TD Bank 2009 Annual Report Download - page 51

TD BANK FINANCIAL GROUP ANNUAL REPORT 2009 MANAGEMENT’S DISCUSSION AND ANALYSIS 47
Non-interest expenses were $1,615 million in 2008, an increase of
$64 million, or 4%, from 2007. The increase in expenses was primarily
due to the inclusion of U.S. wealth management businesses and
other items such as the new mutual fund administration fee and the
continued investment in growing the sales force in our advice-based
businesses. The efficiency ratio worsened by approximately 230 bps
to 69.4% over the last year primarily due to the addition of U.S.
wealth management businesses.
TD Ameritrade’s contribution to Wealth Management earnings was
$289 million, compared with $261 million in 2007. TD Ameritrade
delivered record net income as it generated 515,000 net new accounts,
representing an increase of 8% over 2007 and resulting in a 17%
increase in revenue with asset-based revenue increasing by 12%.
While TD Ameritrade’s underlying earnings increased by 24%, our
equity share of those earnings increased by 11% due to strengthening
of the Canadian dollar and a change in transfer pricing.
Assets under administration decreased by $12 billion, or 6%, prima-
rily driven by market volatility partially offset by the inclusion of assets
from U.S. wealth management businesses of $10 billion and the
addition of net new client assets. Assets under management grew
$10 billion, or 6%, over the prior year, mainly due to the inclusion
of assets from U.S. wealth management businesses of $8 billion, the
addition of net new client assets and increased mutual fund assets
under management from TD Ameritrade, which were partially offset
by the impact of market-related declines.
U.S. Personal and Commercial Banking’s reported net income and
adjusted net income were $722 million and $806 million, respectively,
for the current year, compared with $320 million and $359 million,
respectively, in the prior year. Adjusted net income for the current
year excluded a $70 million after-tax charge related to restructuring
and integration charges and $14 million related to other tax items.
Adjusted net income in the prior year excluded a $39 million after-
tax charge, being the Bank’s share of TD Banknorth’s restructuring,
privatization, and merger-related charges. The $447 million increase
in adjusted net income related primarily to the contribution
of Commerce since April 2008 and an increased ownership in
TD Banknorth from the privatization transaction that was completed
in April 2007, when the Bank acquired 100% ownership interest in
TD Banknorth (the average ownership percentage increased from 72%
in 2007 to 100% in 2008). In addition, the segment now includes
the banking operations from TD Bank USA which provides banking
services to customers of TD Ameritrade. Prior period results have
not been restated to include the results from TD Bank USA as they
were not significant. The return on invested capital increased from
4.6% in 2007 to 6.1% in the current year.
Revenue grew by $1.0 billion, or 54%, over last year, primarily due
to the acquisition of Commerce, offset in part by margin compression
and a stronger Canadian dollar. Margin on average earning assets
declined by 9 bps from the prior year to 3.84% in 2008, compared
with 3.93% in 2007.
PCL increased by $106 million, or 88%, compared with last year.
Higher provisions related largely to increased loan balances resulting
from the Commerce acquisition, as well as increased charge-off
levels. Impaired loans and loan write-offs increased during the year
and since the acquisition of Commerce, due largely to weakness
in the U.S. economy.
Expenses increased by $570 million, or 47%, over 2007, due primarily
to the added expenses of Commerce. The efficiency ratio for the year
was 59.8%, compared with 62.7% in 2007. The improved efficiency
ratio was primarily due to cost saving initiatives and expense control
discipline. The average FTE staffing level was 19,773 at the end of 2008
compared with 8,032 at the end of 2007 with the increase due to
the approximately 12,000 employees of Commerce.
Wholesale Banking reported net income was $65 million in 2008,
a decrease of $759 million from $824 million in the previous year.
Results this year were significantly impacted by a challenging operating
environment characterized by a severe decline in global liquidity and
reduced market activity as the weakness in global financial markets
continued to broaden and intensify. Substantial credit trading losses
incurred were mainly attributable to a significant decline in market
liquidity as well as weaker and more volatile credit markets. The return
on invested capital for 2008 was 2%, compared with 30% in the
previous year.
Revenue for the year was $1,250 million, compared with
$2,494 million in the previous year. Capital markets revenue suffered
from a sharp deterioration in market conditions, especially in the
fourth quarter stemming from a broad-based decline in global financial
markets. Revenue was lower than last year primarily due to substantial
credit trading losses. The losses were mainly attributable to weaker
proprietary trading revenue, largely related to significant volatility in
credit markets and a dramatic decline in global market liquidity. The
decline in liquidity led to mark-to-market trading losses due to signifi-
cant widening in the pricing relationship between assets and CDS, as
well as lower valuations on financial products due to a widening in the
bid/ask spread. As a result of this continuing deterioration, Wholesale
Banking has repositioned its credit trading business to focus on North
America. In addition, effective August 1, 2008, Wholesale Banking
reclassified certain debt securities into the available-for-sale category.
The debt securities in the available-for-sale category will be managed
with the goal of recapturing value over time as the markets stabilize.
In addition, the decline in liquidity led to lower mark-to-market values
on loan commitments. Equity trading revenue declined primarily due
to a significant decline in global equity prices as well as lower non-
taxable transaction revenue compared to last year. Advisory and under-
writing revenue was down, reflecting lower levels of market activity
which was impacted by weaker financial valuations, higher funding
costs, and a decline in investor demand for new issues. These decreases
were offset by higher foreign exchange and interest rate trading, due
primarily to volatility in the currency and interest rate markets which
led to an increase in client activity and additional trading opportunities.
Revenue from the equity investment portfolio decreased as gains in our
private equity portfolio were largely offset by write downs in our public
equity portfolio due to a significant decline in North American equity
markets. Corporate banking revenue increased due primarily to an
increase in lending volume. In addition, Wholesale Banking results
benefited from favourable tax items.
PCL were $106 million in 2008, an increase of $58 million from
$48 million in 2007. In 2008, the increase in PCL related largely to two
exposures in the private equity portfolio. The accrual cost of credit
protection in Wholesale Banking in 2008 was $47 million, a decrease
of $1 million compared with 2007. Wholesale Banking continues to
actively manage credit risk and held $2.3 billion in credit protection
against the lending portfolio, a decline of $0.3 billion from last year.
Expenses were $1,199 million, compared with $1,261 million in the
previous year. The decrease related primarily to lower variable compen -
sation on weaker financial results.
Risk-weighted assets of Wholesale Banking increased by $12 billion
to $56 billion this year, primarily related to an increase in market
risk driven by an increase in market volatility, and higher corporate
lending exposures.
Corporate segment reported a net loss of $147 million in 2008,
compared with a reported net loss of $162 million in 2007. On an
adjusted basis, the net loss was $251 million for the year, compared
with a net loss of $9 million last year. The year-over-year change in
the adjusted net loss was primarily driven by higher unallocated corpo-
rate expenses, securitization losses, the impact of retail hedging
activity, and increased costs related to corporate financing activity.