Toronto-Dominion Bank (TD) 2002 Q4 法說會逐字稿

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to Toronto Dominions Bank's fourth quarter results conference call. At his time all participants are in a listen-only mode. Following the presentation we will conduct a question and answer session.

If anyone has any difficulties hearing the conference, press star, zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded and please stand by for Mr. Dan Marinangeli.

Well, perhaps we could get started. Welcome to the TD Bank Financial Group's fourth quarter 2002 investment presentation.

My name is Dan Marinangeli and I'm the CFO of the Bank. This meeting is being Webcast in audio and video as well as a telephone conference call. Various media participants are listening to the meeting as such. Please consider this meeting to be on the record.

After the formal presentation, we'll entertain questions from those present as well as pre-qualified analysts and investors on the phone. Those watching the Webcast will be able to e-mail us questions. There is a slight delay between the phones and the Webcast so we suggest one or the other, but not both.

With us today is Charlie Baillie, the Bank's Chairman and CEO. He will present introductory comments. I will cover our financial performance followed by Tom Spencer, Vice Chair Group Risk Management on risk management issues. And concluding the presentation will be Ed Clark, President and COO who will discuss our businesses. Also present to answer your questions today is Bob Dorannce, the new appointed Chairman and CEO of TD Securities.

This presentation may contain forward-looking statements and we draw you attention to the statement concerning forward-looking statements at the end of our formal presentation. Charlie.

Thank you, Dan, and welcome to those of us who have joined us today either in person, on the telephone or who are watching our Webcast.

Before I pass the microphone to Dan, who will be taking us through the numbers, I wanted to make a few comments. This will be my last analyst meeting and it clearly is not what I had envisaged. When we made our announcement in July regarding our revised strategy for TD Securities and our sectoral provisions, I thought we had taken the right steps to put our corporate lending challenges behind us.

Regrettably, before we could too far in implementing our revised strategy, we faced further deterioration in the utilities sector. With this deterioration, we took additional provisions for credit losses, and made an even more dramatic shift in our approach to corporate lending. We are materially reducing our exposure to corporate lending so that we will never again be as vulnerable.

We strengthened our organizational structure within TD Securities, making responsibility lines clear. We are also enhancing our credit and business processes, including being more proactive in hedging risks, and leveraging industry views through independent research.

We have moved decisively, and I am confident that with the steps Ed and I have taken together, we have the right solutions in place. But, I cannot express how disappointed and embarrassed I was to stand up three weeks ago with another problem.

A good leader takes responsibility for the actions of his or her team. As I've said in the past, this happened on my watch and I take the responsibility for the actions that have brought us to where we are today. At the same time, Ed and I believe in a culture of accountability, and our recent actions should bear that out.

While I feel dreadful about the loan losses and our current results, I have a very sanguine outlook. I appreciate better than most that one cannot guarantee the future. But, we have taken decisive action. We are now heavily reserved, and we are seeing some preliminary signs that the worst of the corporate lending problems are behind us.

This year's problems have been difficult for everyone, but they are cyclical in nature, and the secular strength of this franchise is what matters in the long term. That strength we have in abundance.

I'm pleased with the strength of the franchise, and believe TD's future is brighter than ever. When I became CEO six years ago, TD was the smallest of the big five. Through the efforts of a dedicated team, today we have three core businesses, and we are large enough to firmly control our own destiny.

With the integration of Canada Trust, we have moved from the smallest to the largest and strongest retail franchise in Canada. TD Waterhouse gives us a global footprint that will prove an unparalleled asset, and will be virtually impossible to replicate. TD Securities has evolved from a marginal participant to the leader in derivatives and fixed income and a force in equities.

When I announced my retirement as CEO in October, I agreed to stay on as Chairman in order to provide institutional memory, assist with the transition, and provide ongoing advice. Ed and I worked very closely together to make this leadership transition a smooth one despite the recent adversity we've faced. We are completely aligned on the strategy, organization structure, and processes we need to implement to adapt to the changing circumstances we face.

Given the fact that I firmly believe we have strong plans in place, and the right management team for the times, I think it is appropriate to pass the torch sooner rather than later. I've told the board that I shall be stepping down as Chairman at the next annual general meeting.

The decision as to who will be the next chair resides with the board of directors. They will have a number of factors to consider when making their decisions, including the ongoing debate on corporate governance. It is important to note, however, that the board has indicated, as I do, that it has full confidence in Ed's ability as CEO and as Chair, should they decide to have an executive chair.

Having worked with Ed over the past three years, there is no doubt in my mind that he will lead the bank to new heights. It is time for the new team to shine, and shine they will. TD is moving into a new era and we look forward to a prosperous year and a prosperous decade. I'd like to thank you for participating in these analyst meetings , I've enjoyed all but the last few. I would now like to pass the microphone over to Dan, who will take us through the numbers.

Thanks Charlie. We reported earnings per share this quarter on a cash operating basis, actually a loss of 10 cents per share. On a GAP basis that's 34 cents per share loss. Both of these numbers are well within the range of loss that we announce earlier this month.

On a more positive front TD Canada Trust had net income of $287m this quarter, that's up $10m over last year and it's a new record for TD Canada Trust. Wealth management net income $22m, up 16% year over year. TD Waterhouse had a net loss of $4m compounded in that number verses $7m in the same quarter last year.

TD Securities net loss was $357m verses income of $239m last year. TD Securities took $841m of the $950m worth of credit losses this quarter. The $950m is comprised of $350m quarterly specific provision and a $600m extra in sectoral provisions taken in Q4. The specific provision compares to $400m in Q3 of this year.

Pier One Capital, at the end of the year, is at 8.1%. This is higher than expected. We have you number that was lower than this, a few weeks ago. We were much more successful in our risk weighted asset reduction program than we had anticipated and we were able to move some of the actions that we anticipated in taking Q1 up to Q4. So, we did reduce our risk weighted assets by a fairly large amount this quarter.

Looking at the full year, you see that for the year cash operating earnings were $442m. That's down very significantly from the $2.075b of last year. Obviously, the major impact here is higher credit losses, but it's interesting, I think, to note as well that our revenue, which isn't impacted by credit losses, was also down by 5% and we were only able to reduce expenses, other than PCL, by 2%. So, we weren't able to make up the revenue decrease through expense decreases to year.

Looking at the business lines for the year you can see that TD Canada Trust had a $1.114b, it's up 2.2% from the same number last year or from $1.09b last year. The Wealth Management businesses were down slightly year over year, 131 verses 148 and the TD Securities results, obviously, very significant declines in profitability from a record $914m last year to a loss this year of $663m and that had the impact of taking down the total bank to $526m for the year.

Looking at the reconciliation between cash operating earnings and reported GAP basis earnings, there's' only reconciling item this quarter and it's the amortization of intangibles, $156m or 24 cents a share, taking your from a loss of 10 cents to a loss of 34 cents. On a full year basis the amortization of intangibles represented 98 cents per share, $634m. We also had a relatively small special gain on the sale of our mutual fund record keeping business that was $32m post tax or five cents per share.

Looking at the projected capital ratios over the coming year, there's been a fair degree of interest, I think, on our capital ratios. What we've done here is project what our capital ratios might be at the end of the year, assuming that your analyst forecast for earnings are correct, and risk weighted asset growth is a variety of items from five% up to 10% and we've impounded about $60m per quarter in our dividend reinvestment plan which is the going rate, the running rate, and you can see that on a 10% risk weighted asset growth, which is at the high end of a range, we've got 8.8% by the end of the year and on a by percent growth of risk weighted assets, we'd get 9.2% at the end of the year. Perhaps more importantly our net common ratio, which currently stands at 6.1%, that's up from a 5.9% figure last quarter, would be at--in the range of 6.7 to 7%. This would take us well into the current range of our peer group.

