Toronto-Dominion Bank (TD) 2003 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the TD Bank first quarter results conference call. At this 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 during the conference, please 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.

Welcome to the TD Bank financial group's first quarter 2003 investor presentation. My name is Dan Marinangeli. I'm the CFO of the bank. This meeting is being Webcast in audio and video as well as a telephone conference call. After formal presentations, we'll entertain questions from those present as well as prequalified analysts and investors on the phones. Those watching the Webcast will be able to e-mail us questions.

With us today is Ed Clark, the bank's CEO, who will give an overview of the quarter's results. I'll cover our performance in more depth, followed by Tom Spencer, Vice Chair, Risk Management. Also present is Bob Dorrance, Chairman and CEO of TD Securities.

This presentation may contain forward-looking statements and we draw your attention to the statement regarding forward-looking statements at the beginning of our presentation - Ed.

Thank you, Dan. I would characterize the quarter as relatively uneventful. It can be best thought of as a first step in a series of quarters where we re-establish our credibility and consistently execute what we said we were going to do. Against that criteria, I can say I'm pleased with the quarter. We met the expectations we laid out last quarter and we delivered on our promised actions.

Let me start with capital and our management of risk-related assets. As you heard me said in the past, I do not believe we have a capital concern. Looked at in any realistic way, we have surplus capital. Rather, we have an earnings concern. The question has been can we produce (inaudible) and growing earnings. We did it this quarter, and we intend to do so consistently in the future. Our focus this year is on a high quality operating result in a tight strategic framework which includes intense focus on portfolio and risk management, and a proactive approach to acknowledging and dealing with issues.

We are also focused on being jai highly disciplined on our use of capital. We measure economic profit and we want to grow economic profit. We have an ability to grow free capital to give us strategic choices, and we intend to do so. I'm pleased with how much free capital we generated, increasing our regulatory capital to 8.5%, a figure which you know ignores intangibles and accepts the definition of risk-weighted assets in our trading book. And of course does not reflect the potential in the capital tied up in the non-core bank or for general reserve release.

As to our earnings, while our earnings are down year over year, we met the expectations we laid out last quarter as to what we would do in each of our businesses, and we are very pleased with the quality of our earnings. I think it is clear or becoming clear that I want an organization biased towards operations and operating excellence. When I look at our three businesses, they are well positioned and do not face significant strategic dilemmas.

The fundamental issues are execution issues. How do exploit and leverage the advantages that we have. Last quarter, I told you I would highlight what's on my mind including vulnerabilities within our businesses. I will briefly give you my views on the near-term positioning of our major businesses which will put some context around the numbers Dan will provide in more detail on our operating performance, and then Tom will discuss risk management.

Turning to retail, our results for TDCT (ph) are excellent and consistent with our view that double digit growth is possible with this business this year. To get there, we will have some challenges. Last quarter, I raised my concern that there was a risk that retail margins in the industry may experience compression this year because of low interest rates and competition. This quarter our margin showed some sign of compression, dropping two basis points from last quarter and nine basis points from a year ago. Although that comparison is skewed because margins spiked last year because of a temporary widening of the prime spread. A four basis point decline would be a better estimate of the compression year over year.

While margin on the money outside has been relatively stable, I foresee narrowing in mortgage yields because of price competition. The money inside is showing the effect of sustained low prevailing interest rates which reduce the margin on core accounts. Additionally, term deposits are feeling the competition during the RSP season, which has been unusually weak. I expect further margin compression next quarter. The volume our market share results are better than previous quarters but are still not positive. We should be getting to the end of the effects of branch mergers in the next few quarters. The competition is clearly heating up as those who lost market share to aggressive pricing last year are trying to regain share moment mow men, and those who continue to be aggressive continue to buy on profitable share. We will continue to occupy a middle ground on willing to write business at a loss yet to prepare to follow our competitors in thinning out margins. This may mean some shedding of share.

Our active core accounts, the heart of the franchise, have remained stable, so we see no franchise threat from the market share trading which has gone on. Our efforts to grow our underrepresented personal and commercial businesses like small and commercial banking and insurance are showing signs of success. Our focus on business banking has primarily been on deposits, which have grown 15% or $3.2 billion over last year. Insurance, one of our share undershare businesses continues to grow faster than the competition, and our underlying growth in retail banking. Meloche Monnex (ph) grew for $56 million year over year.

On expenses and efficiency ratio, we have committed to improving our efficiency ratio while investing on building a better bank, streamlining processes and permanently lowering costs. Our strategy here is a simple one. Keep expense growth lower than revenue growth. This quarter, we were very successful. While we continue to invest in systems and processes and growth businesses, this was more than offset by lower integration rated costs as we realize the cost savings from process improvement in our back office and remaining synergies from branch mergers.

I want to be clear on what building a better bank means on building our overall expense plans. The cost of integrating the two large organizations has been more expensive than the original integration plans. The investment in systems and process is not a large incremental spend from past years, and we have attempted to finance it through shifting priorities. While this quarter we saw dramatic decline in expenses quarter over quarter, I do not expect another such reduction as we proceed through the year. We are, however, looking at ways to make faster progress on this front, given revenue uncertainties.

Next quarter, I expect our efficiency ratio to be modestly higher, largely from the impact of fewer days in the quarter. For the rest of the year, further efficiency improvements will need to come from revenue growth, not expense reductions. The good news is that we do expect to see revenue growth in future quarters.

Turning to wealth management, TD Waterhouse in North America experienced the benefit of higher trades per day. Globally, we saw trades per day increase 15% from last quarter, and Waterhouse showed a profit of $11 million versus a loss of $4 million last quarter as our previous cost cutting has paid off. Unfortunately, indications in the month of February are the trade volumes are once again showing slowing as a result of the growing geopolitical and economic uncertainty. Until the war issue is resolved, it is unlikely we will see improvements. Indeed, profits could be less in the second quarter than in the first quarter.

