TD Bank 2007 Annual Report Download - page 44

TD BANK FINANCIAL GROUP ANNUAL REPORT 2007 Management’s Discussion and Analysis40
BUSINESS HIGHLIGHTS
• Reported earnings up 31%, and adjusted earnings up
24%, from last year.
• Return on invested capital of 30%, compared with 28%
in previous year.
• Top 3 dealer in Canada (for the nine-month period
ended September 30, 2007):
– #1 in equity block trading
– #2 in fixed-income trading
– #2 in fixed-income underwriting
– #3 in mergers and acquisitions (among Canadian peers)
– #3 in equity underwriting (full credit to bookrunner)
•฀ Realized strong security gains in the equity investment
portfolio while also increasing the unrealized gains from
the prior year.
•฀ Continued to maintain a low credit risk profile.
CHALLENGES IN 2007
• Solidifying our position as a top 3 dealer in Canada in a
mature market with intense competition.
• Dealing with the volatility in the credit markets and
reduced liquidity, in the latter half of the year, and its
impact on Wholesale Banking business.
INDUSTRY PROFILE
The wholesale banking sector in Canada is a mature market
with intense competition from the Canadian banks, the large
global investment banks and, to a lesser extent, small niche
investment banks and dealers. In order to compete effectively, it
is necessary to offer a complete package of solutions and prod-
ucts, with credit often being a key component of a relationship.
Additionally, it is necessary to offer international expertise in
order to service the Canadian-based international corporate
client base. There are increasing opportunities for a wholesale
bank that offers innovative solutions and ideas which span
across products and regions.
OVERALL BUSINESS STRATEGY
• Solidify position as a top 3 dealer in Canada:
– Protect the #1/#2 market share rankings in equity block
and fixed-income trading.
– Increase share of equity and debt underwriting and merger
and acquisitions industry revenue.
– Prudently extend credit to support top 3 initiative and
continue to hold CDS protection.
– Continue to support domestic franchise with niche product
and service offerings in the U.S., Europe and Asia.
• Grow proprietary trading in scalable and liquid markets.
• Achieve an attractive rate of return on the equity investment
portfolio over a medium to long-term holding period.
REVIEW OF FINANCIAL PERFORMANCE
Reported net income was $824 million in 2007, an increase of
$195 million from $629 million in the previous year. Adjusted
net income was $824 million in 2007, an increase of $160 mil-
lion from $664 million in the previous year. The return on
invested capital for 2007 was 30%, compared with 28% in the
previous year. Adjusted net income in the prior year excluded
a $50 million restructuring charge. There were no items of note
(adjustments) in the current year.
Wholesale Banking revenue is derived primarily from capital
markets, investing and corporate banking activities. Revenue for
the year was $2,494 million, compared with $2,271 million in
the previous year. Capital markets revenue was higher than the
previous year on stronger non-taxable transaction revenue in
equity trading and higher syndication, merger and acquisitions,
and underwriting revenue. These increases were offset by lower
credit trading revenue, primarily due to volatility in the credit
markets and a breakdown in traditional pricing relationships
between corporate bonds and CDS in the latter part of the year.
Revenue from the equity investment portfolio decreased moder-
ately due to lower security gains. Corporate banking revenue
increased due primarily to an increase in loans and commitments
related mainly to mergers and acquisitions activity.
Provisions for credit losses were $48 million in 2007, a
decrease of $20 million from $68 million in 2006. Provisions for
credit losses in the Wholesale Banking segment comprise allow-
ances for loan losses and the accrual costs for credit protection.
The change in market value of the credit protection, in excess
of the accrual cost, is reported in the Corporate segment. The
accrual cost of credit protection in Wholesale Banking in 2007
was $48 million, flat compared with 2006.
Wholesale Banking held $2.6 billion in credit protection
against the lending portfolio, a decrease of $0.3 billion from
the end of last year. The decrease was due primarily to the
strengthening of the Canadian dollar relative to the U.S. dollar,
as most of the protection is denominated in U.S. currency.
Wholesale Banking continues to proactively manage its credit
risk through active management of the credit protection
portfolio.
Risk-weighted assets of Wholesale Banking increased by
$10 billion to $44 billion this year, primarily related to an
increase in corporate lending exposures related to mergers and
acquisitions activity and conversion of ABCP liquidity lines from
“market disruption” to “global style” in response to market
liquidity concerns.
Expenses were $1,261 million, compared with $1,312 million
in the previous year. The decrease related primarily to $50 million
of restructuring costs in the prior year associated with the exit
of the global structured products business.