If we look at the specific results of TD Canada Trust first, first looking at revenue and net interest margin, margins were quite stable. They were down slightly from last year and slightly from last quarter two basis points. Revenue at a 1.465b was up slightly from last quarter, but actually only up about one percent, 1.3%, year-over-year. There are some special items in the fourth quarter of last year. If you exclude those items, revenue is up about 4% year-over-year.

Moving on to expenses and operating efficiency, expenses held fairly well this quarter, 886m, and that's actually down from last year which was 908. There was a bulge in the fourth quarter of last year, you will recall, based on the integration efforts going on within PD Canada Trust. That bulge has been taken out of the system, up only slightly from the previous quarter. We're effectively reinvesting expense synergies in the improvement of systems and processes within Canada Trust to support the customer service model.

Operating efficiency at 58.7% is up a little bit from the 58.5& in the last quarter, but down considerably from the very high 60.8% efficiency ratio achieved in the fourth quarter of last year. Expenses are down $22m year-over-year; we're quite pleased with that. On a full-year basis, efficiency this year is 58.9 versus 59.6 last year. Profitability and operating ROE, again I mentioned total profitability at $287m is up 10m from last year. That's 4% over the last year's number, up only slightly from the 282m last quarter. On an operating basis, ROE is 27%. Quite consistent with the figures we've gotten in earlier quarters.

Moving on to some market share data. First, personal loans and mortgages. We had a decline year-over-year, personal loans and mortgages, of about 44 basis points in market share, but we've been able to reverse the trend in the most recent quarter and increased our market share by about three basis points. Since the announcement in August of '99 of the merger, our market share in personal loans and mortgages is still up 32 basis points. The volume growth in loans and mortgages this year was 5.3%.

Looking at personal deposits. We had a slight decline of 11 basis points in our core deposits this quarter, but that's still up 66 basis points year over year. On a term basis we're down 37% year over year, but up very slightly only one basis point in the current quarter.

We are building a better bank. And as evidence of that you can see that our customer service index is at a new high. Since the merger, 84.4% up from 84 last quarter and it's even up from the -- well up from the merger announcement date of 81.6%. There are 24 more branches to be merged and they'll be done over the next six to nine month period.

Looking at quarterly provision for credit losses. The quarterly provision in TD Canada Trust this quarter was $120m – 27m of that related to small business and commercial lending, whereas 93m related to personal lending. You'll recall that in the first two quarters we had some problems in our collections process. Those problems are definitely behind us. That related to about 38m of losses in the first and second quarter.

Last year in Q4 of '01 we had virtually no losses in the small business or commercial segment. It's clear that that was not a sustainable position to be in. The third quarter also included $20m of agriculture sectoral, which was transferred into specific losses -- specific loan losses this quarter.

Looking at credit losses on an annual basis, $505m -- 38 of that related to the problem in collections, 102m related to small business and commercial, and 365m related to personal lending. Up from 340m the previous year. Again, the commercial and small business last year was an exceptionally low 40m up to 102m this year.

Both of these -- the 505m is down from guidance that we gave you in Q2 and in Q3 and it's down 35m from the original guidance given to you in the second quarter. So, we're quite pleased with that.

Wealth Management. We've broken the revenue and earnings out here between TD Waterhouse, which is the blue section of this overhead, to the rest of Wealth Management, which is the green section. You can see that year over year the revenue in TD Waterhouse is up 3% . That's despite the fact that total trading volumes on a trade per day basis are down considerably.

On the main Wealth Management business, revenue is down $10m from last year representing lower funds under management and a lower average -- lower weighted average fee in the retail mutual fund complex.

On an income basis, the rest of Wealth Management is very stable over the period with profitability between $26 and $29m. The results of TD Waterhouse, again, a loss this quarter. A $4m loss. That's slightly better than the $7m loss last quarter and the $7m loss last year. An interesting point of these items is that there some write downs inherent in the most recent two quarters relating to some international investments. International joint venture investments. And if those write downs had been excluded, Waterhouse would have made a small profit in both quarters.

Assets under management are not surprisingly down from the previous quarter. Two reasons for that: we've lost some assets under management in the quantitative index management business as one of our major customers internalized some of their assets. The other reason is that we've had market declines, of course, this quarter, which tended to drive the assets under management figure down. We're at 112b this quarter, versus 119 the same quarter of last year.

TD Waterhouse operating statistics are on this slide. The key statistics, here, are trades per day -- trades per day at 82,000 average trades per day, down from 96,000 average last quarter, and 90,000 average trades per day last year -- about a 10% decline year-over-year, and a 15% decline quarter-over-quarter. Again, as I mentioned before, despite lower trades per day, Waterhouse is actually up in revenue year-over-year. It's because of price increases. We've adjusted both the commissions on trades. We've adjusted the inactivity fee in Waterhouse, and we've adjusted the margin loan rates, as well, which has helped keep up the revenue.

We've announced a number of times over the last few quarters whether we're comfortable with the TD Waterhouse business model, and the answer has always been, "Yes, we are." And I think some of the reasons why we are comfortable with the model is because we've seen continually improved new account generation statistics recently, and I've got some stats here on this chart, which point out this fact.

We've looked at two periods in time -- March of 2000 versus October of 2002. You will recall that March of 2000 was the absolute peak of the internet brokering craze, and it was the absolute volume peak in TD Waterhouse. We were getting 1.8 times the number of accounts transferred into Waterhouse at this point. We're still getting 1.4 times the number of accounts transferred in from other brokers, versus the amounts -- or the number of accounts transferred out. So, that's slightly less in our favor. But, the average size of the transferred in accounts is much higher now, and the average size of the transferred out accounts is much smaller than it was in March of 2000. This is in U.S. dollars -- the average account transferred in is $92,000, versus $68,000 transferred in in March of 2000. The average size of accounts transferred out is only 62,000 now, versus 117,000 in March of 2000.

And finally, the average size of new accounts -- that is accounts starting from scratch, not transferred in from other brokers -- is up from a little less than $15,000 U.S. to about $39,000 U.S. So, we're getting higher quality accounts in and we're maintaining our advantage over other brokers in terms of the ratio of accounts transferred, versus accounts transferred out.

So again, this is a robust business model. We continue to attract new customers, and the customers that we do attract are stronger than the ones in previous periods.

TD Securities, on a quarterly cash net income basis -- obviously Q3 and Q4, very poor results, resulting from the very high credit loss figures. Obviously, the ROEs of these quarters are going to reflect the losses, as well.

If you look at the actual source of revenue in TD Securities on this chart, you can see that the -- there's been a number of changes in the mix of business in TD Securities. The peak in the last year was certainly in quarter one of this year where we had exceptionally strong debt capital markets revenue, that is not the case this quarter. Debt capital markets includes fixed income, high yield interest rate derivatives, money market sales, credit derivatives and customized solutions group. That result in Q4 is -- although it's up from Q3 is down considerably from the peak of revenue in Q1.

The green bar, the corporate bank including lending syndications and fee revenue from the corporate clients has been declining now since the peak reached a gain in Q1 and Q2 of this year, down again in Q4. Good news is equity capital markets this quarter. This was the highest quarterly revenue from equity capital markets. Equity capital markets include institutional equities, convertible arbitrage, equity options and equity derivatives.

I guess I should go back and point out that -- that didn't work. I can't go back, sorry. What I meant to say was that if you exclude the impact of security gains out of the actual revenues in TD Securities you can see that in Q4 revenue before security loss is $580m is up considerably from the $534m recognized in Q3, but down a gain significantly from both Q1 and Q2. So, hopefully the worst is behind us in terms revenue in TD Securities and the trough of the current market may have been reached in the third quarter.