We continue to work hard to reduce the losses in our international businesses. In wealth management in Canada benefited from higher trade activity in Waterhouse, and we continue to make progress in prudently building our advisor and planner forces. There are early indications too that our mutual fund share is turning with positive gains in the last few months.

Now turning to wholesale, while we are still in early in the process, our wholesale business is delivering what we said they could deliver. Core TD Securities net income was $156 million this quarter. Now this quarter, we were able to refine our strategy and begin to build the enhanced infrastructure that I told you about last quarter. And we are very pleased with the progress we made. In looking at the earnings numbers, you should take into account the fact that we did not incur any PCL or PCLI expenses this quarter. Normalizing for annual PCL's of $100 million would lower earnings to $140 million this quarter, consistent with TD Securities contributing $500 million to earnings this year. We continue to plan for 25 million to 30 million per quarter of PCL-like expense in our core business going forward.

Offsetting the lower expected PCL charge as Dan will mention is the fact that we are incurring significant costs to right-size our operation. We are absorbing these expenses related to this strategy as they are incurred. This does distort somewhat the running rate of TD Securities' expenses and profits because we have significant severance costs this quarter. The major disappointment in TD continues to be our options business. We still believe we can turn the business around, but margins in the business have collapsed, and a new business paradigm is clearly needed to make money here. We are driving towards the model that successful players are using, but we expect that the year will be one in which we incur substantial losses.

Turning now to the non-core banks, we are very pleased with our progress in the non-core bank. We have a clear business plan, we have the infrastructure in place, we have a team focused on a simple objective, making the non-core bank irrelevant from a valuation point of view, and freeing the sterilized capital and general reserves associated with these assets. We are planning to undertake in the second quarter a minor reallocation of our split between core and non-core, which will involve transfer of accounts from core to non-core and (ph) core to core. These reflect sharpening of our business strategies. Tom will give you more detail on our non-core portfolio as of January 31st, and at the end of the second quarter, we will be explicit about any portfolio shifts.

While the non-core portfolio did not incur PCL expense, we did have an equivalent counter party loss of $38 million in a derivative transaction with a non-core client. The non-core bank earned $6 million this quarter, which is consistent with a self-funded exit. Tom will be giving you some exposure numbers on our non-core portfolio, and you will see that net exposure is down $3.6 billion this quarter, while drawn exposure is down by 1.8 billion. This is good news, but we do not expect this to climb in total exposure to be a quarterly run rate this year, so I'm not suggesting by the end of the year, our exposure would be reduced by four times these numbers.

The key question continues to be, are we adequately provided in the non-core and, therefore, can we self-fund our exit? We continue to be confident in both. Behind the bigger picture, the U.S. exposure is looking more promising and our European exposure is looking less promising than we had hoped a quarter ago. On balance, I would say that we are feeling comfortable about our reserve position. But also continue to be cautious about declaring victory too early because the business environment is still fragile and a small number of accounts can have a large impact.

Overall, as I said at the start, we see the quarter as a good beginning and absolutely consistent with our strategy. We will continue our near term strategy on focusing on operating results within a tight strategic framework. We believe we have some earnings momentum after we get through the second quarter. We believe we have made progress towards growing our capital aggressively and freeing up the sizable sterilized capital on our balance sheet, and we look forward to another uneventful quarter in the second quarter.

Thank you.

Thanks, Ed. I'll just flip through your slides here quickly.

Was I supposed to do my slides? I'm sorry.

Self-service.

There must be another cost measure.

It will just take a moment here. These were good slides, too. Just about there. There we go. OK. Well, Q1, we earned 7 cents cash operating earnings. 50 cents on GAAP basis. The TD can Canada Trust cash basis earnings $309 million, up 28 million or 10% from last year. Wealth management 39 million in profit, down from last year by about a third, and the TD Waterhouse component of the wealth management profitability was 11 million this quarter versus 29 million in the same quarter last year. TD Securities net income combined both core and non-core were $162 million. 6 of that represented the non-core so 156 represented the core part of the business.

Total PCL for the quarter was $112 million, all of that relates to the retail business. There was no PCL recorded in TD Securities. We did use $236 million, though, worth of plural reserves this quarter in the non-core part of TD Securities. Capital ratio up to 8.5% from 8.1% last quarter, representing retained earnings and a virtually flat position on liquidated assets quarter over quarter. Looking at the trend of earnings by segment, total earnings for the bank cash basis $480 million. That's down slightly from the 528 million reported last year. Segments are shown on this slide. Wealth management down as I mentioned, and TD Securities down from a fairly strong $203 million from the first quarter of last year to 162, but obviously greatly improved from a loss -- losses recorded in both Q3 and Q4 of last year.

Reconciling our cash basis earnings to GAAP results, GAAP earnings as I mentioned, 324 million, 50 cents a share. The only difference between cash basis operating earnings this quarter and GAAP earnings are the amortization of intangible balances, representing 20 cents a share or $133 million. No special items otherwise, no special gains, no special accruals or anything like that. Capital 8.5%. If you were to forecast or project what the capital ratio might be at the end of the year and assume certain growth rates and in the risk-related asset balances, you'd get anywhere from a 9% to 10% growth rate to the end of the year or 9.3% with a 5% growth rate from this point to the end of the fiscal year.

We kept our risk-related assets virtually constant from end of Q4 to end of Q1. In TD Canada Trust, we had about a billion and a half worth of risk-related asset growth on the personal loan side offset by about the same amount in reduction in commercial loans. In TD Securities, our corporate lending activities in both the core and non-core portfolios reduced assets by about $2.4 billion, offset by a great degree in the investment banking and risk-related assets in TD Securities for a net result across the bank virtually the same.

Looking at a question that had been asked a fair amount recently, pension accounting, wanted to confirm again that we have very conservative assumptions in our pension accounting approach. We have 6.75% assumed long term rate of return in the pension fund. 3.5% rate of compensation increase, fairly conservative numbers, I think. We forecast expense this year to be about $56 million for pensions. That's up from 38 million last year.

