TD Bank 2012 Annual Report Download - page 34

TD BANK GROUP ANNUAL REPORT 2012 MANAGEMENT’S DISCUSSION AND ANALYSIS32
REVIEW OF FINANCIAL PERFORMANCE
U.S. Personal and Commercial Banking reported net income, in Canadian
dollar terms, for the year was $1,128 million, a decrease of $60 million,
or 5%, compared with last year. Adjusted net income for the year was
$1,422 million, an increase of $152 million, or 12%, compared with
last year. In U.S. dollar terms, reported net income for the year was
$1,123 million, a decrease of $82 million, or 7%, compared with last
year and adjusted net income was US$1,416 million, an increase of
US$127 million, or 10%. The increase in adjusted earnings was primarily
due to strong loan and deposit volume and higher fee-based revenue,
partially offset by higher expenses to support growth, and the impact of
the Durbin Amendment. Adjusted net income for the current and prior
year excluded integration and restructuring charges relating to acquisi-
tions, litigation reserves and Superstorm Sandy. The reported return on
common equity for the year was 6.4%, while the adjusted return on
common equity was 8.1%.
In U.S. dollar terms, adjusted revenue for the year was
US$6,107 million, an increase of US$289 million, or 5%, compared
with last year driven by increased loan and deposit volume, higher fee-
based revenue, and gains on sales of securities, partially offset by the
impact of the Durbin Amendment and the anticipated run-off in legacy
Chrysler Financial revenue. Average loans increased by US$12 billion,
or 17%, compared with last year with an increase of US$9 billion, or
31% in average personal loans and an increase of US$3 billion, or 8%
in average business loans. Average deposits increased US$17 billion,
or 11%, compared with prior year, including a US$10 billion increase
in average deposits of TD Ameritrade. Excluding the impact of
TD Ameritrade IDAs, average deposit volume increased by US$7 billion,
or 7%. The margin on average earning assets for the year decreased by
13 bps to 3.60% compared with last year primarily due to the low inter-
est rate environment and timing of cash flows on acquired portfolios.
Reported PCL for the year was US$778 million, an increase of
US$80 million, or 11%, compared with last year. Adjusted PCL for
the year was US$723 million, an increase of US$25 million, or 4%,
compared with last year due primarily to organic loan growth, the
acquired credit-impaired loan portfolios and the impact of new regula-
tory guidance on loans discharged in bankruptcies, partially offset by
improved asset quality. Personal banking PCL, excluding debt securities
classified as loans was US$391 million, an increase of US$131 million,
or 50%, from the prior year. Business banking PCL, excluding debt
securities classified as loans was US$320 million, a decrease of
US$43 million, or 12%, compared with prior year. PCL for loans
excluding debt securities classified as loans as a percentage of credit
volume was 0.84%, a decrease of 2 bps, compared with last year.
Net impaired loans, excluding acquired credit-impaired loans and debt
securities classified as loans, were US$1,059 million, a decrease of
US$84 million, or 7%, compared with last year due to continued
improvement in credit quality. Acquired credit-impaired loans were
US$3.8 billion at October 31, 2012 compared with US$5.6 billion at
October 31, 2011, while net impaired debt securities classified as loans
were US$1.3 billion compared with US$1.4 billion at October 31, 2011.
Reported non-interest expenses for the year were US$4,107 million,
an increase of US$464 million, or 13%, compared with last year. On
an adjusted basis, excluding the items of note for litigation reserves,
Superstorm Sandy and integration and restructuring charges, non-
interest expenses were US$3,678 million, an increase of US$181 million ,
or 5%, compared with last year due to investments in new stores and
infrastructure, the Chrysler Financial acquisition and economic and
regulatory factors.
The average FTE staffing levels for the year increased by 834, or 3%,
compared with last year due to the Chrysler Financial acquisition and
new stores, partially offset by store closures and consolidations. The
reported efficiency ratio for the year worsened to 67.3%, compared
with 62.7% last year, while the adjusted efficiency ratio for the year
remained flat at 60.2%, compared with last year.
KEY PRODUCT GROUPS
Personal Banking
• Personal Deposits – We continued to build on our reputation as
America’s Most Convenient Bank by opening 41 new stores in fiscal
2012. We delivered strong year-over-year growth driven by maturing
stores and a competitive product offering.
• Consumer Lending – Our principal product offerings of home equity
loans and lines of credit and auto loans offered through a network
of auto dealers continued to grow organically. Loan loss rates have
improved over the prior year and remain at the lower end of loss
rates in the industry.
• Residential Real Estate Secured Lending – We grew profitable
market share and franchise customers, with strong credit quality,
during a tough economic environment. Loan volumes have increased
by US$4 billion over last year driven by higher originations. In-store
originations are a key focus to leverage cross-selling opportunities.
• Small Business Banking and Merchant Services – The Small Business
Banking group continues to be among the top ranked small busi-
ness lenders in most of our markets. Merchant Services offer point-
of-sale settlement solutions for debit and credit card transactions,
supporting over 15,000 business locations in our footprint.
Commercial Banking
• Commercial Banking – Commercial and industrial loan demand
increased significantly while commercial real estate demand
remained relatively low resulting in strong overall loan growth
at competitive spreads. Commercial loan volume grew by 8%
organically, significantly outperforming peers. Loan losses continue
to improve throughout the portfolio and our overall asset quality
remains better than the industry.
BUSINESS OUTLOOK AND FOCUS FOR 2013
We will continue to build on our strength of industry leading
convenience banking, providing superior customer service, and
efficient, local decision making. We expect to open in excess of
30 new stores in fiscal 2013. Revenue growth will be muted by
the impact of prolonged low interest rates. Adjusted for acquisi-
tions, the rate of expense growth is expected to decline driven
by productivity improvements while continuing to invest in
future growth including new stores and technology infrastruc-
ture. PCL is expected to continue to normalize in 2013.
Regulatory and legislative actions will continue to impact the
operating environment and economics of TD Bank which will
result in an increased focus on evolving the product offering to
TD Bank’s customers while maintaining a strong market position
despite increased competition. The goal of U.S. Personal and
Commercial Banking is to achieve consistent earnings growth
over the long term.
Our key priorities for 2013 are as follows:
• Continue broad based organic growth of loans and deposits,
while adhering to a conservative risk appetite.
• Continue to deliver convenient banking solutions and services
that exceed customer expectations.
•
Continue business expansion by opening new stores in larger
markets such as New York, Florida, Boston and Washington, D.C.
• Improve efficiency and productivity to counter margin
compression and drive long-term competitiveness.
• Broaden and deepen customer relationships through
cross-selling initiatives.
• Select asset purchases to optimize the balance sheet
(i.e., announcement of agreement to acquire Target’s
U.S. credit card portfolio).