Looking at the quarterly provision for credit losses, TD Securities absorbed $841m worth of credit losses this quarter. That's down from the $1.132b absorbed last quarter. Specifics this quarter, $241m plus the $600m added sectoral that we booked in Q4. If one wanted to determine what the total specific losses were, the actual losses this year, you'd simply take the sum of the specific provisions in the first or in the four quarters and then add the $185m ,000,000 telecomtelecomtelecom draw down of the sectoral reserves in Q4. If you were to do that you'd get a $1.225b being the actual losses -- direct losses in the year, verses the much higher number absorbed through the build of sectoral reserves.

We've got a number of questions, as well, on the makeup of our private equity portfolio or our merchant banking portfolio and I thought I'd give you some information on that. Total portfolio currently stands at a little under $1.300b -- $1.279b. Debt investments represent 39% of that, equity 43% and fund investments, i.e. investments in other people's merchant banking funds or buyout funds, represent 18%.

Looking at the industry breakout of the direct investments, i.e. the debt and the equity investments, we've given you the breakup by industry here and you can see that it's spread over a number of different industries. As well, our total market excess in our investment securities portfolio over cost we disclosed this quarter at $228m. The vast majority of that excess over cost is represented by the merchant banking portfolio.

Finally, we've made references a number of times to the sustainability of TD Securities profitability. We gave you some indication in the call on November 4th that we felt that an ongoing reasonable sustainable earnings number for TD Securities might be in the range of $500 to $550m. We've taken the fourth quarter results of TD Securities, on the left side of this graph, we have adjusted the credit loss number to a more sustainable, or reasonable, $250m per year, so we've imputed 63m, a quarter of that, as a loss in the fourth quarter.

That gets net income a normalized income of TD Securities approximately $150m this quarter. We've then split that between what we think it might be in the core business of TD Securities and the non-core business of TD Securities. Non-core business is effectively the rundown, the gradually over time rundown of the non-core portfolio. Based on the results in Q4 and spreading those credit loss numbers over the two portfolios, we get about $568m on a pro forma basis in the core business in TD Securities and about $36m of profitability in the non-core business. Now, there are some items that are going to come out of that. Obviously, we're going to lose some cross-sell profitability by running down half of our corporate lending book. We haven't taken that into account here. So we stand by our $500 to $550m core profitability of TD Securities.

I should also mention that these PCL numbers next year may not actually be realized as PCL. There's a possibility that credit losses could be less than these numbers, but if that's the case, we intend to expend PCL light expenses through loan sales or other credit protection expenses in any event. So it would be reasonable to assume that if we don't realize PCL of 250, we will be realizing similar type expenses to reduce the risk and get that non-core portfolio down faster than otherwise.

So on that note, I will pass the podium over to Tom.

In addition to the normal credit and market risk information I would normally provide in a presentation at a quarterly meeting, there are two issues I want to point out up front that I'm going to spend a little time on, a snapshot of the core and non-core portfolios, and I want to also address the issue of reserve adequacy relative to the non-core portfolio and, hopefully, convince you that we've got--we've addressed the problems in our corporate lending business and have them behind us. We've provided disclosure on the telecom utilities portfolio as appendices to the slides. I don't propose to go through those in this talk. We did go through a fair amount of discussion on that in the November 4th call, but if there are questions later, we can certainly answer them.

So as Dan pointed out, total provisions for the year, including sectoral provisions, were 2.925b, which represents 224 basis points of loans and BAs, excluding reverse repos. If you make the adjustment Dan referred to and get down to actual credit losses in the year excluding sectorals, the ratio is 124 basis points is loans and BAs. We did not add to general allowances relating to our loan portfolios. These remained at 1.141b year over year. We did, however, increase our credit deferrals relating to our derivative activities and that principally relates to deterioration in the credit quality of certain corporate counter parties.

So, general allowances relating to derivatives ended the year 65m up from 34m a year earlier. In terms of risk weighted assets as a percentage of risk weighted assets you can see a substantial increase from 92 basis to 100 basis points year over year. In fact, we're at 92 basis points at the end of the third quarter as well. And that substantially relates to the reduction in risk weighted assets that Dan referred to.

New impaired formations were 1.027b or 78 basis points of loans and DA's (ph) from the fourth quarter. Retail new formations were actually down slightly at 191m. Commercial mid-market impairment was 66 million and that was substantially accounted by two files, one of which related to our agricultural portfolio.

And as Dan mentioned, we transferred the 20m agricultural sectoral that we established in the third quarter to establish a specific reserve against the same in the fourth quarter. Corporate new formations were $707m of which 270m related to the telecom sector and 500m related to utilities.

Aggregate gross impaired loans increased 2.5 to 5b at the end of the fourth quarter. In terms of the excess of specific sectoral and general reserves and over gross impaired loans, that number is 975m this quarter as compared to 799m at the end of the third quarter. I think I'd mentioned a number more like 879 at the November 4th call.

I remember getting some ribbing about that being an estimate. But there was a significant -- as we worked through the rest of the numbers through the balance of the year -- there was some foreign exchange adjustments. When the retails numbers finally came through a couple of payments were processed. The number ended up actually being a little more conservative than the 879 we'd mentioned on November 4th.

I thought we'd lay out the movement in specifics in sectorals in the corporate portfolio just to make it a little clearer in terms of what went on. So, we started the quarter in terms of specifics at 687m. And processed write-offs of 197m. Had recoveries of 2m. And then recorded a PCL of 240m of which really all of it related to the utilities portfolio.

And then a drawdown against telecom of 185m. And 185m, as we mentioned on November 4th, was related to a number of files becoming impaired at an earlier date than we anticipated earlier and also a couple of loan sales. So we end the period with specific allowances of 917m.

In terms of the sectorals -- we setup the 600m telecom and 250m U.S. corporate in the third quarter. So, we ended that period at 850m. The 185m draw down, an additional sectoral of 600m and then a foreign exchange adjustment related to hedging of the sectoral in relation to foreign currencies assets was intended to provide against which was deposited at 20m this quarter left us ending the period with 1.287b of sectorals.

Looking at the core, non-core -- the core portfolio -- there has been some minor fine tuning since the November 4th call, but the core portfolio is about $9.7b. Of that, 66% is investment grade. As you can see from the pie chart, it is well-diversified. I would point out oil and gas at 20% seems like a concentration. It's something we will have to spend a little time on. But of that number, 40% is to (ph) integrated oil and gas companies, and so a lesser concentration in the development sector. And geographically, 87% of the core portfolio is in North America.

Looking at the non-core portfolio -- about $11.2b -- these are net of specifics in prior write-offs, 39% investment grade, much more concentrated – 55%, I think, was the number we had given you as concentration in the telecom and power sectors on the November 4th call. And in terms of geographic -- clearly, U.S. the most significant representation there at 62%.

If you look at reserves against the non-core portfolio -- it's shown on this slide -- and the investment grade, non-investment grade totals. These numbers are grossed up for specific reserves and prior write-offs relating to loans that are still on the books. So, the non-investment grade total of $8.072m -- I think of it in terms of that number in relation to the reserves that we have. So, we had previous write-offs against those loans of 437, 917m of specifics, which was the number we ended the year at. Sectorals was 1.285b. And then the discussion we had with Osvy (ph) has lead us to believe that the number of 300m of generals being allocated to the non-core portfolio would be conservative. So, in total, around just in excess of $2.9b of reserves against the entire the entire non-investment grade non-core portfolio, or 36.4%.

