TD Bank looking for cost savings amid continued low interest rates

TORONTO – TD Bank Group (TSX:TD) is looking to cut costs as low interest rates appear likely to put pressure on profit margins for at least another year.

“Finding current-year cost savings is not enough,” president and chief executive Ed Clark said during a conference call Thursday.

“We continue to focus on more permanent cost reductions. We are carefully reviewing all opportunities on this front.”

The bank said it is heartened by improving economic conditions in the United States and expects that the economy south of the border to outperform Canada’s over the next few years.

But Clark noted that the environment in the U.S. remains challenging.

“The good news is that our strong volume growth has been able to offset most of this compression, leaving us in a very strong position should rates rise,” he said.

Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier, said recovery south of the border means U.S. banks are also on the mend and looking to regain some of their lost market share.

That means TD Bank is facing more competition from large U.S. banks.

“Remember, when TD got in there it was during the financial crisis, so they were able to buy things relatively inexpensively,” said Nakamoto.

“I think now the U.S. banks are much stronger, and they’re probably looking at some of the competitors out there to see if they can take away some of their market share.”

TD reported a second-quarter profit of more than $1.7 billion and growth in most of its major sectors, including its main Canadian and U.S. banking operations.

The bank’s overall net income was up two per cent from a year ago at $1.723 billion or $1.78 per share while its adjusted earnings were $1.8 billion, or $1.90 per diluted common share.

A year ago, TD earned a profit of $1.69 billion or $1.78 per diluted share and an adjusted profit of $1.74 billion or $1.82 per share.

Total revenue was $6 billion, up from $5.75 billion a year ago.

While the overall adjusted earnings were up from a year ago, they were just short of a consensus estimate of $1.91 per share compiled by Thomson Reuters.

However, Desjardins Securities analyst Michael Goldberg wrote that some of the details in the report will probably be good for investors in the longer term, pointing to the U.S. banking division’s acquisition of Target’s credit card assets.

“While TD’s results appear neutral to negative at first glance, upon closer examination, the acquisition of the Target credit card portfolio had an immediate positive reaction and should have a favourable continuing impact on results,” Goldberg wrote.

TD shares were down slightly Thursday. They traded as low as $82.83 but recovered some lost ground to close at $83.65, off 39 cents or 0.46 per cent from the previous close.

Clark had told shareholders at their annual meeting last month that it would be tougher for TD to meet its growth targets due to the slow economy.

Among other things, the Canadian banking sector faces a slowing housing market and stricter lending rules that could affect their mortgage businesses.

In addition, the uncertain economic conditions in Canada and the United States could affect lending and other services to the business sector.

The bank increased its provision for credit losses to $417 million, up from $388 million a year earlier and up from $385 million in the first quarter of fiscal 2013.

But Nakamoto noted it was not a large increase.

“When they start doubling and tripling their loan losses, then you start to get worried,” he said.

TD continued to show flat or higher profits in its major operations.

In the three months ended April 30, TD’s Canadian personal and commercial banking sector reported $847 million of net income, or $877 million of adjusted earnings — up five per cent from the second quarter of 2012.

Its wealth management and insurance operations delivered $364 million of net income, which was about the same as last year.

TD’s American personal and commercial banking operations, mostly located in the eastern states, generated US$392 million of net income — up nine per cent, year-over-year.

Wholesale banking — the bank’s capital markets operations — had $220 million of net income, up 12 per cent from the second quarter of 2012.

TD bank also announced Thursday that it plans to buy back up to 12 million of its common shares over the coming year, or about 1.3 per cent of the total.