By Rita Trichur
Toronto-Dominion Bank warned of more challenging operating
conditions in 2015 after posting fourth-quarter earnings that
missed analyst expectations and broke several years of
outperformance by Canada's largest bank by assets.
TD's worse-than-expected results added to disappointments this
week from three of Canada's other biggest banks and helped send the
sector lower on the Toronto stock exchange.
Much of TD's concern on Thursday came out of its large U.S.
retail operations, where the bank forecast "modest earnings growth"
for fiscal 2015. The bank also predicted middling growth in Canada.
Toronto-based TD operates a bigger branch network in the U.S. with
1,318 locations compared with 1,165 in Canada.
"We would find it hard to describe its fourth quarter earnings
release as anything but surprisingly disappointing," John Aiken, an
analyst with Barclays Capital Inc. wrote in a research note.
TD has bet big on a U.S. expansion that has lasted for much of
the last decade. But even as the U.S. economy shows signs of
gaining traction, the slower pace of global growth, the overhang of
low interest rates, increasing expenses and a growing regulatory
compliance burden remain challenges, according to senior
executives.
"We face several headwinds," said newly minted Chief Executive
Bharat Masrani on a conference call with analysts. "The operating
environment remains difficult with interest rates still low, a
global recovery that is only gradually taking hold and increased
competition from traditional and non-traditional players," he
added.
Mr. Masrani took over the top job on Nov. 1, the official start
to the bank's fiscal 2015 year.
Although TD targets earnings-per-share growth of 7%-10% over
"the medium term," Mr. Masrani acknowledged that "in the current
environment it is difficult to say how we will get into that range
next year."
During the last quarter, TD's margins were squeezed in its
retail operations on both sides of the border. But the persistence
of low interest rates will continue to put pressure on margins in
2015.
"We don't see interest rates rising really until the latter part
of 2015," said Chief Financial Officer Colleen Johnston in an
interview.
After a year of low loan losses, credit loss provisions in the
U.S. are expected to edge higher in 2015 as they return to more
normalized levels.
"The key now is that I think, our losses will grow in line with
volumes, " Ms. Johnston added.
Overall, TD earned 1.75 billion Canadian dollars ($1.54
billion), or 91 Canadian cents a share for the three months ended
Oct. 31. That compares to C$1.62 billion, or 84 Canadian cents a
share, in the year-ago quarter. Earnings for the quarter were
affected by items, including the amortization of intangibles, that
amounted to C$62 million, and C$54 million of integration charges
for TD's acquisition of MBNA Canada's credit-card portfolio.
Adjusted to strip out extraordinary items, earnings rose 3% to
C$1.86 billion, or 98 Canadian cents a share. Analysts polled by
Thomson Reuters were expecting a profit of C$1.05 a share.
"Almost everything that one does not want to see at TD came
through in the quarter...a lack of growth in revenues and outsized
margin compression on both sides of the border," Mr. Aiken
said.
This week has seen three of Canada's "Big-Five" banks miss
earnings' expectations. Canadian Imperial Bank of Commerce and Bank
of Montreal revealed a slump in capital-markets during the quarter.
Royal Bank of Canada narrowly beat expectations but worried
investors with a similar falloff in capital markets.
Bank of Nova Scotia, which is Canada's third-largest lender,
will wrap up Canadian bank earnings season on Friday.
Write to Rita Trichur at rita.trichur@wsj.com
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