TD Bank 2009 Annual Report Download - page 46

TD BANK FINANCIAL GROUP ANNUAL REPORT 2009 MANAGEMENT’S DISCUSSION AND ANALYSIS42
REVIEW OF FINANCIAL PERFORMANCE
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 substantial
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 protection,
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.
BUSINESS HIGHLIGHTS
•Record net income for the year of $1,137 million.
•
Return on invested capital of 30%, compared with 2% last year.
•Improved asset values, high volatility, elevated volumes,
wider bid-offer spreads, and tightened credit spreads drove
record revenue in several businesses.
•Reduced risk-weighted assets (RWA) by $22 billion, or 39%,
to $34 billion.
•Grew franchise fixed income and FX businesses.
•
Repositioned credit trading business to focus on North America.
•Centralized Asia-Pacific presence in Singapore.
•Executed strategic decision to spin out the TD Capital private
equity fund of funds business.
•Maintained top-three dealer status in Canada (for the nine-
month period ended September 30, 2009):
– #1 in equity block trading
– #2 in fixed-income trading
– #2 in fixed-income underwriting
– #3 in equity underwriting (full credit to bookrunner).
CHALLENGES IN 2009
•Strategic decision to exit the public equity investment
portfolio realizing security losses.
•Managing the residual risk and earnings impact associated
with the exit of non-core positions and business lines.
INDUSTRY PROFILE
The wholesale banking sector in Canada is a mature market with
competition primarily from the Canadian banks, large global invest-
ment firms, and to a lesser extent, small niche investment banks and
dealers. Credit market turmoil has altered the competitive landscape as
some competitors have exited the market or retrenched their operations.
While capital is now returning to the market, there is a greater focus
on client driven revenue given pressures to maintain a lower risk profile
and reduce balance sheet usage. In order to successfully compete,
firms offer a complete package of products and solutions to clients
while maintaining a disciplined approach to risk management, with
credit being a key component. Currently there are attractive returns
and growth opportunities for wholesale banks that offer innovative
client solutions and ideas which span across products and regions.
OVERALL BUSINESS STRATEGY
To provide top quality wholesale banking solutions to existing and
prospective corporate, government, and institutional clients in regions
where we operate:
•In Canada, the strategic objective is to continue to strengthen our
position as a top-three dealer.
•In the U.S., extend the goals of the Canadian franchise and leverage
the networks of our U.S. businesses. The focus is on growing
government fixed income and FX businesses.
•
Globally, extend the goals of our North American franchise, including
trading in liquid currencies with high quality government, institu-
tional, and corporate clients, as well as underwriting, distributing,
and trading high quality fixed income products.
•
Support and enhance the Bank’s brand with our corporate, govern-
ment, and institutional client base.