TD Bank 2003 Annual Report Download - page 27

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TD BANK FINANCIAL GROUP ANNUAL REPORT 2003 • Management’s Discussion and Analysis 25
Fiscal 2003 was a very satisfying year for Wholesale
Banking. We repositioned the business to focus on our core
strengths and strategy to deliver consistent lower risk earn-
ings, implemented stricter limits around credit exposures and
industry concentrations, and reduced the non-core lending
portfolio with no additional negative impact on earnings.
Review of financial performance 2002
Financial results for 2002 were adversely affected by weak
credit conditions and a strained operating environment
resulting from heightened investor concerns over corporate
governance issues and lingering geopolitical risks. On a cash
basis, Wholesale Banking reported a net loss of $657 million
in fiscal 2002 compared with net income of $926 million in
the prior year. The decline was due primarily to an increase
in provisions for credit losses, which had an after-tax impact
of approximately $1,400 million. Significant declines in trading
volumes, deterioration in equity markets, widening credit
spreads and weak corporate activity led to lower revenues
in 2002. Total revenue was $2,668 million, a decline of
$495 million or 16% from revenues of $3,163 million in 2001.
Provisions for credit losses rose sharply to $2,490 million in
2002, a $2,163 million increase from $327 million in 2001.
The increase was mainly related to significant credit deteriora-
tion in the telecommunications and utility sectors, exposures
to companies impacted by malfeasance and the fallout from
the political instability in Argentina. During fiscal 2002, we
established $1,450 million of sectoral provisions related to
loans in the non-core portfolio. At the end of fiscal 2002,
we had drawn down $185 million of the sectoral allowance
to establish specific allowances. Cash basis expenses of
$1,235 million in 2002 were $138 million below 2001 expens-
es of $1,373 million. The decline in expenses was driven
by lower variable compensation, offset partially by additional
investment in technology and risk management.
Financial results of key product segments within
Wholesale Banking
Corporate banking revenue declined 57% from $752 million
in 2002 to $326 million in 2003. This decrease reflects: (i) the
reclassification of $11.2 billion in loans and acceptances
(greater than 50% of the total loan portfolio) to the non-core
portfolio at the beginning of 2003; (ii) higher costs incurred
in 2003 for credit protection against the core loan portfolio;
and (iii) lower assets in the core loan portfolio due to lower
corporate loan activity.
Investment banking and capital markets revenues declined
11% from $1,757 million in 2002 to $1,559 million in 2003.
Investment banking and underwriting revenues increased
over last year reflecting better market conditions and an
improvement in our franchise rankings and market share.
These gains were offset by weaker trading performance in
our structured product businesses reflecting reduced corpo-
rate activity levels in structured transactions and lower
market volatility.
The equity investment portfolios, comprised of public
and private equity, had marginally lower revenue in 2003 on
reduced net security gains. Taking into account the increase
in the unrealized gains in the portfolio from $228 million
at the end of 2002 to $429 million at the end of 2003, the
overall portfolio had significantly improved results in 2003
compared to 2002.
The non-core portfolio was established at the end of fiscal
2002, representing just over half our total lending portfolio
at the time with a majority of the exposures in communications
and utilities and almost exclusively outside of Canada. A key
criteria in segregating the loan portfolio between core and
non-core was total client relationship returns. The non-core
portfolio represents accounts on which the risk-return rela-
tionship were unsatisfactory. The non-core portfolio strategy
is to proactively manage down the portfolio as quickly as
possible in a manner which optimizes shareholder returns,
leading to the eventual redeployment of this capital. We
aggressively reduced the size of the portfolio from $11.2 billion
to $4.2 billion at the end of 2003, releasing approximately
$600 million in invested capital and $8 billion in risk-weighted
assets. During 2003, the non-core portfolio generated
$136 million of revenue, net of $113 million of losses on
derivative and loan sales, and after reflecting a release of
$80 million in sectoral allowances reported net income of
$103 million.
Total revenue
(millions of dollars)
$2,177 million
01 02 03
$4,000
3,000
2,000
1,000
0
Cash basis net income (loss)
(millions of dollars)
$363 million
01 02 03
$1,000
500
0
-500
-1,000