We've been running at about the same run rate since Q3 of last year, so the point I'm making here is that we're absorbing higher pension expense within the current expense levels, and furthermore, both our significant registered pension funds are now if fully funded, so there's no funding shortfall. We have another executive pension plan which is not registered an it's our policy not to fund that plan.

Moving on to personal/commercial banking, looking at revenues first, virtually flat, in fact, exactly flat from last quarter, and up only 1% from last year. Ed mentioned we're seeing relatively strong volume growth in the major the ca categories of TD Canada, margins down two basis points this quarter and nine basis points from the previous year.

Moving to our quarterly provision for credit losses, 123 million before the effect of securitization, 24 of that represents small business and commercial lending and the balance of 99 million represent personal lending, fairly consistent results from previous quarters. You'll recall in the first and second quarter of last year, we had elevated PCL levels in TD Canada relating to collection problems in the first and second quarter. Those problems have goon gone away, so we're at a running rate of between 120 and 125 million.

Expenses well controlled this quarter, down from both last quarter and the previous year. This has resulted in a fairly significant improvement in our efficiency ratio of 57.3%. Ed mentioned that average FTEs were down about 1600 year over year. Actually point in time numbers are down even more. They're down about 2150 last year to this year. And that's resulted in less expense, offset, as you might expect, by higher severance costs relating to the reduction of head count.

Finally, net income numbers and return on economic capital rates, 309, up 10% as I mentioned before, and the economic capital return this quarter was 29%, up from 27 both last quarter and last year. Looking at market share data, first one is personal loans. Personal and real estate loans in TD Canada Trust. Volumes have grown by about 5% year over year, fairly healthy growth. Despite that fairly healthy growth, we've seen market share declines about 33 basis points year over year.

For the reasons that Ed was mentioning. Moving on to personal deposits, core personal deposits are up a very high 12% year over year. Terms are up 3%. That's resulted in, despite the very high growth in core deposits, it's resulted in a slight decline year over year of seven basis points while term market share remained flat over the past year.

Looking at commercial loans and deposits, this does not include small business, but just for commercial, the growth in deposits a staggering 20% while commercial loans have declined by about 6% as demand for commercial lending products has been relatively weak. We don't have share data on this particular product grouping. And finally, the TD Canada Trust customer service index hit a record high of 85% this quarter. That's the highest its been since the merger took place. We're very pleased with that and it obviously points to the fact that the merger consolidation efforts are gradually winding down. We have a few branches to merge in the current year, but virtually complete.

Moving on to Wealth Management, the components of Wealth Management revenue this quarter are on this slide. The TD Waterhouse total revenue is down about 7% this quarter versus same quarter last year. Wealth other than TD Waterhouse down about 4%. We had good results in mutual funds in Canada, Private Client group in Canada, and I'd say that the Canadian business in TD Waterhouse held up relatively well. We had poor results in the full service TD Waterhouse full service brokerage results in Canada, and continued weak results in the international part of TD Waterhouse.

Looking at profitability, the Wealth Management component other than TD Waterhouse probably stable over this period, five quarters in the range of $26 million to $29 million. This quarter we did earn a profit total in TD Waterhouse $11 million, an improvement from weak third and fourth quarter results. You'll recall that we had some write-downs in the international part of Waterhouse last quarter and the quarter before, but this does represent an improvement from those depressed amounts. The return on economic capital rebounded slightly to 30% this quarter, down from last year but up from the previous weak quarters of last year. Assets under management, not much change here. Year over year, there's a decline once (inaudible) obviously in the market levels. That's had an impact on assets.

We also had a reduction in the quantitative capital, the index management business through some reductions in the pension plan assets that we're managing. Quarter over quarter, virtually stable. As Ed mentioned, we've got some good news finally in the mutual fund area in terms of market share. Total share including all funds year over year up about seven basis points, but more importantly, long-term share, that's the non-money market, the longer term funds are up by 21 basis points year over year. Some of the operating statistics relating to Waterhouse are here.

Virtually the same balance of new accounts quarter over quarter versus last quarter, 87 versus 88,000 new accounts. That's effectively maintained active accounts at approximately the same level, although down slightly from the first quarter of last year. Trades per day, 94,000 trades this quarter. That's up 15% from last quarter, which was only 82,000, but down from a fairly high first quarter of last year as the trading activities rebounded after a depressed fall relating to the September 11th issue.

As Ed mentioned, February is starting out very weak, and it may be difficult to maintain volumes at these levels for the second quarter. Customer assets are virtually flat from the fourth quarter to the first quarter. Wholesale results. We had a bit of a rebound in the wholesale results this quarter. Total revenue was up 8% from last quarter to $610 million. That's down 34%, though, from a record first quarter of last year. We had significant trading-related revenue last year, which didn't come through at the same level this quarter. Security gains were also very high last year, and they were virtually nonexistent this quarter.

In terms of profitability, as I mentioned, 162 million in total, up from two loss quarters, Q3 and Q4, but down from the strong first quarter of last year. Return on economic capital, 16%. A fairly satisfactory result given the recent experiences we've been having in TD Securities. At the split between the core and non-core businesses, I mentioned that the core part of TD Securities earn $156 million. You can see on this slide that that represents revenue of 587 million. No credit losses. In fact, this quarter there were no credit-related costs in TD Securities' core businesses, and you'll find that the expense levels are relatively high as well. The efficiency ratio in the core part of TD Securities is about 10 percentage points higher than it's been running in the past. Relating to a couple of factors.

First of all, as we've been restructuring the business, there has been some severance costs incurred. Significant increase in the previous -- the comparable quarter last year in (inaudible), and secondly, we've been, I think, quite conservative in the accrual of incentive compensation expenses this quarter. We'd like to be conservative and accrue for perhaps a little more than may be totally necessary in the early part of the year so we're not behind the curve.

In the non-core side of TD Securities, we show a negative trading and fee income number of $25 million, net of the $38 million swap loss that Ed was mentioning, so prior to the write-down of 38 million, we had 13 million of fee income. NII was 48 million. No PCL costs. PCL's went through the sectoral reserve, 236 million were booked through sectorals. The swap write-down of $38 million was certainly a PCL-like expense, comparable expense, and is running -- that $38 million to $40 million is about the $150 million for the year that we mentioned at the end of Q4 in terms of credit-related or credit costs that we would expect to incur in the non-core part of TD Securities.

