American Bankers Prove Inferior to Canada Bankers Led by Toronto-Dominion

Toronto-Dominion Bank (TD) Chief Executive Officer Edmund Clark faced investor doubts when he announced in 2004 he was buying a U.S. consumer lender, challenging larger rivals such as Bank of America Corp. (BAC) in the world’s largest financial market.

“Every analyst said ‘You see, another dumb Canadian trying to go into the U.S.,” Clark said yesterday in an interview at Bloomberg’s headquarters in New York. “They don’t know how to do it. They don’t have the guts. They’re too conservative.”

More than seven years later, Canada’s second-largest bank is one of the 10 biggest lenders in the U.S. by assets, and may soon have the third-most branches in New York City, a banking market almost as big as Canada’s.

By sticking to consumer lending and avoiding high-risk subprime loans and structured products, the Canadian lender posted profit of almost C$3 billion ($3 billion) in U.S. consumer banking over the past three years, while bigger banks such as Bank of America and Citigroup Inc. (C) required government bailouts.

“When we went into the United States, we refused to do subprime lending,” Clark said. “We said, ‘I don’t care what the spreads are, we are not going to do that.’”

Shareholders have rewarded Clark’s ability to weather the financial crisis while expanding earnings on both sides of the border. Toronto-Dominion now has more branches in the U.S. than in Canada. It’s also one of the only banks with an Aaa credit rating from Moody’s Investors Service.

Shares Rally

Toronto-Dominion shares have gained 42 percent in the five years ended Dec. 31, 2011. That’s the best performance among Canada’s five largest banks over that period, and compares with a drop of 87 percent for Charlotte, North Carolina-based Bank of America.

“We have had a philosophical view all along that people were changing banks from being built around customers and clients, to being built around traders,” said Clark, 64. “And that was not a good thing for society and it wasn’t a good thing in the end for the banking system.”

The lender posted record annual profit in 2011 of C$6.05 billion, or C$6.43 a share, according to International Financial Reporting Standards. Since Clark became CEO in December 2002, Toronto-Dominion has increased earnings 18 percent on a compounded annual basis.

Bank of America CEO Brian T. Moynihan, 52, has spent the last two years atoning for ill-fated acquisitions made by his predecessor, Kenneth D. Lewis. The 2008 takeover of Countrywide Financial Corp., the biggest home lender during the U.S. housing bubble, saddled the firm with so many liabilities from shoddy mortgages that last year it weighed putting the unit into bankruptcy.

Avoiding Subprime

Jerry Dubrowski, a Bank of America spokesman, declined to comment.

Toronto-Dominion and other Canadian lenders avoided subprime lending and structured products during the worst financial crisis since the Great Depression. Canada’s banking system has been ranked the world’s soundest for four straight years by the World Economic Forum, and avoided government bailouts.

“I’m a big believer that you should run an institution and become capable of understanding any part of the institution that you run,” Clark said. “The moment you’re saying ‘No, no, no, but I have a third vice president that does,’ look out. I like to keep institutions a little narrow in their focus.”

TD’s narrow focus began in August 2004, when the lender announced it would buy 51 percent of Portland, Maine-based Banknorth Group Inc. for $3.5 billion.

TD Ameritrade

A year later, the bank sold TD Waterhouse to TD Ameritrade Holding Corp. (AMTD), making it the largest shareholder in the Omaha, Nebraska-based discount brokerage.

By 2007, Toronto-Dominion had acquired the rest of Banknorth for $3.19 billion. In March 2008, the bank bought Cherry Hill, New Jersey-based Commerce Bancorp for about $8.33 billion. Toronto-Dominion added South Financial Group Inc. for $191.6 million and now has about 160 branches in Florida.

“You look eight years ago, TD really had no U.S. retail banking presence,” said John Aiken, an analyst at Barclays Capital Inc. in Toronto. He rated Toronto-Dominion shares “overweight/neutral.” “Fast forward to today and they’re a top-10 lender in the U.S., which is hugely impressive.”

U.S Southeast

Toronto-Dominion purchased auto lender Chrysler Financial Corp. from Cerberus Capital Management LP in 2010 for about $6.3 billion. Clark said a year ago that the bank will become a top- 10 auto lender in the U.S. within three to four years.

The U.S. Southeast bore much of the brunt of the financial crisis as subprime lending and falling home prices roiled housing markets in the area.

Regions Financial Corp. (RF), Alabama’s largest bank, hasn’t posted an annual profit since 2007. The Birmingham-based bank wrote off more than $3 billion in loans during the financial crisis, mostly tied to developers, home builders and mortgage borrowers in Georgia and Florida. Its shares have fallen about 84 percent since 2007.

SunTrust Banks Inc. (STI), based in Atlanta and the 10th-largest U.S. lender by assets, posted six consecutive quarterly losses from 2008 to 2010 as borrowers in the Southeastern real estate market struggled to keep up with loan payments.

Florida Expansion

Tim Deighton, a spokesman for Regions, declined to comment. Michael McCoy, a spokesman for SunTrust, didn’t immediately respond to messages seeking comment.

Toronto-Dominion was said to be in discussions to buy Florida lender BankUnited Inc. last month before the bank decided to remain independent, according to people with knowledge of the situation. Clark declined to comment on the potential sale, and said the bank doesn’t need acquisitions to grow.

The U.S. economy is showing signs of a turnaround, he said.

“There is a mood shift here,” he said. “Consumers are more optimistic, businesses are more optimistic.”

The bank’s next goal is to become a “top three” bank in New York, Clark said. He said the city’s deposit base is about $750 billion, compared with C$1 trillion for all of Canada. Toronto-Dominion needs to add 60 or 70 more branches to become third largest in the city, Clark said.

“We are now the fifth-largest bank in greater New York City and we’ve set a goal to be the third largest,” Clark said. “So over a 15-year period, we’ll go from zero to third largest.”

To contact the reporter on this story: Sean B. Pasternak in Toronto at spasternak@bloomberg.net.

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net; David Scheer at dscheer@bloomberg.net.

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