.
Net income improved $46 million from the prior
quarter which included $25 million acquisition
expense relating to the purchase of Rivkin Croll
Smith. Brokerage commissions and mutual fund
management fees continue to improve, increasing
26% from the first quarter.
Bolstered investor confidence resulted in record
trade volumes for Green Line and TD Evergreen,
increasing 28% and 46% respectively from the
prior quarter. TD Asset Management retail mutual
fund volumes continued to grow with an increase
of 11% in the quarter.
Waterhouse has enjoyed tremendous growth as
trading volumes increased 176% and the number of
active customers was up 77% from a year ago.
Electronic trading as a percentage of total trades has
grown to 54% from 31% in the same quarter last year.
Investment Banking
Investment Banking more than doubled its net income
compared to the same quarter last year to $85 million.
Much of the success of the quarter can be attributed
to our expansion and strong capital markets in the
quarter. This was particularly evident in trading and
fee income from fixed income products. Revenue from
interest rate derivatives also improved significantly
from a year ago with contribution from the relatively
new credit derivatives business. Contribution from
money markets more than doubled compared to
last year as a result of strong growth in commercial
paper programs.
Domestic fixed income benefitted from strong trading
results in Government of Canada bonds combined
with improvements in fee income as we underwrote
several corporate issues during the quarter. TD
continues to build upon its strong position in the
Eurobond market with revenues increasing
substantially compared to a year ago. The high
yield group is experiencing exceptional growth
in its business.
The institutional equities and structured finance
businesses were able to take advantage of the increased
activity in the global equity markets during the quarter
resulting in improved trading income.
The segment's return on equity improved to 30%
during the quarter reflecting the higher net income.
Corporate Banking
Corporate Banking net income of $94 million
decreased 6% compared to the same quarter last year
despite net interest income increasing $12 million
and other income increasing $25 million. The
reduction in reported income was caused by a
$15 million increase in the segment's provision for
credit losses reflecting increased provisions based
on the estimated annual average experience over a
credit cycle and a $19 million increase in income tax
expense due to higher rates. Credit quality remains
high and the segment's impaired loans as a percentage
of total loans are less than half last year's level. Total
loans and acceptances increased by 12% from a year
ago. Return on equity decreased slightly to 13%
which was in line with lower net income.
Fee income increased by 42% from a year ago as a
result of higher loan and syndication fees. TD led
several large credit facilities during the quarter which
provided significant fee income. Revenue from
syndications more than doubled compared to last year.
Net income increased by $4 million from last quarter
and return on equity is unchanged, when prior quarter
results are adjusted for the gain on disposition of TD's
payroll services business.
During the second quarter your Bank generated record net income of $307 million. This is an increase of
$67 million or 28% from the second quarter of 1997 and is $14 million or 5% better than last quarter. The
1997 results included a one-time after-tax expense of $29 million relating to our purchase of Pont Securities.
The record net income is a result of very strong other income reflecting returns from our investments in wealth
management businesses and our expansion of TD Securities. At $828 million, other income is 47% ahead of
the same quarter last year.
Earnings per share in the quarter were a record $1.00,
$.22 or 28% higher than last year. Return on common
equity was 17.3% in the quarter compared to 15.2%
last year. On a cash basis, return on equity would be
19.6% this quarter compared to 19.2% last year.
Net interest income
On a tax equivalent basis net interest income
increased $46 million or 6% from the second quarter
last year to $772 million this quarter. The growth in
net interest income was a result of a 23% increase in
average earning assets which grew to $153.3 billion
from $124.3 billion last year. Earning assets growth
continues to be primarily due to strong growth
in trading securities and securities purchased under
resale agreements, activities which support our
increased investment banking businesses. While
these assets have a much lower margin than other
intermediation products, they do contribute to net
income and have minimal credit risk, making them
less capital intensive than other intermediation
products. This change in the mix toward lower margin
assets coupled with a flatter yield curve contributed
to a 33 basis point decline in margin from the second
quarter last year, which partially offset the positive
effect of higher earning assets.
Credit quality and provision for credit losses
Credit quality continues to be strong. This quarter
net impaired loans once again fell below zero to
minus $78 million at the end of the quarter. This is
$445 million lower than second quarter last year and
reflects an increased level of general reserves and
the Bank's continued strong credit performance.
The full year estimate for provision for credit losses in
1998 is unchanged from last quarter at $250 million
and is based on establishing the total provision for
credit losses at the estimated annual average
experience over a credit cycle. In 1998 this provision is
expected to contribute towards establishing additional
general reserves after providing for all expected credit
losses this year. One quarter or $62 million of the full
year estimated expense was taken this quarter.
