TD Shifts to Business Loans in Consumer Slump: Corporate Canada

TD Shifts to Business Loans in Consumer Slump
Customers use ATM machines at one of Toronto-Dominion Bank's Canada Trust branches in Toronto. Photographer: Norm Betts/Bloomberg

Toronto-Dominion Bank plans to focus on business lending, credit cards and Quebec to counter a slowdown in profit for Canadian consumer banking, the lender’s largest business unit.

“We had this period of extraordinary levels of growth, both beyond our expectations and relative to the competition,” said Tim Hockey, head of Canadian banking. “Now we’re going back to more normal rates of growth.”

Hockey said the Canadian business, which has expanded as much as three times faster than some of its competitors, will be pressured by slowing demand for personal loans and tighter margins on products such as mortgages. Toronto-Dominion expects to increase profit at the unit in the “mid-to-high single-digit” level in fiscal 2012, he said.

That follows average profit gains of 16 percent over the past seven years, according to data compiled by Bloomberg. By comparison, Canadian Imperial Bank of Commerce has climbed 5 percent, National Bank of Canada by 6 percent, and almost 11 percent at Royal Bank of Canada over the same period.

The profit gains have made Toronto-Dominion the second-best performing stock among Canada’s six-biggest lenders over the past five years, with a total return of 40 percent, double the gain for the Standard & Poor’s/TSX Banks Index.

A Canadian banking slowdown may reduce earnings growth for the banks this year. Operating profit is expected to climb an average of 6 percent in 2012, compared with a 15 percent increase in 2011, according to Sumit Malhotra, an analyst at Macquarie Capital Markets in Toronto.

Rising Debt

Lending may slow amid warnings by Bank of Canada Governor Mark Carney that record-high household debt levels have become a growing concern and that consumer spending needs to slow.

“When we look at the overall level of consumer indebtedness, and the inevitable potentiality of interest rates increasing, then it does seem that there are a growing proportion of consumers that are more on the edge,” Hockey, 48, said in an interview from his Toronto office.

Toronto-Dominion doubled its domestic consumer banking operations with the C$8 billion ($8 billion) purchase of CT Financial Services Inc. in 2000. Hockey’s unit, which has about 1,150 branches across the country, posted record profit of C$826 million in the first quarter ended Jan. 31.

“We have a dead-simple strategy that’s been executed for over a decade,” said Hockey, who has been with the bank for 28 years. “We will compete primarily on service and convenience.”

Business Bankers

Toronto-Dominion says its Canadian branches are open 50 percent longer than competitors, including 400 branches that are open on Sundays, Hockey said.

“Even in this day of mobile and Internet, customers love to be able to come in and do banking on their terms,” said Hockey. “All of those things over time are what drive the growth and momentum.”

Corporate lending is becoming a priority after Canada’s second-largest lender almost tripled its number of business bankers to 1,420 over the last five years. Business lending volume growth increased 14 percent in the fiscal first quarter, Hockey said.

“We’re taking market share and consistently reaping the benefits of those investments we made in 2009 and 2010,” Hockey said in a March 21 interview. “It probably takes two to three years minimum to get them really productive, so they’re just hitting their stride now.”

The Toronto-based bank also expanded its credit-card business by purchasing Bank of America’s MBNA card business in December for about C$7.5 billion. The acquisition allows Toronto-Dominion to offer Visa and MasterCard products, expanding its share of the Canadian card market to 19 percent from 6 percent, Hockey said.

Risk Appetite

After dropping card clients who “won’t fit in with our risk appetite,” Hockey said he would be happy with Toronto-Dominion having 22 percent to 24 percent share in the Canadian card business.

Macquarie’s Malhotra expects TD’s Canadian bank operations to continue outperforming its peers this year.

“No bank in the country has as consistently managed the revenue versus expense relationship as well as TD,” said Malhotra, who rates TD shares ‘outperform.’ “When you add in the MBNA Canada book, we see the Canadian banking unit at TD delivering 11 percent growth this year.”

Toronto-Dominion also plans to grow in the province of Quebec, where it has 114 branches. Hockey plans to add locations in Canada’s second-most populous province faster than the rest of the country. The bank typically adds 25 to 30 branches across Canada per year.

“We’re investigating how fast we can ramp that up,” Hockey said. “I’m not going to take all 25 new branches this year and say only Quebec. But I will say that Quebec will get more than its fair share of branch openings now and in the foreseeable future, because it’s a great growth opportunity.”

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