TD profit beats forecasts as Canadian, U.S. units boost bottom line

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Toronto-Dominion Bank reported its second straight $2-billion quarterly profit, with strong earnings from both its Canadian and U.S. operations.

Instead of relying on one unit to drive earnings growth, TD benefited from boosts to many bottom lines, including its Canadian retail operations, its wealth management business and its U.S. personal and commercial banking arm.

TD shares touched a new high on the results, rising 2.3 per cent to $53.11 in morning trading in Toronto.

TD's core earnings amounted to $1.99-billion, or $1.04 per share, up 17 per cent from the year prior. After stripping out one-time items, TD made $1.09 per share, handily beating analyst expectations of $1.02 per share.

However, much like its main rival, Royal Bank of Canada, TD has to start proving it can set a new benchmark. Growth is up over the previous year, but the quarter-over-quarter comparisons aren't as compelling. Canadian retail's profit, for instance, barely grew relative to the previous quarter after accounting for the big one-time credit card expenses TD incurred early in 2014.

Canadian banking's profit amounted to $1.3-billion, boosted by everything from decent personal loan growth to TD's acquisition of half of the Aeroplan credit card portfolio. Business lending continues to be a bright spot, with TD's commercial loan book growing 12 per cent.

The bank's U.S. retail arm saw its earnings jump 13 per cent from the same period in 2013 to $470-million, boosted by the acquisitions of Target's credit card portfolio and a U.S. wealth manager, as well as 8-per-cent organic personal loan growth. However, much of the jump also came from lower provisions for credit losses, rather than core earnings growth.

"The U.S. operating environment for banks is quite tough right now," chief financial officer Colleen Johnston said in an interview. Loan margins are getting squeezed because banks are all chasing the same big clients, leading them to cut prices, and the regulatory environment has changed dramatically.

Wholesale banking's results weren't as encouraging, with profits falling to $207-million, down slightly from both the prior quarter and the previous year. However, capital markets profits are the most likely to fluctuate from one earnings season to another.

Looking forward, TD is optimistic about its prospects for the second half of fiscal 2014. There's "definitely more of a positive vibe coming out of this quarter," Ms. Johnston said.

Not only is TD benefiting from recent acquisitions that are now showing up in its earnings, but the bank expects current levels of loan growth to hold, and for its margins to remain stable – both of which should give investors confidence. Credit losses have also dropped sharply, a trend that helped the bottom line in a big way in the second quarter.

However, TD acknowledges that its insurance arm is a wild card, and earnings will depend on the number of weather-related events, as well as any regulatory reforms.

TD has been determined to prove 2013, when the bank suffered from big insurance losses largely caused by weather-related disasters, was an abnormal year for profits. Because of the one-time items, the bank's core earnings barely grew.

However, TD started the current fiscal year off with a bang last quarter, posting a profit that topped $2-billion for the first time. The bank benefited from continued strength in Canadian personal and commercial banking, as well as sizable earnings in wealth management – themes that were echoed by many of its rivals.

TD did not change its dividend this quarter, something to be expected after chief executive officer Ed Clark announced in Feburary that TD would likely only review its payout once a year from now on. The news confused some investors, because they worried it meant the bank was concerned about cash flow, so Mr. Clark had to explain his reasoning when speaking at TD's annual general meeting in April.

A few years ago TD shifted its target dividend payout ratio to between 40 and 50 per cent of annual earnings, up from between 35 and 45 per cent. To get there, the bank had to beef up its quarterly dividend quite quickly, so it became the norm that TD would boost its payout twice a year. Now that the dividend is in line with the target, Mr. Clark and his team have decided to cool the frequency of hikes.