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TD U.S. Wager Brings Best Return on Lowest Risk

Toronto-Dominion Bank (TD) Chief Executive Officer Ed Clark is showing Canadian rivals that you can bet on the U.S. without risking your stock.

Toronto-Dominion, which spent $25 billion on a decade-long U.S. expansion, has generated the best returns among Canadian lenders in the past year while rewarding investors with the nation’s least volatile bank stock.

“Money around the world is going into the U.S. and TD is sharing some of that glow,” said Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Inc., whose firm manages about C$4.7 billion ($4.3 billion) including bank shares. “The more confidence people have that TD has made a success of themselves in the U.S., the more money will go into that stock.”

Toronto-Dominion shares rose 3 percent in the past 12 months after adjusting for price swings, the best among Canada’s six biggest banks, according to a Bloomberg Riskless Return ranking. The Toronto-based lender, which also has the highest total return at 32 percent, has the least volatility among its peers.

“This flows exactly out of our strategy,” Clark, 66, said in an April 3 interview. “Low-risk strategies are in fact the highest-return strategies.”

Toronto-Dominion’s risk-adjusted return edges out Canadian Imperial Bank of Commerce and National Bank of Canada, which both gained 2.5 percent, and is about double that of Bank of Nova Scotia, the lowest performer on that basis.

Photographer: Pawel Dwulit/Bloomberg

The Toronto-Dominion Bank logo is displayed atop the TD Canada Trust Tower in Toronto. Close

The Toronto-Dominion Bank logo is displayed atop the TD Canada Trust Tower in Toronto.

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Photographer: Pawel Dwulit/Bloomberg

The Toronto-Dominion Bank logo is displayed atop the TD Canada Trust Tower in Toronto.

Double Down

Bloomberg’s risk-adjusted return is calculated by dividing total return by volatility, or the degree of daily price-swing variation, giving a measure of income per unit risk. The returns aren’t annualized.

Toronto-Dominion, Canada’s largest lender by assets, began a U.S. expansion in 2004 after agreeing to buy a 51 percent stake in Portland, Maine-based Banknorth Group Inc. Toronto-Dominion, which now has more branches in the U.S. than its home country, earned C$1.85 billion from U.S. businesses in the fiscal year ended Oct. 31, compared with C$4.68 billion from Canada.

“Investors like the diversification,” Clark said. “We obviously have a very, very strong franchise in Canada, and at the same time we have optionality that the U.S. is going to recover.”

Toronto-Dominion doubled down on the U.S. while its rivals retreated. Royal Bank of Canada sold its money-losing North Carolina-based RBC Bank to PNC Financial Services Group Inc. in March 2012, while Canadian Imperial pulled the plug on a U.S. online bank in 2002 because the business failed to turn a profit after about three years.

‘Less Volatile’

Bank of Montreal is the only other Canadian lender with a sizable U.S. presence in consumer lending, operating BMO Harris Bank in Midwestern states for 30 years. Scotiabank has avoided the U.S. market.

“TD bought their properties pre-crisis, so the exceptional benefits of the last year came at a very high price in 2007 and 2005, when they did their deals,” said Peter Routledge, an analyst with National Bank Financial, who rates the stock outperform.

Toronto-Dominion’s emphasis on lower-risk businesses such as personal lending, commercial banking and wealth management rather than investment banking has made the stock less volatile. The company earned about 9 percent of its profit from wholesale banking last year, the lowest share among Canada’s biggest banks, according to financial statements.

The bank’s ability to better manage the risks that undermined some North American lenders after the 2008 financial crisis gives it a competitive advantage, Clark said at the firm’s April 3 investors’ meeting in Calgary.

‘Right Moves’

Toronto-Dominion exited the structured-credit derivatives business before the financial crisis, and refused to do subprime mortgage lending when it entered the U.S., Clark told investors.

“These kinds of choices meant giving up profit in the short-term to avoid risks in the future,” Clark said. “In hindsight, we made the right moves. We managed through the crisis dramatically better than most banks in the world -- expanding our footprint, growing our book of business and taking market share.”

Canada’s eight-company Standard & Poor’s/TSX Commercial Banks Index returned 2.6 percent on a risk-adjusted basis in the past 12 months, outperforming the 1.8 percent return of the KBW Bank Index (BKX) of 24 U.S. lenders.

“The whole stability of TD’s balance sheet and weighting toward retail banking means it’ll tend to be less volatile than peers that have higher weightings toward capital-markets related businesses,” Routledge said in an interview.

‘Boring’ Stock

Toronto-Dominion should continue to outperform its peers, even in an environment of low interest rates, increased regulatory demands and slower Canadian economic growth relative to the U.S., Clark said.

“I would be surprised if they didn’t,” said Clark, who is retiring in November after a dozen years as CEO.

Toronto-Dominion’s risk-adjusted return over five years was 9 percent, in line with National Bank of Canada’s 9.3 percent gain and Bank of Montreal (BMO)’s 9.1 percent, according to the Bloomberg ranking. During that period, Canadian Imperial and Scotiabank both returned 7.6 percent, and Royal Bank advanced 6.4 percent, according to the ranking.

“Most of our clients are conservative,” Nakamoto said. “They gravitate to the Canadian banks knowing that this has one of the lowest volatilities and they’re still being paid. What more do you want?”

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net

To contact the editors responsible for this story: Peter Eichenbaum at peichenbaum@bloomberg.net; David Scanlan at dscanlan@bloomberg.net Steven Crabill, Jacqueline Thorpe

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