If I just drill down a little bit and look specifically at all of the telecom portion of it -- all of the power and power generation non-investment grade, and all other watch accounts and impaired accounts -- that number is just under 6.4b, and the same reserves represent 46% -- slightly over 46%. So, that includes all performing and non-performing telecom and power loans. And I think that's a pretty comfortable position.

In terms of market risk -- this slide is prepared on the same basis as was the case last quarter. I think last quarter we mentioned for the first time that we had removed any inception or origination revenue on individual transactions in excess of $10m, so as not to distort the chart. Our value at risk was actually down slightly this quarter at 17.8m, as compared to 18.9m in the third quarter, and daily trading losses did not exceed our bar at any point during the quarter.

This histogram shows the number of days that revenues fall within certain revenue ranges. We lost money on nine trading days this quarter, and that would represent 14% of the trading days in the period -- so, slightly higher than would have been the case historically.

With that, I'll turn the podium over to Ed.

Thanks, Tom.

Since this is a bit of a transition meeting between Charlie and I, I thought I would just start off with a few brief remarks about my, sort of, approach to these meetings and, frankly, my approach to what my job is and what I think your job is. I want to start off by saying I don't want to be in the forecasting business, I find the world far too complex and difficult for me to predict and I don't find that forecasts from me have been particularly helpful over the past year.

So, I think my job is to comment on the trends that we see developing within our business or within our industry as a whole and how we see those trends affecting our operations. I'm also not in the stock valuation business. I'm going to leave that job to you. I'm in the value creation business. My focus is on developing and implementing business plans that take into account our view of the environment in which we operate and directing our attention to things that we can actually control.

I clearly have a duty to provide investors with the facts about our business. In presenting those facts I'm not going to try to make them overly positive or overly negative and I will present the facts to the degree that I'm not harming our competitive position or giving confidential information about our clients. I leave it to you to listen to our plans, hear the facts, see our results and make your own forecast and valuation. I will try to address your concerns and I'll make a point of highlighting what's on my mind as the CEO, including areas of potential vulnerabilities within our business.

I have one reservation about doing that, I don't my discussion of vulnerabilities to be interpreted as an imminent issue of problems facing our business or that in raising issues that I exaggerate their importance. I just want you to know what's actually worrying me today and do not assume that these are necessarily things that are isolated for us in the industry.

You obviously know my style, if there are vulnerabilities that warrant significant action our action will be swift, decisive and widely communicated. A recent example of this is the actions we took with the way -- to the deterioration of the utilities portfolio. These actions also speak to something that you can expect from me, accountability and making sure that responsibility for actions is clearly defined as well as monitored and appropriately compensated. If you run a business in this bank you are accountable for all aspects of the business.

You've heard from Dan and Tom on our numbers. I'm going to talk to you about where our businesses are, our strategies and my thoughts on where our businesses are going for the coming year. With that in mind, let me talk about the businesses. I'll start with the retail. We're obviously very pleased with the results of the integration. Over the two and a half years since we started our revenues have been strong, our customer satisfaction surpassed the pre-conversion level and our composite market share has stabilized and with the exception of mutual funds we have turned the corner on each of our products. But, it has been a tough journey and I am far from satisfied with where are. We have built a bank, but not yet the better bank that we can and will build.

In the first half of the year we had some integration execution issues that affected our customer satisfaction. We've addressed those issues and because of extraordinary efforts of our frontline and operational staff our CSI ended the year higher than our pre-integration levels. Going forward, however, we want to make sure that we continue to streamline our processes, so that our customers can have a comfortable experience with the assistance of our employees, not because our employees have made Herculean efforts to make things happen.

From the branch mergers we've completed 146 mergers in 2002, on top of the 92 in the latter half of 2001. With the program 89% complete we've seen a significant reduction in FTEs while increasing branch hours. Today we continue to be the hours leaders as compared to our competitors. And while we have realized much of the expense synergies, we've had to invest more in systems and processes to support our service model. These investments have allowed us to improve the CSI faster than we would have thought. We have sacrificed some of the expense savings, for example, to maintain customer satisfaction as we work toward building a better bank. Our revenue growth has been better than anticipated, which helped offset these increased expenses.

So what do we see in TDCT going forward? During our last quarter earnings call the issue of margin compression was raised. Let me reiterate what I said last quarter. We have a disciplined approach to ensuring profitability. We avoid interest rate gapping and run a fully hedged book. That being said, we recognize that there are limits to how much protection these actions can actually provide. There are business factors facing the industry that we cannot control and that can impact our overall retail net interest margin. If, for example, prevailing interest rtes fall far enough, eventually you reach a floor with respect to your ability to re-price. Our business mix can change such that you have a higher proportion of lower margin products and it is clear that retail banking in Canada is very competitive and competitive price pressures can affect the margin. I am not forecasting that our margin will decline in the coming year, but it is clearly an area of concern and vulnerability for us.

Let me turn to the issue of revenue growth and market share. A loss in market share we've experienced over the past year was largely in commodity products such as mortgages, where discount pricing can steal business. Aggravating this loss in share was the integration related collection issue we addressed early in the year and the process of merging branches. With the exception of mutual funds, this trend in market share has begun to turn and with the mergers all but complete, we believe that we are well-positioned to grow market share going forward. Over the long run, our market share should also be aided by our focus on continuing improvements to customer satisfaction. With the gains made in CSI last year, we recognize that CSI improvements will not be at the rate we've experienced over the last three quarters, but the cumulative effect should mean that we maintain our competitive edge. We also expect to augment the inherent growth in our retail business by continuing to benefit from growth in those areas where we are under share. For example, we see potential in small business lending, commercial lending and banking, and property and casualty insurance through Meloche Monnex. Meloche Monnex in particular experienced significant growth last year and we expect this to continue next year. This business operates at a much higher efficiency ratio than TDC overall and the growth in Meloche Monnex) caused a 70 basis points increase in our efficiency ratio last year.

Expenses. On the issue of efficiency ratio, as we look to 2003, we'll continue to keep our strategy very simple. Keep expense growth less than revenue growth. We'll be tough on expenses while maintaining our focus on improving systems and processes. In terms of our North American strategy, as I said before, at the moment we are focused on being disciplined about our operations and the accumulation of capital, so I don't see a major acquisition on the horizon.

As you're aware, we've been working with Wal-Mart and the U.S. regulators to obtain approval to provide banking services in Wal-Mart stores in the United States. We were not able to get the U.S. regulator comfortable with the unique approach we were taking to provide financial services through Wal-Mart stores, so we decided not to resubmit the application in the form that we were originally planning. We are continuing to have a dialogue with Wal-Mart to determine possible options going forward.

Let me turn to our Wealth Management business. Let me first talk about Waterhouse. In North America we have invested in operational improvements to reflect the low trade volume environment in which we're now operating. We are focused on lowering the breakeven point as well as increasing non-transactional revenues per account.

Even at today's volumes (ph) we are profitable in both the United States and Canada. We are well leveraged to an increase in volumes. Internationally, the story is not as positive. As Dan pointed out in his presentation, International has not been profitable and we've had to rig down our investment in Japan once we restructured it.

To address this, we are taking actions to stem the loss in the international area in 2003 and intend to breakeven by 2004. Specific initiatives include our recent deal with Natwith (ph) in the U.K.. We are actively pursuing other restructuring opportunities and will report out to you as soon as anything materializes.

Overall, we would expect TD Waterhouse globally to be more profitable in 2003 than in 2002. This is based simply on maintaining current profitability in North America, while decreasing the losses internationally as we proceed through 2003. I caution that we do not expect to see this improvement on a comparative basis in the first quarter 2003 because of Waterhouse's relatively strong first quarter last year.

