Toronto Dominion's American Conquest

At the main campus of TD University in the Philadelphia suburb of Mount Laurel, N.J., bright green, red, blue, and yellow walls of varying angles brighten dozens of classrooms, complete with mock teller stations and a bank vault. A 400-seat theater hosts everything from pep rallies to air-hockey tournaments. All of Toronto-Dominion Bank's (TD) 24,000 U.S. employees must attend a five-hour training session here or at one of 47 other campuses across the country. "You have to buy 100 percent into our culture," says Fred Graziano, president of U.S. consumer banking for the Toronto-based company. "That's how we start them off and let them know what we stand for."

The training is a centerpiece of Chief Executive Officer Edmund Clark's strategy to export the customer service model that has made his bank the most profitable consumer lender in Canada. If he makes it work, he'll do what most Canadian banks have failed to do: post sustained profit in a market more than four times the size of Canada's.

"The next step will be proving the bank can consistently grow revenue in a marketplace in which the competitive, economic, and regulatory backdrop appears much more difficult than what TD faces at home," says Sumit Malhotra, a bank analyst at Macquarie Capital Markets in Toronto.

So far, Clark is succeeding. Canada's second-biggest bank recorded C$282 million ($276 million) in U.S. consumer bank earnings in the most recent quarter—a record for the fledgling division and almost a quarter of the company's overall profit of C$1.18 billion. Toronto-Dominion said in June that U.S. operations may have earnings of $1.6 billion a year within three years.

Convinced that there were limited growth opportunities in Canada—the federal government blocked domestic bank mergers in 1998—Clark, who became CEO in 2002, set his sights on the U.S. Since 2004, Toronto-Dominion has spent almost C$20 billion on U.S. acquisitions. Its biggest was the March 2008 purchase of Cherry Hill (N.J.)-based Commerce Bancorp for about C$8.5 billion. It now has about 1,300 branches in 16 states from Maine to Florida, compared with 1,116 in Canada. "We made a decision to go big or go home," says Clark, 63. "We wanted to make sure that we could...create a truly North American bank."

Domestic rivals haven't grown as quickly south of the Canadian border. Royal Bank of Canada (RY), the country's largest lender, hasn't recorded a profit in the last nine quarters at its international banking unit, which includes operations in North Carolina and Alabama. The lender has spent $4.6 billion buying U.S. consumer banks since 2001. At Bank of Montreal (BMO), which invested $3.4 billion to build its Chicago-based Harris Bank, U.S. profit accounted for just 6 percent of net income in the latest quarter.

As it does in Canada, Toronto-Dominion counts on customer service to distinguish itself from rivals. It calls its U.S. branches "stores" and pursues a strategy that Bharat Masrani, head of U.S. operations, calls "retail-tainment." Each store features a coin-counting machine—labeled "Penny Arcade"—that's free for customers to convert spare change into bills. People who guess how much change they have within $1.99 are eligible to play a video game where they can win TD-branded prizes.

In addition, many stores feature drive-through teller lanes; free pens; lollipops and piggy banks for children; and water bowls and treats for dogs. Many of the locations are open seven days a week, from 7:30 a.m. to 8 p.m. The bank surveys 800 clients each night to assess the service.

Such touches helped Toronto-Dominion increase consumer lending by 20 percent in the U.S. from the end of 2007 to June 2010, says Masrani. That compares with a 4 percent average decrease among other major U.S. banks, he says.

In addition to boosting lending, Toronto-Dominion wants to increase the number of products it sells to each U.S. client to five or six from three, according to Graziano. "Where we don't have our fair share are things like residential lending," he says. "We have the product set—now we're going back to our customers and we're doing a better job of selling it to them." The bank also plans to have advisers at all branches who can offer TD Ameritrade brokerage products by yearend, Graziano says.

Clark recognizes the timing of his foray into the U.S. wasn't ideal. "Obviously what we didn't anticipate was that the world would have a financial crisis and the U.S. would have the biggest downturn since the Great Depression," he says. Even so, Clark says he is not retreating from his ambitious profit targets for the U.S. business: "Bharat's challenge is going to be, O.K., to the extent that the world's gotten worse, what are you going to do" to reach your goals?

The bottom line: Toronto-Dominion hopes its emphasis on customer service will help it become the first Canadian bank to excel in the U.S.

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