And moving on to the credit loss number, there was no actual credit losses recorded in the wholesale part of the bank this quarter. You can see it's nil there. I've given a breakout of the sum of actual credit losses recorded, and sectoral reserves taken, so you'll notice that the 236 million recorded here as Q1, that is the usage of sectoral reserves this current quarter. The previous quarter, Q4 of 02, $426 million, represents 241 actual credit losses booked, and a usage of sectorals in the wholesale bank of $185 million for a total of 426. The non-core portfolio analysis is here. We have drawn loans and BA's decreasing from $11.181 billion down to $9.318 billion.

There are a number of factors which was bringing the balance down. There's obviously the increase in specific allowances booked against the portfolio, 236 million. These are net of specific reserves, so that is a reducing factor. Foreign exchange had $50 million reduction effect as the U.S. dollar weak end versus Canadian. That left a net reduction, IE, we got money in, restructured loans, reduced portfolio. On a total exposure basis, the exposure went from 20.694 down to 16.995, a gaining net reduction excluding the impact of specifics and FX of 3,000,000,314. Ed mentioned this is a fairly rapid rate of reduction and perhaps we wouldn't expect this to continue for the balance of the year. Most of this draw-down was in investment grade loans.

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

Thanks. We'll see how many different ways we could show you the same information here. As Dan mentioned, PCL this quarter 112 million, no PCL in the core bank, that's 34 basis points of loans and BA's, lowest number we've had for a while, obviously, and much lower than recorded in the fourth quarter. We did not add to our generals this quarter. Our generals on the loan book remained at 1,141,000,000. We did, however, increase deferrals relating to our derivative business from 65 million last quarter to 76 million, and that's really just a function of ongoing risk shifting and increase in size of the portfolio.

As a percentage of risk-related assets, general reserves increased slightly to 101 basis points. In terms of new formations, this quarter 660 million or 51 basis points of loans and BA's favorable relative to last quarter, which is over $1 billion, and that is split retail 193 million basically running -- or the way they have the past few quarters, commercial quite low at 9 million and the non-core portfolio at 458 million and zero in the core portfolio. Of the non-core 458, as Ed said, the underperformance, if you wanted to look at it that way this quarter, was really in Europe. And 85% of the 458 million was either in UK merchant power companies, substantially companies that had power purchase agreements from troubled energy companies in the UK, and as well in the European cable sector.

Two observations here. This is the good point in this slide this, is the lowest number this has been since the first quarter of last year, so that's a positive. And the other observation I would make is I think in terms of having set up the non-core bank and got the guys going in a formal way this quarter, they also took a good close look at the portfolio and rerated some files.

I think as we go forward, we're going to see lower and new impaired formations in the next few quarters. In terms of aggregate gross impaired loans, 2.783 billion or 2.09% of growth loans and BA's continue to be well reserved as aggregate-specific sectoral and generals exceed gross impairs down from 975 million excess at the end of the previous quarter.

To give you the quick reconciliation then on specific allowances, started the quarter with 917 million. The combined effect of draw-downs, foreign exchange and specifics transfers from sectorals actually, left us with an ending number of 1.112 billion. The sectoral allowance, I think we mentioned last quarter we started at a billion 265, we had set the number at a billion 265 but we also had a foreign adjustment relating to some hedging we done on sectorals that took the total at the end of the quarter to a billion 285, so this quarter strengthening the Canadian dollar reversed some of that foreign exchange of 17 million and we had the 236 million draw-down, so at the end of the quarter, we're at a billion 32 in terms of total sectoral allowances in the non-core bank.

I'll flip over this next slide, we'll show it to you a couple different ways. She's already shown you the composition or sort of the portfolio reduction in the non-core bank. This shows you the -- in terms of investment grade and non-investment grade. It gives the same picture in these pie charts.

In terms of exposure, we did not slow you show you the slide this quarter, although I think in terms of questions, we provided essentially this type of information, so that exposure defined as credit commitments, uncommitted utilized minus any specific allowances, cash collateral and credit protection against the portfolio, 17 billion net this quarter, and the mix has shifted. So it's quite, I think, fair to say that the easier wins came in maturing or selling investment-grade portion of the portfolio, and there were smaller reductions in the non-investment grade portion, so this quarter-end, we're showing investment grade now of 47% of the portfolio in terms of exposure last quarter it was 51%.

In terms of non-core portfolio in terms of looking at it in terms of loans and BA's, 9.3 billion. Once again, you can see the effect or I can tell you the effect in terms of investment grade/non-investment grade shift. In terms of drawn last quarter, investment grade is 39%. It's now 31%. That would, I guess (ph), point me to indicating that, you know, it's going to be slower going forward, because now we're going to be digging into files that are going to be stickier in terms of trying to move out of the bank. To try and get a sense of reserve assessment, we showed you these files last quarter or these slides last quarter. What we tried to tried to do is take a look at the non-core portfolio in terms of the gross drawns (ph), so as compared to the 9.3 billion I just showed you on the previous slide, we've added back previous write-offs on files that are still on the books.

We've added back specifics and that gets us to the total $10.8 billion in terms of amounts owing, if you will, from obligors. And if we look at our reserves against that 10.8 billion, we have 406 million of previous write-offs, 1,112,000 (ph) of specifics, and as we mentioned, we had some discussions that would lead us to believe that 300 million of generals might be allocated to this portfolio, so that gets you to 2.85 billion in reserves against the portfolio. 26% of the total drawn non-core portfolio 36% of the non-investment grade. That number has changed only slightly from last quarter, non-investment grade, we were 36.4%, so we're really still notwithstanding the movement in the quarter, we're still reserved at about the same level against the non-investment grade portfolio.

