TD Bank 2010 Annual Report Download - page 40

TD BANK GROUP ANNUAL REPORT 2010 MANAGEMENT’S DISCUSSION AND ANALYSIS38
total year end FTE staff level increased by 5,659, or 41%, compared
with last year end due to the achievement of synergies partially offset by
the impact of opening 33 new stores in 2009. Additional reductions are
expected in the first quarter of 2010 as integration efforts wind down.
Wholesale Banking net income for the year was a record $1,137 million,
an increase of $1,072 million compared with last year. Net income was
impacted by a substantially improved trading environment characterized
by increased liquidity, improved asset values, and periods of elevated
volatility which resulted in high client volumes and trading opportunities.
The return on invested capital for the year was 30%, compared with
2% last year.
Wholesale Banking revenue was derived primarily from capital
markets, corporate lending activities, and investing. Revenue for the
year was a record $3,221 million, an increase of $1,971 million, or
158%, compared with last year. Capital markets revenue increased
significantly compared with last year primarily due to strong credit,
interest rate, and foreign exchange trading revenue, recovery from the
cancellation of a loan commitment, higher energy and equity trading,
and underwriting revenue. Strong results in interest rate and foreign
exchange businesses were driven by wider margins, increases in client
activity, and improved asset values as credit spreads tightened. Strong
results were also achieved in credit trading compared to credit trading
losses in 2008 arising from the severe decline in global market liquidity.
The narrowing of credit spreads and outperformance of cash products
relative to derivatives resulted in a significant improvement in credit
trading revenue. The narrowing of credit spreads also led to a substan-
tial
increase in other comprehensive income from gains on the mark-
to-market of certain debt securities reclassified from trading to
available-for-sale last year. Energy trading revenue increased primarily
due to strong client volumes and trading gains from declining natural
gas prices. Equity trading revenue increased primarily due to a recovery
of global equity markets compared to significant declines last year.
Advisory and underwriting revenue were higher reflecting stronger
levels of market activity as clients recapitalized to leverage low debt
financing costs and investor demand for new equity issues increased.
Corporate lending revenue increased primarily due to higher average
lending volumes and higher margins. The equity investment portfolio
posted significant losses in the year driven by realized net security
losses due to the strategic decision to exit the Bank’s public equity
investment portfolio.
PCL comprises specific provision for credit losses and accrual costs
for credit protection. The change in market value of the credit protec-
tion, in excess of the accrual cost, is reported in the Corporate segment.
PCL was $164 million in 2009, an increase of $58 million, or 55%,
compared with prior year. In 2009, PCL increased primarily due to two
exposures in the corporate lending portfolio and a single exposure in
the private equity portfolio. The accrual cost of credit protection was
$41 million, a decrease of $6 million, or 13%, compared with the prior
year. Wholesale Banking continues to actively manage credit risk and
held $1.4 billion in credit protection against the lending portfolio,
a decline of $900 million, or 39%, from last year.
Non-interest expenses for the year were $1,417 million, an increase
of $218 million, or 18%, compared with last year. The increase relates
primarily to higher variable compensation on stronger results, higher
severance costs, and ongoing investments in control processes.
RWA declined by $22 billion, or 39%, to $34 billion this year,
primarily due to lower market risk as measured by Value-at-Risk (VaR),
the exit of the public equity investment portfolio, and continued
reductions in credit trading positions outside North America.
Corporate segment reported net loss for the year was $1,719 million,
compared with a reported net loss of $147 million in 2008. The
adjusted net loss for the year was $399 million, compared with an
adjusted net loss of $251 million last year. The year-over-year change
in the adjusted net loss was primarily attributable to lower tax benefits
reported this year, losses associated with retail hedging and corporate
financing activities, and higher unallocated corporate expenses that
were partially offset by a decrease in net securitization losses.
U.S. Personal and Commercial Banking reported net income and
adjusted net income were $633 million and $909 million, respectively,
for the current year, compared with $722 million and $806 million,
respectively, in the prior year. Adjusted net income for the current year
excludes $276 million (US$240 million) of after-tax charges related to
restructuring and integration expenses while the prior year excludes
$70 million (US$68 million) of such after-tax charges. The $103 million,
or 13%, increase in adjusted net income related primarily to the full
year inclusion of Commerce results this year and the translation effect
of a weaker Canadian dollar, partially offset by higher PCL. Actual
adjusted net income for the current year is lower than the previously
announced estimate, as the effects of the economic slowdown, the
low interest rate environment, and higher PCL adversely affected
growth rates in the segment compared to management’s earlier
expectations. Return on invested capital decreased from 6.1% last year
to 4.5% in 2009.
Revenue for the year was US$4,053 million, an increase of
US$1,101 million, or 37%, compared with last year, primarily due to
the full year inclusion of Commerce results. Adjusted for the impact of
Commerce, revenue decreased slightly due largely to margin compres-
sion (including effects of higher non-performing assets), partially offset
by strong loan and deposit growth. Margin on average earning assets
declined by 32 bps to 3.52% compared with last year due to the low
rate environment and increased levels of non-performing loans.
Certain debt securities, including all non-agency collateralized mort-
gage obligations (CMOs), which were previously accounted for as
available-for-sale securities were reclassified to loans in 2009 as a
result of amendments to Canadian GAAP which provide that debt
securities that are not quoted in an active market may be classified as
loans. These debt securities were reclassified at their amortized cost
retroactive to November 1, 2008. As at October 31, 2009, debt securities
with an amortized cost of US$7.3 billion ($7.9 billion) were reclassified
as loans. The impact of reclassification was the reversal of the unreal-
ized loss recognized in other comprehensive income (OCI) with the
offset being an increase in the carrying value of the assets. Under a
loan accounting framework, a general allowance was also required for
certain reclassified debt securities. The general allowance was retroac-
tively established for certain debt securities and totalled US$256 million
at October 31, 2009. The general allowance was recorded by a
US$89 million provision recorded as an adjustment to November 1,
2008, opening retained earnings, a US$75 million provision in the first
quarter of 2009, a US$95 million provision in the second quarter of
2009, and a US$3 million reversal in the fourth quarter of 2009. In
the fourth quarter of 2009 a US$42 million specific reserve was also
recorded against certain of these debt securities. The fair value of this
portfolio as at October 31, 2009 was approximately US$7.0 billion,
or US$321 million below their carrying value, net of specific allowance
for credit losses.
PCL was US$810 million, an increase of US$588 million, or 265%,
compared with last year. Higher provisions related largely to higher
levels of charge-offs, higher reserve requirements resulting from the
economic recession in the U.S, and $209 million of provisions on debt
securities classified as loans. Net impaired loans were US$993 million,
an increase of US$680 million, or 217%, compared to October 31,
2008 due to net new formations resulting from continued weakness in
the real estate markets, the recession in the U.S, and US$181 million
for impaired debt securities classified as loans.
Reported non-interest expenses were US$2,763 million, an increase
of US$1,001 million, or 57%, compared with last year, due primarily
to the full year inclusion of Commerce, higher integration charges,
increased FDIC premiums, and the impact of new stores, partly offset
by Commerce deal expense synergies during the year. Excluding
restructuring and integration charges, adjusted expenses increased
US$736 million, or 44%. The reported efficiency ratio for the year
worsened to 68.0%, compared with 59.8% last year. The adjusted
efficiency ratio for the year worsened to 59.0%, compared with
56.1% in 2008. The efficiency ratios worsened primarily due to margin
compression, higher FDIC premiums, and new store openings. The