In Canada we dramatically shifted all of our Wealth Management operations under the TD Waterhouse brand. In doing so we introduced a second compensation grid for the investment advisors in order to grow our advisor base. While some market observers were skeptical, this transformational exercise has actually worked.

We've ended the year with more advisors than at the start of the year with more assets on our administration than at the start of the year and we have been profitable. We have a new uniform referral process that enables smooth hand-offs between our businesses and is showing strong signs of increasing our ability to cross sell products and services to our customers.

We have two simple roles for next year. We have to demonstrate that our strategy will actually increase profits. And we have to stop the decline in our mutual fund market share.

Now, let me turn to the Wholesale Bank. Let me reiterate the decisive action we took to address our credit issues. We responded to the sudden increase in impaired loan formations in our utilities portfolio in the fourth quarter with provisions and a more dramatic shift in approach to corporate lending. We will continue to apply this head on approach for any other issues should they arise.

Part of this decisive action includes ensuring that we have the right management team in place to lead this business. We believe the team we have now is committed to the TD Bank and to our business model. And we have clarified any ambiguity regarding ownership or responsibility for all our businesses including credit risk and capital.

The team is onboard with our strategy and I'm confident that under the new structure and leadership of Bob Dorannce and Mike McBain, TD Securities will continue to be a valued and growing part of the TD Bank Financial Group.

Let me talk about the shift in corporate lending. We undertook an organizational restructuring that allows TD Securities to deal with its credit issues and go forward focusing on its strengths. It has been observed to me that banks have reacted to high credit losses with an announced shift in strategy only to later revert to old form .

So, why are we any different? Well first, we have actually divided our corporate banking operations into two discreet units, one for ongoing operations with core clients, and one for business that we want to exit over time with our non-core clients. It's actually the non-core portfolio we run separately and under the leadership of a seasoned invested banker, Barrett Mazrani (ph) , who will report directly to me.

One of the first things that Barrett recommended was to bring back former Deputy Chairman of the bank, Bill Brock in a consulting capacity, which we have now done. We agreed with Barrett that this process will be labor intensive, and we could benefit from someone who's actually managed through previous credit cycles.

Another difference with our approach is that we've separately capitalized the non-core portfolio. This means that the core TD Securities is already operating with a lower level of capital investment, and a lower corporate credit book. Capital that becomes available through the exit of the non-core loans will be reinvested to make the shift to retail.

The core business will be allocated new capital additional to its new base as a normal operating business.

Within three years, we'll reduce the non-core book to the point where it is no longer a valuation issue for the bank. The earnings generated from this portfolio, plus the provisions that we've taken should allow us to self-fund this exit.

While I believe that the actions taken immunizes TDBFG from the non-core portfolio, I also recognize that we have to demonstrate to the market that this is indeed so.

How will we manage the core book going forward to ensure that we don't face another corporate lending challenge of this magnitude? That takes me to our risk management framework.

We've also made some significant changes to our credit and business processes to support our new strategy that I'd like to outline. We're increasing the resources applied to risk management, and effectively creating an additional level of risk management. We split the mandate for risk management into two groups, and applied more resources to both. The risk management group's primary responsibility will now be focused on policy, as well as authority and exposure limits. In addition, we are establishing a function responsible for researching and identifying industry and portfolio trends.

We've also moved to clarify any ambiguity regarding who is responsible for credit. The business unit will have a credit group that is primarily responsible for adjudication, which will operate under stricter authorization exposure limits. Our strategy makes it clear that going forward we are lending on a business relationship basis, and therefore, the business owns responsibility for the loans. We have moved to ensure that our business leaders' compensation will properly reflect this responsibility.

So, you'll be asking, "How can we deliver the earnings with the new TD Securities?" Well, Dan took you through some of the numbers, but let me provide some additional context. Strategically, when you make a radical change like we have, there's always some risk, but we believe the plans we have in place will work. In exiting the non-core business, we are getting rid of activities that don't support our franchise, and focusing on activities that do.

We believe we have a strong Canadian franchise -- both in corporate money (ph) and investment banking, with the highly diversified portfolio across industries and companies.

But, going forward, we will continue to be selective in focusing on clients. Good clients, where we enjoy a broader relationship, will see no real change in our Canadian strategy.

Outside Canada, we have strong capabilities in capital markets, which we want to grow. This is an important source of strength for us. Our challenge was in the corporate lending area where we became over-concentrated in certain sectors and name and had too many clients where our only relationship was lending and client returns were inadequate.

We want to continue to lend on a more limited basis outside of Canada focusing on a few sectors, telecom, energy, auto and forest products, but only to companies with which we have a broader relationship and with exposure levels more consistent with the capital we're prepared to commit to the wholesale business. We want to focus our industry expertise, but far -- with far stricter exposure limits and far less capital available to invest in this area.

If you look at the past year, for the core bank, we actually had a pretty good year. We recognized that client driven investment banking revenue can be lumpy from quarter to quarter, as we have experienced this year. But, we will not smooth client revenues by taking on greater market risks. As Dan pointed out, using 2002 as a guide we believe that core TD Securities earnings in the area of $500m is reasonable.

We recognize that by reducing our risk profile in the corporate bank TD Securities will see a higher proportion of its earnings coming from investment banking and capital markets related activities. This is the simple arithmetic. We are not shying away from the fact that we are bigger in certain investment banking areas than our Canadian competitors. Credit derivatives, for example, is a major business for us. Credit derivatives is the primary business activities behind our -- primary reason why our relatively -- we had relatively higher market risk weight asset number and many of you have commented on this.

You should also be aware, though, that this higher market risk weight asset number is affected by differences between regulatory capital requirements and economic risk measured by our models. We recognize that this is still a question mark for some investors and that the proof will be in our results. We're going to try to organize some meetings with you in the coming months to get your input on how we can better explain this area of our business, as we move forward. We will then provide this information on a wildly disseminated basis.

We know that we still have to demonstrate that we have sufficient provisions to deal with our corporate lending issues. As I've highlighted today and on November the 4th, we have taken decisive action to address our corporate lending challenges. I appreciate, though, that no matter what I stand up here and say, the results of our action will be the ultimate proof of our success. I said at the beginning of my presentation I deal in facts, which I will continue to provide. I leave the interpretation of those facts to you. Thank you.

Questions?

One moment, please, for the first question. The first question comes from Jamie Keaton, Merrill Lynch. Please go ahead.

Hi there and perhaps just before I start I'd like to just congratulate Charlie on his dynamic influence over the years and certainly we all enjoyed working with you very much Charlie. So, we look forward to you enjoying your next adventures. I had a couple quick questions, if I could.

Jamie, thank you. Could you speak a little more loudly, there's something the matter with the system on the -- for the questions.

Great, is that a little better Charlie?

Yes, thanks.

OK, two quick questions. I guess, one for Ed. In looking at the relative contribution of the retail banks across the peer group it strikes me that some banks are gaining market share and some are being, either, more disciplined or not concerned about it and I wondered if, Ed, you might comment on the relative competitiveness? We touched on this a little bit in the prior meetings and I'm very curious to know how you feel your strategy fits in, in terms of these market share shifts and in particular some of the banks seem to be experiencing either a revenue yield lift or perhaps a productivity improvement. It's largely, perhaps, catch up, but the concern might be that it's a trend. I wonder if you could just talk a bit about that. I don't want to name the other names necessarily, but I hope you know which ones I'm wondering about.