To try and look at this in a little more precise way, same basic calculation to get to gross loans, but I'm showing on this slide only the telecom portfolio, the power and power generation portfolio, and then in the rest of it, only the classified accounts. So that gets you to 6.3 billion dollars, and those same reserves would represent 45% of the total of those loans. I think that's reasonably strong reserve position. In terms of the aggregates, telecom and cable net loans and BA's down 470 million this quarter. More of that would have been in non-investment grade -- or (inaudible) -- excuse me -- in investment grade, down only 93 million in non-investment grade. But reserves relatively the same.

This slide we've shown you for a number of quarters now so I won't go through it in a lot of detail. Suffice it to say total (inaudible) against impaired telecom loans are 71%. That's the number in the lower right-hand corner. That was the same number last quarter. So really it hasn't changed quarter over quarter in terms of total reserves against telecom. The power and power generation portfolio, once again we've seen some reductions about 500 million this quarter, 506 million to be exact, about evenly split between investment grade and non-investment grade.

And once again, looking at reserve adequacy in the portfolio without going through it in a lot of detail, last quarter we showed you total reserves against this portfolio of 55% this quarter it's with 56%. Turning to market risk, our value at risk was quite a bit lower this quarter at 14.7 million relative to 17.8 million in the fourth quarter of last year. There is one change in the methodology here that took place during the course of the quarter on December 15th, we had received approval to turn on our general credit spread model and so the effect of that is in the data, the solid red line at the bottom of the chart, and you can see then as a result, there was a spikedown in terms of higher risk representing the credit spread risk. Our daily trading losses did not exceed our VAR (ph) at any point during the quarter.

And then looking at the histogram of daily trading revenues, actually a very good quarter from profitable trading days, 98.5% of the trading days profitable, only one loss day in the trading quarter. Each bar here represents the number of days that we would have recorded trading revenue within the dollar range as shown across the horizontal access.

So that sums it up from a credit perspective.

Why don't we open it up for questions. We'll go to the floor first. To those who showed up.

Michael?

Did you record a gain on TSX in the quarter, and would that have been in your investment gains? And also you mentioned the charges that you had in right-sizing TD Securities. How much would those have amounted to?

We did recognize a gain on TSX shares. In total for the bank, it was about $15 million. It is included in the net security gains number you see in the schedules which shows $5 million, so obviously the $15 million would have been lumped in with all of the other gains and losses which would add up to $5 million.

The severance amounts booked in the total bank, I'll start with that, are about $40 million higher this quarter than they were same quarter last year. We have been incurring higher severance costs towards the end of last year as well, so it wouldn't be as much of a difference between Q4 and Q1. That amount is spread over a number of businesses. The amount in TD Securities is approximately $15 million difference from year to year. I'd rather not give the absolute level. It tends to change around a bit, but it's up a lot from last year.

I had one more actually. In shrinking the size of the non-core portfolio as you did during the quarter, were there any losses incurred?

In loans? They're not significant.

OK.

Two questions. First, I noticed a big increase in your revenues related to credit fees, and I'm curious if you can elaborate on that given the fact that you've indicated that you're exiting or significantly reducing your exposure there.

Good question. We also, net certain write-downs on that line, so when we have syndicated loans that are in overhold positions, I think I may have mentioned this in previous meetings, but we mark those to market, and over the last year, we've been taking write-downs in overhold loan positions and it goes into that line. Those writedowns have slowed down considerably as the markets have improved a bit and we've written them down virtually to zero.

OK.

So that's why the amount sprung back. It's really a net figure.

OK. And my second question is with respect to retail margins. A couple of your peers that have reported so far this quarter have indicated expanding margins in Canada, and I'm just trying to figure out why there's such a bifurcation between the banks in Canadian retail.

I don't know that we can give you a full explanation. One possible element would be that as you are aware, we probably tend to run a more fully hedged book than they do, and it could be that in previous years, they suffered more margin compression than we did, and what happens in the way we hedge the book is that if you're hedging against fundamentally low interest rates, eventually those hedges work themselves off and so it may be that we're suffering from the fact that we did better last year than they did as opposed to -- because they suffered -- some of them suffered margin compression last year.

But we've been trying to dissect what's going on because there clearly is some pretty aggressive pricing going on there, so I don't know why it isn't showing up in their margin numbers what's obviously -- they've got some other offsetting balances someplace else.

OK. I'll have to dig a little more with them. Thank you.

On the retail bank, if you look at what your key drivers are, we see revenues basically flat-lining through what has been a good retail environment, margins under a little bit of pressure but not materially so. You say the expense cutting largely done, there's not a lot left that's going to be revenue-driven, and PCL's look like they're at core levels. So you've got $1.90 per share there. Where do you get the driver from here in terms of opportunity for TD Bank to take that higher, the 10% in

How are we going to get 10% earnings if we have that environment? I guess you get it in several places. First, we do have underlying volume growth, so we're getting the 5 or 6% underlying on the core businesses, volume growth, but this quarter, it got offset by margin compression and I guess I'm hinting that, you know, our best guess would be that there be another round in the second quarter, but we think we'll have run through the margin compression effect by the end of the second quarter. We think that that might well stabilize, and if it does stabilize, then the fact that you're growing volumes every quarter will start to kick in and give you some revenue growth there.

Secondly, there's a number of fee -- some seasonality to our fee income, and so we actually see positive fee growth there, and we do have our businesses in which our undershare businesses, all of which have significant earnings momentum built into them that hasn't fully shown itself in the numbers. So when we work through the numbers, it doesn't mean, as I said, that there isn't risk to that, but, you know, we still haven't moved off from our view that 10% profit growth for the year is possible in that business.

But as I indicated in my comments, given, you know, the potential for a slowing economy and more margin compression than we built into it, that does mean that we are looking to say are we going to have to take costs out more dramatically than we originally had anticipated for the year in order to achieve that goal.

But presently that's not part of the program, the cost right now?

We're still going to get the 10% profit growth without doing that.

Steve?

In TD Securities, you describe it as a sort of a good clean quarter. If you had zero in PCL's and it probably should be, I don't know what it is, 75 million, I don't know, a quarter, just to pick a number, and we only had 15 million of incremental severance costs, aren't TD Securities numbers unusually high and not sustainable at this level?

