TD Bank 2006 Annual Report Download - page 46

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Management’s Discussion and Analysis
42
2005 FINANCIAL RESULTS OVERVIEW
2005 Financial Performance
by Business Line
Canadian Personal and Commercial Banking reported a net
income increase in 2005 of $252 million from 2004. A positive
spread of five percentage points between revenue and expense
growth combined with strong credit performance resulted in
17% earnings growth. Return on invested capital increased from
20.4% in 2004 to 23.1% in 2005 as earnings growth exceeded
the 4% growth in average invested capital. The segment con-
tributed strongly to shareholder value by generating additional
economic profit during 2005 of $228 million over 2004.
Revenue grew by $483 million over 2004. Volume growth
across most banking products was the main contributor to revenue
growth and was particularly strong in business deposits and real
estate secured lending. Volume growth was partly offset by lower
margins. Also contributing to higher revenue were growth in
banking and credit card service and transaction fees and insurance
revenue growth through improved claims experience and new
sales. The acquisition of the insurance business from Liberty Mutual
in 2004 contributed $57 million to revenue growth in 2005.
As compared with 2004, real estate secured lending average
volume (including securitizations) grew by $10 billion and
personal deposit volume grew $4 billion,while other personal
loans were relatively flat. Business deposits grew by $3 billion,
while business loans and acceptances grew by $725 million.
Originated gross insurance premiums grew by $242 million.
Margin on average earning assets decreased from 3.05% in
2004 to 2.96% in 2005, primarily due to a change in product
mix as volume growth was weighted towards lower margin
products, such as real estate secured lending and guaranteed
investment savings accounts.
Provision for credit losses (PCL) comprised $354 million from
personal loans and $19 million from business loans. PCL was
unchanged compared with 2004.PCL as a percent of credit
volume improved to 0.25% from 0.27% in 2004.
Expenses increased by $123 millionfrom 2004. The Liberty
insurance acquisition accounted for $37 million of expense
growth. Employee compensation, marketing, systems projects
and organic insurance business volume growth werethe main
factors contributing to the remaining expense increase, partially
offset by synergies and lower integration expenses related to the
branches acquired from Laurentian Bank in 2004. Average FTE
staffing levels increased by 704, compared with 2004, primarily
due to the growth in insurance business (including the acquisi-
tion) and the addition of sales and service personnel in branches
and call centres. The efficiency ratio for 2005 was 56.3%, an
improvement of 2.4 percentage points over 2004.
U.S. Personal and Commercial Banking net income for the
seven month period to September 30, 2005, was $158 million,
the annualized return on invested capital was 5.4% and the
economic loss was $105 million.
Total revenues were $1.0 billion. The margin on average
earning assets was 4.11% and benefited from balance sheet
de-leveraging in February 2005. Consumer loan growth was
solid, while commercial loan growth slowed late in the year
and residential mortgage loans declined.
PCL was $4 million, reflecting strong asset quality.
Expenses were $549 million, including $10 million of merger
related charges. The average FTE staffing level was approximately
7,284. The efficiency ratiowas 54.7%.
Wholesale Banking net incomein 2005decreased by $166
million from 2004. The return on invested capital for 2005 was
22.3%, compared with 24.7% in 2004. Economic profit for
2005 was $229 million, compared with $278 million in 2004.
Revenue decreased by $208 million from 2004. Capital
markets and investment banking revenues were lower, largely
due to the impact of losses of $153 million incurred due to a
reduction of the estimated value and exit of certain structured
derivatives portfolios. Excluding these items, revenue was up
slightly on significant growth in equity underwriting and equity
facilitation revenues, partially offset by weaker trading revenue
in the equity, credit and interest rate portfolios. Revenue from
the equity investment portfolios decreased as higher security
gains were more than offset by lower interest, dividend and
other income. Lending revenue decreased as margins came
under pressure due to high investor demand for assets relative
to corporate borrowing requirements.
PCL increased by $11 million and were attributed solely to
costs of credit protection. The credit quality of the portfolio
remained strong. Wholesale Banking held $3.2 billion in credit
protection against the lending portfolio, a decrease of $1.3 bil-
lion from 2004.
Expenses increased by $36 million, primarily as a result of a
$43 million restructuring charge, compared with a $7 million
restructuring release in 2004. The underlying change in expenses,
before the impact of restructuring, was a decrease of $14 million,
aresult of lower variable compensation related to weaker per-
formance in the capital markets businesses, partially offset by
higher operating expenses related to infrastructure improvements.
Wealth Management net income for 2005 increased by $80 mil-
lion from 2004 as a result of growth across the Wealth businesses.
The return on invested capital for the year was 16.4%, compared
with 13% in 2004. The economic profit improved by $91 million
over 2004.
Total revenue increased by $156 million from 2004 due to
strong growth in advice-based and asset management businesses.
Mutual fund management fees increased, primarily as a result of
20% asset growth and the shift in portfolio mix to higher earning
fund classes while growth in assets under administration generat-
ed improved results in private investment advice and financial
planning. Trade volumes in discount brokerage declined 3%
while interest revenue increased, primarily due to higher margin
balances and increased deposit spreads.
Expenses increased by $36 million from 2004, primarily due to
higher trailer payments to sellers of the Bank’smutual funds and
higher sales force compensation in private investment advice and
financial planning businesses.
Assets under management at October 31, 2005 increased $13
billion from October 31, 2004, primarily due to strong sales of
mutual funds and growth in institutional assets. Assets under
administrationat the end of the yearincreased $36 billion from
October 31, 2004, primarily due to the addition of new assets in dis-
count brokerage, private investment advice and financial planning.
Corporate reported a net loss of $485 million in 2005, driven
primarily by an increase in the Bank’s contingent litigation
reserve of $365 million related to Enron, amortization of intangi-
bles of $546 million and a tax charge of $163 million relating to
the TD Waterhouse reorganization that preceded the Ameritrade
transaction in the first quarter of 2006. Other expenses included
apreferred share redemption premium charge of $13 million.
These losses were partially offset by gains realized in the non-
coreportfolio relating to loan loss recoveries previously provided
for under sectoral provisions in U.S. subsidiaries of $229 million,
ageneral allowance release of $35 million and gains of $27 mil-
lion resulting from the impact of hedging relationships
accounting guideline (AcG-13). Favorable tax items of $98 mil-
lion included the benefit of a court decision and a $30 million
tax benefit as a result of a higher tax rate applied on sectoral
provisions in 2004.