I follow the industry, at least superficially, so I have a feel for it. You know, the difficulty here is that the market share numbers, you know, I don't want to duck the issue, but you do have to go behind, and there's a story behind each of these movements, and that you have to really look at the individual products. I think what I was trying to say, you know, for us, is that we clearly lost composite market share in the past year, even if over the period since the beginning of the merger to the end we didn't lose market share. So we had these two phases where we gained market share and then we lost market share. And the market share that we lost, what's interesting is about the amount that we originally anticipated, we lost that in the past year once we started doing the conversions and the merger. So our analysis was right, we just hadn't anticipated gaining market share before we started this process. And where we lost market share was not so much in the core banking area where we actually gained significant market share, it was in the commodity products and that was partly, in our view, because we had trouble in the merger in the back rooms and that particularly affected the mortgage area. And then we had the natural fallout from the branch merger activity.

As a strategic statement, I think some of the competitors are saying, "I want to get out of this market share game, it's not a profitable game. I want to select my customer base and I'm willing to let market share and I don't want to get in these commodity war-fares." And others are clearly saying, you know, "The old commodity game is worth playing and I'll grab the core customer eventually, even if it costs me in the opening round. By buying the commodity product, I hope I'll eventually win the transaction account, if you will, of the customer." And then overlaying this are also some structural things that are obviously in the mortgage area, how strong you are in the advisor market in the mortgage area is a major determinant of your mortgage market share movements over the past year and each of the banks differ to a significant extent to which they get mortgage share outside their own proprietary distribution systems.

As to, you know, we're not, I guess what we're saying is we think we kind of bottomed out here in terms of other than in the mutual fund where I can tell you I've seen, you know, a turnaround in what's happening to our market share. But in the other, in the basic banking products, we think we've bottomed out here. We only have, you know, a small number of branch mergers to go so that effect should be much less next year. And, as I've said before, either we believe in this customer service model or we don't, and it, you know, it should over the long run translate into market share gains that are profitable market share gains. We're not in the game of subsidizing anybody here. And so, you know, we ought to be able to get customers in at reasonable prices.

Thanks, Ed. You mentioned upgrading the systems. Are you, from a technology perspective, happy with your current state of affairs? Do you want to try and get a leg up on the street again in that department?

I'm not at all happy with our state of affairs. I guess what I'm saying is, I think when you do a big merger, what you do is you focus on just getting the thing together. So we've got the thing together, but I think, frankly, we probably lost a little ground relative to our competitors in the process of doing that because I think they continue to improve their systems while we were spending our money on just making the merger happen. And we're certainly not anywhere where I would want to be in terms of the service model, so that's--I think what I'm saying is, this will certainly take us two or three years of significant high IT investment to catch up and surpass. Because, you know, in our model, you know, we are -- you could say, you know, our competitive strength or weakness is if we're going to run a model that's driven by offering a better service model, that means we have to be superior to our competition, not equal to our competition.

Thank you very much.

Ian (ph) ?

Just a -- in the [Inaudible] page 14. I know you're not in the forecasting business, Ed, but just looking at the TD Securities model I guess I'm struck by a couple of things here.

The Q4 numbers had what looked to me like very high trade revenues – 330m. It looks like 60% of the revenues came from trading. How comfortable are you using that as sort of a base to think about?

And the second question is you showed 276m of expenses here, which looks extremely low versus anything else. You know, historical, you know, I'm just sort of wondering how you could run this Bank with 276m of quarterly expenses without making this kind of profitability?

Do you want to start with that?

You're right, Ian (ph) . There was $330m worth of trading related revenue in the current quarter. That is up from a very low Q3 -- 218, I think it was. It's not out of the question in terms of previous periods. It's not anywhere near some of the higher numbers. It would appear to us that $300m worth of trading related revenue is not a bad base and could well be sustainable over to future periods.

On the expense side, there are some reductions in the expense levels in the current quarter. There were also some unexpected items as well in terms of total revenue, which would not repeat. And I think when you look at everything together, you know, I think we're not trying to state that this is the right number for future periods. But it does give a number, which is higher than the, you know, the sustainable 500m, 550m that we talked about.

So it's just trying to give you a base of a forecasting future based profitability. It's not in its own right a forecast by us or any kind of a prediction by us. So, I've had a number of questions over the last few weeks. How does TD Securities look in future? So, this was an attempt by us to give you a breakdown between the core and non-core businesses.

Michael?

A couple of questions. I just want to make sure I understand the issue of expenses in TDCT. My understanding has been that there's still a fairly high level of IT systems type expenses that are loaded in there. Can you give us some idea of how this is likely, if at all, to fall off in 2003?

And I have a question also about the credit process. My impression is that one of the major changes here is the shift in responsibility from store adjudication from outside the business unit to inside the business unit. And in a sense, this sounds like putting the foxes in charge of the hen house.

But can you give us some idea -- I mean, at the same time it almost sounds like backing this up there was no or there was virtually no sort of policy framework that the adjudication will work within. Can you just discuss that in a little more detail?

Let me deal with the first one. No, the answer is on IT expenditures, we're actually increasing the expenditures in 2003, rather than decreasing them. So, you know, the bad news is that I think we're going to be running for your horizon. As long as you focus on things, we're going to be running high expenditures in IT to wrestle the process. So, we didn't get the economies in scale on the IT side that you might have thought we'd get in a merger, because it turned out we needed to put more money in the systems. And so, we actually increased the budget this year.

I'm aware of the -- you know, people's philosophical -- taken aback to saying, "well, maybe what you should have is, you know, even concentrated more risk management in the center and taken even more out of TD Securities," when it would have been one sort of natural emotional response. I think it goes to -- you know, I think you are on to the right issues. I think the reason we didn't do that is for first off, because I think one of the issues has been that when you combine your investment banking and your corporate banking groups together, you want to make it absolutely clear to the investment bankers that they are now in the corporate banking business, that they're in the corporate lending business, and that they will have to bear responsibilities for the downside of those loans, as well as the upside attached to them.

That's why, you know, we changed the compensation programs within TD Securities so that the leadership fully understands that in terms of their compensation package. And you can't tell someone that they're going to be responsible for credit, and then say, "But I'm not going to give you any credit tools to make those judgments on your own." I think you have to then make sure that they're armed. And that's why I say we're essentially doubling up here, because we're essentially saying, "let's get credit capability -- more credit capability within the business if they're going to own this going forward."

I think we always did do a portfolio analysis at the top, but the fact is that the group, Risk Management, had two functions, one is the actual formal adjudication of all of credit, and watching the portfolio. And I think, you know, as Charlie has said in his remarks before, and I've said, you know, if we look back and say, "Well, what are some of the mistakes we made," we probably didn't watch these trends enough, and we didn't vigorously pursue that as much as we should, and so we want to make sure that we have a group who says, "Well, my primary responsibility is not managing individual credits. It's to oversee the summation of those credits and what's going on in the policy."

I mean, obviously we had policies, but you want to make sure that you're testing those policies on a constant basis to say, "Are those the right policies?" And you're a little separate from the actual business process that goes on, so that you can, in fact, look again at what's going on, and are not bogged down in the details of running it.

So, could you give us a little bit of color on the change in compensation, tied in -- you know, tying the credit ownership into that?

I'd just as soon not get into details. Generally, I don't get into details of compensation. But, I can assure you that the leadership of TD Securities today looks at the business in exactly the same way that Ed Clark looks at the business, and that's, I think, the important thing.

[Inaudible] , just on credit. I we can understand in terms of the non-core portfolio, perhaps the number of relationships, Tom, that are in that portfolio, and perhaps what amount of standby facilities, or non-drawn credit might be associated with that non-core portfolio, and how it might divide out by investment grade and non investment grade?

I guess we talked about ourselves ...

We had a bet whether or not someone would ask this question, that's why we're smiling here, so.