I think the way we broke it down, what we said with we thought for TD Securities as a whole, 250 for the year, but that was 150 in the non-core bank and 100 in the core bank. In effect, we took the 100, the 150 and the $38 million swap counterparty, so we are running at the 150, so it's really -- we were 25 light in the wholesale bank on PCL, and that's because we're working through our strategy of portfolio management, but we weren't at a point where we were comfortable pulling the trigger on some things and so we didn't incur the 25 that we originally thought.

I guess we'd say offsetting that are a combination of higher severance costs, higher accrual for bonuses and if you take a look at our tax rate, a conservative tax rate, so we're confident that what we're trying to say to you, if you take a look at the numbers, we still believe we're coming in -- running the business at the originally 500 to 550 that we originally set out a quarter ago. We see no indication of that. Obviously if Capital Markets continue to be the bear market that it is right now, you know, who knows, but there's no indication from the first quarter that we're not on track for that - Steve.

On TD Waterhouse, the goal for this year is to reduce your losses in the international division by half. Can you talk about the progress of that in the quarter, and can you also talk about reduced market expense? Did that happen this quarter, and how do you envision those costs over the course of this year?

I don't know that we've said -- if we did, I just don't recall, precisely that we're going to reduce the losses to half. I think what we said relative to the international is was that our aim was to get ourselves in the position so that in a running rate, we ended the year such that 2004 would be break-even on the international. I would say we continue to be challenged in that respect, so I wouldn't say that we feel any more comfortable in getting that goal than we did before. I think that's a tough goal to accomplish, but it's one that we're determined to do.

The environment have obviously deteriorated yet again, and as we indicated in Waterhouse from the February trading numbers, so it means that things that we have to do to meet that goal are yet tougher, but we are determined to actually, you know, get that going. We'll do what we have to do to get it. In terms of marketing, we have, because of the seasonality in Waterhouse, this is the high marketing season for Waterhouse, but they're marking at a rate that implies, you know, a reduction in their marketing spend from last year. Obviously if these volumes stay where they are, we will probably take a look again at that marketing number and we may take it down yet again.

Second question. The tier 1 quickly got to 8.5%. And we're seeing capital ratios for all the banks going to quite high levels now. Is there a tier 1 ratio that you look at and are comfortable with where the bank has been a little bit late as compared to some of the other banks in terms of raising its dividend? It's been quite a while. Is there any sort of thoughts towards that area, or really your 8.5% at this point in time?

I guess that gets us into the whole issue of, you know, what's the appropriate capital ratio for us given the amount of capital that we don't count for regulatory purposes, and so, you know, obviously our position is that 8.5 doesn't reflect the true capital base we have because the amount of capital -- it would be 11.5% if we counted the intangibles tied up in Canada Trust, and so by that definition, we're obviously accessibly capitalized as an institution.

As I've said publicly before, to me, the issue of, you know, we will address later in the year as to what -- you know, what is the appropriate level of capital that we ought to be running the bank is and what should be do with excess capital when we have gone through the year and demonstrated to the marketplace that we have put the non-core bank issues behind us and that we can produce steady and consistent earnings that grow and that are high quality earnings, and we're going to do that this year, and when we do that, then we'll turn to the issue of what the appropriate capital level is. Why don't we go to the phones.

You have a question from Jamie Keaton (ph), RBC Capital Markets.

Housekeeping question. Ed, think it was you or Dan alluded to the options business in the U.S. -- a drag. Is that a material amount or can you just -- for us?

Ed mentioned, Jamie, that we were disappointed in the results. We haven't disclosed the amount of the loss in that business. I wouldn't say it's overwhelmingly material. I think we'll leave it at that.

And Ed, if I can just follow up on the TD Canada Trust expense ratios. Perhaps I'm misreading it, but the FTE's on the average level -- or excuse me -- on the end of period level look like they're down ...

We're having trouble hearing you.

Let me speak up. Sorry. The FTE's in, I believe, the retail bank are down nicely. I think you're telling us or guiding us that the expense decline this quarter is probably not sustainable going forward. In fact, if I read it correctly, expenses are kind of flat going forward. Can you just comment on that? Are you being a little conservative on that, or is that probably best case?

Yeah, I think what we're saying to you, we're definitely not guiding you, we're just trying to tell you the facts. I think what we're saying is that while we have made obviously an absolute terms reduction in expenses quarter over quarter, there isn't another whole set of absolute (inaudible) here to come, indeed, you could see expenses starting to grow again, but, you know, we're determined to grow them less quickly than revenue, and to, you know, continue to meet the goal that we set ourselves for this year, which was to have an efficiency ratio well below 58%.

Thanks.

Any other -- next question?

The next question comes from Robert Weisel (ph), National Bank Financial. Please go ahead.

Yeah, thank you. I have just a couple quick questions, but in terms of the movement between the core and the non-core portfolio, I guess one of the questions I have for things that you moved into the non-core portfolio, should we conclude that those accounts became impaired and, therefore, if they became impaired, they're sort of by definition now non-core and then you move them in there, I guess? Can you give some sense as to what moves in and out of there and why?

We didn't have any movement of accounts from core to non-core or non-core to core, at least if there was, it was a trivial number in the first quarter. What we were just signaling to you was that obviously when we did this in the fall, we were -- had a lot of issues on the table. We did our best first cut in terms of what we thought would be long-term relationships that we wanted to keep, and long-term relationships that we no longer wanted to.

We now had 90 days to carefully go through that and obviously to have discussions with issuers, and so we're going to end up doing a new recut from that, but we wouldn't be doing it to try to move impaired loans out of the core and into the non-core. We're doing it because we'd come to a different view of, you know, the business relationships we're going to have with clients. And again, as I said, when we do that at the second quarter, we'll be quite explicit with you as to what -- you know, how much the amounts are, whether -- what's the nature of the business that we're transferring one to the other. But it's not being motivated by an attempt to game loan losses or provisioning or whatever.

