TD Bank 2006 Annual Report Download - page 41

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Management’s Discussion and Analysis 37
BUSINESS HIGHLIGHTS
•Wealth management assets under management grew
$21 billion, or 16%, over the prior year, mainly due to
a combination of new sales and market appreciation.
Assets under administration, excluding the impact of TD
Waterhouse U.S.A., increased by $27 billion, or 20%, from
2005, primarily due to growth in the sales force, net new
client assets gained and market growth.
•Record net income of $590 million was 37% ahead of
2005, due to growth in all business lines.
•TD Ameritrade and TD Waterhouse U.S.A. contributed
earnings of $180 million for the year, compared with TD
Waterhouse U.S.A. previous year earnings contribution
of $108 million.
•Canadian Wealth Management increased its client-facing
advisors by 145, exceeding its target of 130.
•TD Mutual Funds jumped to fourth from the number six
position in industry ranking and has been number two in
net sales in long-term mutual funds for four years in a
row with $3.3 billion in net fund sales.
•The discount brokerage operation introduced an active
trader platform in Canada to target its frequent trading
customers.
•The investment in the under-penetrated businesses, con-
sisting of the advice-based channels, showed excellent
progress as record earnings were set in this channel
through a combination of new advisors and growth in
assets.
•The United Kingdom operation was consistently prof-
itable this year, after many years of losses, primarily due
to new business gained through targeted acquisitions
and strong cost controls.
CHALLENGES IN 2006
•Price competition, in both Canada and the U.S., continued
to negatively impact commission revenue. Increased
trading volumes,improved spreadsand growth in margin
and deposit balances, more than offset the price declines.
•Both Canadian and U.S. capital markets were unstable
at various points in the year, due to investor concerns
around the direction of interest rates, inflationary
pressures, and in Canada, volatile commodity prices
for energy and resources. The decline in the new issue
market, due to these challenges, negatively affected
revenue growth opportunities in our discount and full
service brokerage operations.
INDUSTRY PROFILE
The wealth management industry in North America is large,
diverse and very competitive. Profitability is dependent on price
competition, the ability to attract and retain client assets and
market stability. Revenue growth exceeding cost growth contin-
ues to be a key financial goal across the industry. Increasing
operating leverage and scale continues to be a priority to drive
earnings. Cost management is a critical success factor in the
industry and consolidation within the asset management
business continues. Key events in 2006 were:
•The industry benefited from strong growth in long-term mutual
fund sales and strong growth in assets in distribution channels.
The large Canadian banks continue to exert ever-increasing
influence on the mutual fund industry by leveraging their
distribution networks.
•In Canada and the U.S., discount brokerage revenues were
hampered by intense price competition, which was partially
offset by strong trading volumes.
•Capital markets in North America were both buoyant and
volatile during the year, creating short-term uncertainty for
investors.
Longer-term trends for the wealth management industry are
optimistic as benefits should be realized from an aging boomer
population.
OVERALL BUSINESS STRATEGY
The strategy for Wealth Management has remained consistent
for the last three years and is summarized as follows:
•Develop an integrated asset-gathering, client-focused
organization.
•Continue to grow under-penetrated businesses at above
average growth rates.
•Leverage the wealth brands of TD Waterhouse and TD Mutual
Funds as a premier, trusted advisor.
•Develop a top tier continuum of products, services and
solutions designed to meet the needs of each client segment.
•Leverage technology to enhance the systems architecture
supporting the customer experience and to increase operational
efficiency.
•Leverage the strong client referral relationship with Canadian
Personal and Commercial Banking to ensure clients are serviced
in the most appropriate distribution channel within Wealth
Management.
REVIEW OF FINANCIAL PERFORMANCE
Wealth Management’s net income for 2006 was $590 million,
compared with $432 million in 2005, an increase of 37% which
came from the equity share in TD Ameritrade and growth across
the Wealth businesses. The return on invested capital for the
year was 20%, compared with 16% in 2005. The economic
profit for 2006 was $257 million, a significant improvement
of $141 million over 2005.
Total revenue decreased by $486 million from 2005 to
$2,260 million, mainly due to the sale of TD Waterhouse U.S.A.
to Ameritrade, partially offset by stronger results in the domestic
businesses. Domestically, interest revenue grew due to higher
margin balances and client deposits, and improvement in
spreads. Other revenue growth in Canadian Wealth
Management was a result of higher transaction revenue and
higher mutual fund fees due to asset growth. Mutual fund
management fees increased as a result of 17% asset growth
and the shift in portfolio mix to higher earning fund classes,
while growth in assets under administration generated improved
results in private investment advice and financial planning.
Discount brokerage revenues increased as a result of higher
margin volumes and 37% higher trading volumes, partially
offset by a decline in commission per trade.
Expenses were $1,575 million in 2006, a decrease of $508
million from 2005, primarily due to the sale of TD Waterhouse
U.S.A. to Ameritrade. This reduction was partially offset by
higher trailer payments to sellers of the Bank’s mutual funds and
higher sales force compensation in private investment advice and
financial planning. Efficiency ratio improved by 6.2% to 69.7%
over the last year.
Assets under management of $151 billion at October 31,
2006 increased $21 billion, or 16%, from October 31, 2005
due to market growth and strong sales of mutual funds. The
impact of market growth on assets under management was
approximately 6%. Assets under administration totalled $160
billion at the end of the year, decreasing $155 billion, or
49%, from October 31, 2005, mainly due to the sale of TD
Waterhouse U.S.A. to Ameritrade. The decline in assets under
administration was partially offset by significant growth in
domestic assets, mainly due to the addition of new assets in
all businesses combined with market appreciation.