And what we decided was we weren't going to answer it. I mean, I don't think I want to get into specific details in terms of number of relationships in or out. I mean, we've gone through a process here and we do have a bunch of relationships on both sides of the house to run and so getting into that level of detail might be a challenge, but I would say that the concentration, clearly, is outside of Canada in terms of reduction and relationships. I don't know if that -- if you think there's anything more you want to say on that.

No, I think, first off the number doesn't really help you because it's really -- you know, a hundred small credits aren't equivalent of one large credit. So, how many relationships, but we’re sensitive as we break this down further and further they're individual companies that we have to work our way through this process. So, we don't want to get into too much more details. In terms of the exposure, though, the un-drawn commitment, I don't know whether we can give them a sense of the order of magnitude in the non-core banks?

We can do.

Yes.

I guess when you look at it the second issue is where does it fall. So, an un-drawn commitment in the non-core bank -- well, total exposure in the non-core bank is about $22b on a gross basis. On a net basis, after credit protection and so on, it's $20.7b and a lot of that is strong investment grade commercial paper backup lines, that just don’t earn an adequate return on capital and in the non-investment grade portion the un-drawn commitments are about $3b. So, of that, about $3b is non-investment grade.

OK, and do you want to tell us, perhaps, what the average duration of the loan portfolio is in the non-core, so we can get a sense of whether this is going to be a -- you know, can you hit your mark on basic runoff verses more aggressive -- having to be more aggressive into the loan sale game.

We're probably early to tell you -- I don't -- we're not opposed to telling you that eventually. We're working our way through -- I mean, the answer is you can't -- we won't hit -- we may well hit the -- the measure that we've set is that in three years this will become an irrelevancy from a valuation point. That doesn't mean there won't be stuff on our books, but that will be so confident that whatever provisions we have left will cover that. But, we haven't worked through, to be honest with you, all the details of that plan to come to the exact question that you're asking, which is how many sales do we have to reach to reach that versus, you know, how much will it just happen ourselves. We're working our way through those details.

And renegotiations are very frequent and they're not built into the runoff and we're having difficulty getting a good figure on that. Heather.

I was just wondering if we could hear from Bob, since this is -- you're relatively new to the role. Wondering if we could hear a little bit about what your business plan is outside of corporate lending, where you think you have weaknesses and areas where you'd like to improve TDSI?

I would say that in the Canadian franchise we have very strong market shares in the fixed income derivative parts of the organization and we have good market shares in the equity related businesses, but we still are, by in large, towards the lower end of the competition and we would like to grow those businesses more in line with the market shares that we have in our businesses in Canada. So we see opportunity for growth in the equity related businesses, investment banking, M&A, et cetera.

Outside of Canada, it's very much we're looking to be relevant to those customers that can provide us with good returns and, basically in the U.S., looking at a relatively confined origination strategy towards the medium telecom business, more on a boutique basis, and cross-border Canadian centric business, where we have competitive advantage in knowing Canadian customers or customers that are interested in investing in Canada. The other parts of the business in the U.S. will be capital markets oriented. We'll use credit to the extent that we need to--primarily those are large cross-border investment grade oriented accounts and obviously the institutional customers in the United States that have been our traditional customers either interested in our U.S. product or in our Canadian product.

We look, I think this was mentioned earlier, probably there's a disproportionate amount of the credit loan book that is becoming non-core in the U.S., but it's largely becoming non-core because we had limited revenues other then net interest income or syndication revenue against it.

Outside of North America, it's primarily a capital markets driven strategy. We have good businesses, good institutional businesses. We will continue to have good cash businesses oriented towards core treasury types of accounts, again, significantly investment grade and where we already have established long-term relationships. We'll look to grow other businesses where we can see a competitive advantage coming out of these strengths we have in these market places. It was also mentioned that we have strong derivatives businesses and we look to continue to invest and grow in them. I think also in the core bank that we are--we will be constrained by capital and the allocation of capital and we'll be looking to allocate that capital to where we enhance the franchise. Also where we maximize returns and where we can minimize expected loss--or unexpected losses.

How does one go about growing the equity related business in Canada given capital restrictions and a pretty tight market?

The Canadian--the capital that we have dedicated into Canada right now is not changing and, in fact, perhaps will grow. Increasing market share is a difficult business in Canada because of long-standing relationships, but it takes time. We're investing in people, we're investing in research, we're investing in investment bankers. We're growing our franchise. Comes down to executing a strategy that's--you know, there are no unique strategies to grow market shares; it's very much execution oriented. And we have--we have very good franchises and pretty good market shares in fixed income and money market foreign exchange lending and we haven't fully utilized the cross-sell into equity. So we're looking to do that as well. So, really, our equity franchise -- our equity market shares I should say -- are not consistent with the market shares that we have in the balance of the bank in Canada. And I think we should be able to over time improve that.

Michael?

Again, looking at that table on page 14 of the presentation package, I'm kind of struck by the $240m lending revenue number and the $36m net income in relation to $11b of assets.

And I know that this isn't unique to Toronto Dominion, but philosophically, you know, and maybe, you know, speaking generally for this type of business, what were you thinking when you put this business on? I mean, it's -- I know it's been an issue that, you know, it seems to have been raised over a long period of time. You know, and this just seems to bear out the, you know, the questionability of this business.

Why do you think it's taken so long for this to get recognized, you know, here? And you know, why hasn't this been recognized to the same extent at other banks? And -- let's just leave it there.

I think, you know, hope springs eternal in the human breast. I think you start with the fact that nobody goes into this business, you know, the numbers that we're putting in here are more than 100 basis points of loan losses.

Everyone always goes into this business and says they're a better lender than everyone else. And so their number is going to be 35 or 40 basis points. That makes a huge difference on the margin that you leverage that difference up by 10 times, which is, you know, is a 10, 11 times margin leverage business.

That delta is a huge delta. And then they say, gees, I don't need much cross sales to make this into a 15% ROE business. And so I think that's what people do. And what keeps the market down in terms of the margin is that hopeful outlook that there's of banks that have, you know, in these markets.

And that's what's really going on here is if you look at the U.S. market there are a lot big players that actually do have the capability to get cross sell. And so they are prepared to use this product as a lead to get those cross sell ratios. And so then they set pricing to that market. And then there's, as I say, there's somebody else always coming along that says, well, maybe I can get a little chunk of the advisory beast too if I participate in this loan.

And so I think, you know, that's what sustains us up to this point. And we're just saying we're not for to this game. It hasn't proved to be a successful strategy.

And even in the core business what do you assume for a cost of funds generally? Is that based off of the cost of funds for the bank as a whole, or is it based off of some notion of cost for TDSI on a non-recourse basis?

There's a variety of ways that we transfer funds into TD Securities, Mike. We do, you know, assume a basic double A (ph) rating on our funding sources. And that basic double A rating is reflected in the cost of funding within TD Securities.

There are some other items to get added onto that in terms of liquidity premium and so forth. But basically, TD Securities does not act as if it's a stand alone funder. It does piggyback on the Bank's rating and the Bank's ability to borrow funds.

What do you think if it was on a stand alone basis?

That's a tough question.

But if you want to look at things, you know, I mean, being responsible in a business unit, is it really reasonable to transfer price at a low rate?

Maybe we can pursue this -- a two minute conversation.

Two questions, first of all, with respect to capital, we are seeing that the capital numbers are a lot better than you'd thought. I guess a question for Dan, in looking at the difference between sort of 7.75 and 8.1, that's like $6 billion worth of risk-rated assets. I have absolute confidence in you, Dan? How would you have missed 6 billion of risk rated assets [Inaudible] .