That's great. Just a follow-up question. I apologize if I got the number wrong, but I think Tom had mentioned that you felt that you had about 300 million of general reserves set aside for the non-core portfolio, and if I'm correct, then do you feel very confident that you'll be able to unlock that number or bring that back into earnings, and if so, do you have some idea -- I guess I'm asking do you have some idea as to the probability of that and then timing?

I guess what we're saying is that it's too early, I mean, one quarter is not -- you know, after one quarter, you don't say whoopee, it's over, we're going to declare victory here. So we're in a situation whereas I indicated, you know, if you want to compare how we're feeling about things, we're feeling better about our U.S. situation and we obviously felt a little worse about our UK situation, although we think we've taken our problems in the UK -- both took them I impaired and provided for them inadequately.

So net-net, if the question is are we feeling better today than I was feeling 90 days ago, the answer is yes, I'm definitely feeling better today than I was 90 days ago about the adequacy of our reserves, but we're still putting the 300 million up there as coverage and until we get through this -- further on into this year and, you know, make sure that as always in these kind of portfolios, you have a number of key accounts that you want to work their way through the restructuring and be assured that you're home free, we're not going to declare victory at the end of the first quarter here.

Great. And sir, I just have one more question. Should we sort of think of these two together, the possible reversal of the sectorals to the extent you were ultimately conservative? You might bring some back into capital. Should we as investors -- who look at a company, should we look at that together with the general reserves in terms of those two events kind of happening at the same time or being driven by the same economic outcome?

I think from a business point of view that's probably true, but I'm not sure from a timing point of view it will be true. I think Osprey, in order to reverse the generals, we would have to get OSFI's approval, and that may not happen at the same time that an intelligent investor would come to a conclusion that ultimately these reserves are going to get released.

That's great. Thank you very much.

The next question comes from Neil Madison (ph), Standard Life.

Thank you very much. Couple of small ones, if I may. There was a mention of a -- if I've got this right -- $38 million of swap counter party transaction or something like this. Sorry, could you just walk us through this? I didn't quite get the gist of what this was about.

Sure, Neil. That was a loss taken on a derivative position, swap position with a counterparty in the non-core bank. That counterparty went impaired in the period and we crystallized the loss on the swap.

OK.

So it's effectively -- those kinds of losses don't go through credit loss line, they go through the trading ...

That's the negative item in the trading line there.

That's correct.

OK. Fine. The other one, make sure I've understood this, is that notionally, you would expect something like $100 million PCL loss for the core bank on an annual basis, although nothing was taken this quarter?

Yeah, I think that's what we said last quarter that, perhaps $100 million might be viewed as a normal credit charge against the portfolio of that size. We didn't take any this quarter, though.

All right. Fine. But that's more of an event driven issue of timing? OK. And the other one finally, just to come back, Dan, to your point about the incentive accruals in TD Securities, I noticed they were up quite a lot for the overall bank. I'm trying to get an idea of what you're signaling here. If you actually have to pay that out, you'll be terribly happy because it means the business is better than it is now? What am I supposed to read about this?

Well, really it's just simply an attempt on our part to be conservative early in the year. I mean, obviously the results are improved in TD Securities from where they might have been in the last few quarters, so you would expect the higher level of incentive comp accruals. It's difficult to forecast what the final results might be for the year, and there's always a number of discussion points between various businesses as to how the incentive comp awards are going to work, so we try to be conservative.

Bob Dorrance is smirking at me here. I'm not sure what that means, but suffice to say that if you look at the ratio of incentive comp awards to actual revenue in Toronto-Dominion securities, I would say we've been quite conservative.

Certainly looking at the overall security ratio, TD Securities, it's up about 10 points versus any quarter you can see on this piece of paper. You know, what should we expect to see? Because on the surface, it looks like an issue. Is this a case of you're actually sort of prepaying some or pre-accruing some of these things or what should we draw from this?

Well, I don't think you'd draw the conclusion that we're prepaying anything. You would hopefully draw the conclusion that we've been conservative in our accrual rate. There are some other costs involved in the restructuring of TD Securities that we mentioned in terms of severance. Those are actual expenses, and you have no problem with that, I wouldn't think, in terms of going ahead. I think the point we're trying to get at is that we would hope that that efficiency ratio would improve, and that, you know, we've been conservative in the accruals so far.

OK. But essentially the increase is being explained by these two factors, the higher severance and the incentive comp accrual?

That's correct.

OK. Thank you.

The next question comes from Jim Bantiss (ph), Credit Suisse First Boston. Please go ahead.

Good afternoon. Question for Bob Dorrance. We're looking at the trading regulated income, and if you actually add back that swap loss, trading revenues were north of 400 million and showing a 25% increase over the previous quarter. Perhaps you can just get a little bit of color in terms of what businesses were working this quarter. Are they sustainable, was the business lumpy?

And secondly, do you feel comfortable with the head count and the footprint that you have now given the market conditions or the severance costs that we incurred in the first quarter likely to be repeated again in the second quarter?

I think in terms of the businesses that did well in the quarter, if you looked at the commonality of the themes, they were the interest rate businesses, foreign exchange, the convertible debenture arbitrage business had a very good quarter, and that would have been a significant delta on, you know, a lumpy type trading. The other businesses, I think, benefited more from just the market to market's activities and trading acumen. And then offsetting that, enlarge the equity businesses and -- were under plan in the quarter.

So there was a mix, and I guess if there was one area that you might construe as lumpy on a historic basis may have been the convertible arbitrage business. I think with respect to right-sizing, I think it's an ongoing exercise, something we've been working at for a while in the latter half of last year and into this year, and I think we continued to need to look at ad expenses in our business, you know, on an ongoing basis and certainly relative to where our markets are currently when we forecast going into the few (inaudible) I think there's an ongoing need to continue to drive expenses lower in the core business.

But Bob, similar to the option business that we talked about a different paradigm developing, is there another line at TD Securities or business lines that you feel are significantly underperforming or has most of that been taken care of now and it's just fine-tuning?