Other income
Led by our wealth management, investment banking
and corporate banking businesses, other income had
an exceptionally strong quarter generating $828
million in revenues. Other income was $263 million or
47% higher than the same quarter last year and
continues to be broadly based. Investment and
securities services contributed $133 million of the
increase from last year, driven by our global discount
brokerage businesses - Green Line, Waterhouse and
Green Line Australia, our full service broker TD
Evergreen, mutual funds and TD Securities.
Compared to last year, total revenue including related
net interest income was 105% higher for Waterhouse
and 43% higher for TD Evergreen. Mutual fund
revenue continues to be strong based on growth in
assets under administration in both Canada and the
U.S. Revenues this quarter increased $15 million or
41% from last year. TD Securities saw a $31 million
increase in underwriting revenue and a $16 million
increase in institutional equity sales revenue over last
year. Also within TD Securities, equity and interest
rate trading had an exceptionally strong quarter
contributing $87 million to the increase in other
income. This is a reflection of the strong capital
markets in the quarter with good performance from
our Eurobonds, high yield and equities businesses.
Corporate credit fees also had a very good quarter
with revenue increasing $24 million or 39% from
last year.
TD's investment portfolio of securities continued to
perform well and $42 million in net investment
securities gains were realized in the quarter. The
surplus of market over book value of the Bank's
securities portfolios at the end of the quarter was
$965 million. This is an increase of $458 million
from last year.
Non-interest expenses
Excluding the $29 million expense associated with
our purchase of Pont Securities Inc. in the second
quarter last year, total non-interest expenses grew
24% - in line with the 24% growth in total revenue.
Strong revenue growth in our wealth management
and investment banking segments was accompanied
by $168 million of increased expenses which
accounted for 21 percentage points of the increase.
Additional expenses associated mostly with increased
customer activity and investments in personal and
commercial banking infrastructure account for the
remaining increase.
Our reported efficiency ratio this quarter improved
1.9 percentage points over last year to 61.6%.
Excluding goodwill, our efficiency ratio was modestly
higher at 61.0% versus 60.7% last year.
Balance sheet
As at April 30, 1998 total assets were $190 billion
which is $37 billion or 24% higher than a year ago.
Growth in securities purchased under resale
agreements, investment and other trading securities
balances in support of our increased investment
banking activity account for $23 billion of the increase
and continues to be the main reason behind this
strong growth. Loan growth continues to be healthy
and is up 10% from last year. Residential mortgage
loans, gross of $2.7 billion in securitizations during
the year, grew 9% or $2.9 billion. Personal loan
growth remains strong and is up 32% or $3.9 billion
from last year. This growth demonstrates improved
consumer confidence and an increase in our domestic
market share. Personal loan growth also benefitted
from growth in Waterhouse which has seen personal
loans increase to $2.9 billion from $.9 billion in
the second quarter of last year. In addition, business
and other loans increased 10% or $3.3 billion over
last year.
Personal non-term deposits increased 15% or
$2.9 billion over last year. Waterhouse contributed
$2.3 billion of this increase. Indicative of the shift
to higher cost sources of funding earning asset
growth, wholesale deposits have increased 59% or
$22.5 billion over last year. This is due mostly to the
increase in investment banking activities. Mutual
funds under management in Canada increased 20% or
$2.5 billion over last year while personal term deposits
declined 2% or $.5 billion from last year. Waterhouse
Securities also continues to experience growth in
mutual funds which increased 102% or $4.7 billion
over last year. Total mutual funds under management
at April 30, 1998 were $24.2 billion, an increase of
$7.3 billion or 43% from last year.
Capital
Common equity increased $149 million in the
quarter primarily due to net income after dividends of
$202 million in the quarter partially offset by foreign
currency translation losses due to the Canadian dollar
strengthening, relative to other currencies, as at
April 30, 1998 versus January 31, 1998.
The ratio of net common equity to risk-weighted
assets at 6.2% as at April 30, 1998 is unchanged from
January 31, 1998 as we continue to actively manage
our risk-weighted assets and capital requirements.
During the quarter we insured a further $1 billion in
conventional residential mortgages with Canada
Mortgage and Housing Corporation and securitized
$500 million in mortgages, which reduces the
regulatory capital requirements for these loans. These
events, together with the increase in common equity
previously noted, offset the increase in risk-weighted
assets from business growth. Our Tier 1 capital ratio
remained at 7.1% while our total capital ratio declined
modestly to 10.7% from 10.8% last quarter.