Couple of things. First of all, we put a full court press on in terms of reducing risk-rated assets this quarter. We were a little more successful than we had anticipated. We were conservative in our forecast. The 7.75 was at the absolute low end of the range. I didn't want to disappoint anybody. It turns out that we got a couple of things done that I wasn't anticipating that we were planning to do in Q1. These things include such activities as buying insurance on home equity lines of credit, which hadn't been done before in this market.

We've been insuring mortgages here in Canada, but we hadn't actually developed a program where we could insure home equity lines. So that took off several billion of risk rated assets, and I wasn't sure what whether we were going to get all of that done this quarter. As well, we went to work on other parts of the home equity line portfolio and were able to get better data on the actual security for a number of the loans. And we applied some resources to that analysis and were able to reduce the risk rating assets ratings in the home equity line by a little over a billion dollars.

There were some growth factors that we anticipated happening in the retail bank which didn't happen in the quarter. We saw marginal loans in TD Waterhouse Canada reduced. We thought they'd hold steady. There were a number of things that happened. Basically, a good surprise. I wouldn't anticipate that these reductions would continue.

I think we've probably in some respects done a very thorough job of combing the balance sheet and getting the risk-rated asset balances out.

Is there any give up at all NII in the coming quarter?

Very minor, very minor effect. Basically, when you buy insurance, you amortize the cost of insurance over the life of the portfolio and it does have some fairly -- in fact, it's a quite minor effect on the actual cost going ahead.

I think we'll go to the telephone now. Are there any questions on the telephone?

We have a question from Robert Wessel, National Bank Financial. Please go ahead.

Hi, just had a couple quick questions. The first question I had is, now that you've made a very significant distinction between your core and non-core accounts and the better part, or all, of your sectorals are now booked against that non-core, will you be using sectoral provisions going forward in the core portfolios?

We hope not.

Well -- and hopefully not in the immediate future. I think the core portfolio, I think TD Securities when they went through their strategic review tried to be quite careful about leaving things that would be risky in terms of credit loss in the near term in the core portfolio, so I wouldn't anticipate in the near future we would be using sectorals.

OK, and just the next question would be, in terms of unlocking some of the generals, would we be safe to assume that that would not be unlocked in sort of one full -- like in one event, and that it would be released sort of over time as the portfolio is run off? How might that work?

That's correct, we're still working through the mechanics of that with [Ossi] , but you're correct, that we had a methodology to determine an appropriate level of general reserves against the portfolio that relates obviously to the size of the portfolio and the riskiness of the portfolio, so as we take the risk out and reduce the size of the portfolio, we would be able to release the generals

And I think I'm going take another stab at following up on Quentin's question, and I know that -- I understand that you're still working on the plans, but if you had to say what the distribution, or what percentage of the portfolio, or how it might go down, would it be like, say, 50% in year one, 20% in year two, 20% in year three? Do you have any -- can you at least give some indication as to how the distribution may go?

No, it doesn't go down that quickly, and one of the things you have to look at when you look at the portfolio is that often in banking arrangements you have extension options at the borrower's request, so the debate gets into at that point most often the borrower might come back and rather than exercising extension option might renegotiate the line and start again with a fresh 364-day commitment convertible to one-year term loan, as an example.

So at the end of -- if you had a facility like that, at the end of one year, two things are going to happen, one of two things are going to happen. We'll either convert to a term loan or it will get cancelled. So our action around that, I think in terms of our strategic action around that will have a significant effect on how quickly that portfolio runs down.

So -- I'm sorry. Just, am I correct in understanding then that the runoff of the non-core portfolio would be maybe a bit more skewed to the latter years?

Well, it steps down steadily, but it doesn't step down in a dramatic way in the first year or two.

OK, great, thank you very much.

Are there more questions on the telephone?

The next question comes from Melanie Ward at RBC Capital Markets. Please go ahead.

Thanks very much. I had a question also on slide 14, certainly about the loan loss provisions on the portfolio of $250m. The last guidance, kind of, we had was 175m run-rate on a quarterly basis. Has that changed at all?

No, I think the -- the 175 is multiplied by 4700 . And we've been saying 450 on the retail side, and 250 on the corporate side. I think what Dan said in his presentation is that our problem on the PCLs is we can put 250 in there, but what we're saying to you is it may not show up as PCLs because if we -- you ought to -- it'll be 250 of expense, but it may be that what we'll choose to do is buy credit protection or use it to cover losses on the sale of loans. So you ought to, in terms of you doing the forecast, since we're not in the forecasting business, assume we spend 250m on the wholesale side here one way or the other, whether it shows up or not.

OK, that's fine. The second question was on the reasonable amount of earnings out of TD Securities in the 500m dollar range. That's a net income number, not a cash earnings, correct? Just wanted clarification on that.

It's cash earnings.

Cash, OK.

That's the only earnings that we really look at, Melanie, as you know.

Well, it didn't state that in the 14 slide.

OK, you got me.

Are there more questions on the telephone?

The next question comes from Sachin Kewalramani, Morgan Stanley, please go ahead.

Hi, I have two questions. First, over the last few quarters, most of the banks have committed to reducing capital in the corporate bank and ship (ph) bank and shifting resources to the retail bank. What do you think this means for profitability and credit losses over the medium term? And secondly, on TD Waterhouse, any plans to build out advisory or distribution capability in the U.S.?

In terms of I think you can model out as well as we can of what, you know, if you duplicate it out, the retail side, what the implications--obviously, there is some PCL implications because there is a running rate, more constant running rate of PCLs associated with any retail banking operation. So I think we wanted to use what we're currently running at in the personal and commercial banking [Inaudible] in fact, what we [Inaudible] if we increase the size of it, that would keep on going. As to Waterhouse, we don't have any immediate plans. Right now we're looking at different U.S. options of what we can do. But, as I said, if you want to know where the whole bank is focusing for the next 12 months it's to make the earnings numbers and to accumulate capital and have, you know, an accident-free few quarters here for us going forward.

OK, thank you.

Back to the floor now. You've had lots. [Inaudible] , did I see your hand go up?

Just--this slide 14 is getting a lot of attention. Just if we can take one more kick at the can. I think on Ian's question on the mix ratio in the annualized core you're reflecting it at about 53% and while you're not forecasting, you're saying you can run a wholesale business that isn't heavily levered to lending with a 53% deficiency ratio that would reflect current activity.

Again, Quentin, I'll say that what we've done is we've taken the fourth quarter actual results and we've done a few adjustments to those results relating to credit losses and we've simply multiplied those results by four, splitting the results as best we could between the core and non-core businesses. We're not trying to give you a forecast, we're not trying to give you a prediction. We're simply using this as evidence that we feel we can run a core TD Securities business with about 500 or a little bit more of core profitability.

But to do that you need to have a mix ratio that's ...

Well, I mean ...

... 3% or ...

... that shows 568 so, I mean, there's some room there to go down to 500m. But you can work out the figures.

OK. And then secondly for Bob perhaps . Are there any handcuffs coming off of the old New Crest employees over the course of the next month that ...

Not in the recruiting business, Quentin.

... that may have an impact in terms of what your employee count levels may or may not be? i.e. are there any handcuffs as part of the New Crest deal that come off in the course of the next month?

The earn out on the New Crest transaction happened over three years. We just have completed the second year of that earn out. So the third year will be completed at the end of the current fiscal year and at that time, there would be, you know, obviously, no further handcuffs on people as it relates to the stock and earn out that our New Crest people earned as a function of the takeover by TD.

Remind me, that was a third, third, third in terms of vesting?

And with that I think we'll bring the call to a close. Thank you very much everyone.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating and please disconnect your line.