I would say the latter. I think all the businesses are -- not all of the businesses are at plan, but there are no businesses that are significantly below plan or what we would say that are strained or stressed. In some cases, the market will help hopefully and in other cases, you know, we have offsetting businesses that are doing very well, so on a blend, because Ed said we're not in the forecasting business but the first quarter was on plan, and we don't see any reason to believe that we'll be off plan for the year at this stage.

That's great. Thank you.

The next question comes from Susan Kahn (ph), Dundee Securities.

Some of the other banks have given their (inaudible) line exposure at the end of the quarter. Do you have those figures handy?

I don't have them with me. We gave those, I guess, post September 11th going back around that event last year and they were so small, we have just stopped reporting them. So it's a diminimus (ph) exposure.

OK. That's fine. Thank you.

There is a follow-up question from Jamie Keaton, RBC Capital Markets.

I was just intrigued by Neil's question regarding the efficiency ratio in Bob's business, and it occurs to me maybe there's a business mix shift underway as well. Is it perhaps, Bob, that a change in the nature of the businesses is creating a slight lift in the efficiency ratio, perhaps trending towards some of the other dealer business mixes and perhaps a away from, I'm guessing, proprietary-type business that is might have commanded a lower ratio or something? Could you comment on that?

I think it's fair to say that we would be conservative in any accruals that we're making in the quarter. I think it's very -- it's too early in the quarter to actually look at, you know, a specific bonus pool for TD Securities, so we're looking at things like mix, we're looking at the market and I think as we have done historically, we have tried to get ahead of the curve in the first quarter.

But I think it is conceivable that our business strategy, which is to drive TD Securities to higher quality, higher ROE earnings might well produce slightly higher efficiency ratio, because we're going to be paying out more in compensation in that model, and that's a good thing, not a bad thing.

I agree. Thanks, Ed.

It's easier for me to say that than Bob - Steve.

Just back to the power group in the non-core portfolio, it's obviously a big representation there. We've seen a lot of activity in the last couple of months in regards to asset sales and divestitures from the group. Can you just talk a little bit about negotiations between banks right now, what the strategy is? Is there communication that's taking place here that you've seen perhaps at a higher or lower level than you've seen before, and just what the level of cooperation is at this point in time.

I guess I would separate the U.S. and UK markets, perhaps, and the single biggest issues around that are really U.S.-related companies, and what we've seen over the past self several months is pretty well organized support for restructuring with in some cases a small -- a handful of holdouts. And in the past, I'm sort of looking back into last year now, when one or more banks has held out, the pitch has pretty much been everybody's in the tent, we're going to restructure this together, no one is going to escape here, and if you think that we're kidding, you know, just watch us file. It's been that kind of discussion. And so as a result, and with a fair amount of pressure within the industry, I would say, you know, those restructurings have taken place with 100% participation, and my sense is that that's going to continue.

So the significantly significant liquidity risk that we saw in number of those companies I would say is lower today than I would have assessed it as being in the fourth quarter, for example.

And one thing that is as discussed in the last quarter was that perhaps we wouldn't see the level of PCL's without expenses in regards to protecting the portfolio increasing such that the overall expenses related to PCL's are going to be at around 700 or a million or so was the number. I don't think we saw slides here in terms of the level of credit protection, and did you buy more over the course of the quarter?

Yeah, there really wasn't a significant amount of expenditure in the quarter. As Ed mentioned, we're getting our arms around it and just getting started, and that in all likelihood, the rate of expenditure either on actual credit losses or credit protection or credit-like expenses in the core portfolio would assume a more nor normal 25 million per quarter, say, or something like that going ahead.

Two questions just on that then, it's not going to be a catch-up to 100 million, so looking at 25 run rate? OK. Secondly, Tom, just in terms of the non-core portfolio, could you -- do you have a breakdown of the tenor of those loans? You mentioned a number of them came up perhaps for renewal or were paid, et cetera. Can you give us how those break down over the next five years, a buck in one year, $2 billion, two, three, so that we know how that ...

That's not something I can do off the top of my head. But, I mean, we did look at it, and, I mean, it steps down steadily, but we could not solve this problem within the three-year time horizon that Ed has sort of set for the guidance rather than five years by amortization alone. We will have to do some things in the secondary market to deal with the problem.

And that would still be the case despite the rather rapid reduction this quarter?

Correct. I mean, we've had -- you know, we've had a number of borrowers where we had longer term facilities for whatever reason, refinance those facilities or pay them down and that's been a positive, but we've also had the early maturities roll off in an orderly way. But I think amortization will not continue at the pace you've seen in this quarter. We will have to work to get the numbers down.

EC I think, you know, in terms of a business strategy, what you'll probably see as the year goes on is that we get more aggressive in selling off long-dated investment quality loans so that we basically say that's probably where we would spend some money, is to shorten the life of this portfolio, whereas good quality loans that are going to roll off in 2003 or early 2004, we wouldn't incur any cost selling them off, but if they were going to go out 2005, 2006, 2007, then we probably will start to do that - Robin.

I guess it's to Tom, really. What's your feel of the secondary markets or the ability now, you've had four months to assess the non-core portfolio about your ability to move the securities?

Bear in mind I'm not managing that portfolio day to day, but I would say that my assessment has been that secondary market activity around these kinds of loans has strengthened materially in the last 90 days, so particularly in January/February, I think you saw on distressed credits, you saw prices trade up substantially. And so the real assessment that we will be doing as we go forward is to try and identify those loans where we think that the trading price on a present value basis bears some reasonable relationship to where we think the ultimate recovery might play out as opposed to just dumping the assets because, you know, we want to get the numbers down, so there's a balance of making sure that we don't destroy capital here and accelerating -- or exiting the portfolio in a relatively aggressive way.

Did you have a question?

Yeah, just two quick housekeeping issues. Ed, you talked about goodwill probably shouldn't be subtracted from tier 1. I guess I would ask how much goodwill there is against the equity option business, the first thing. Second thing, there was a writedown on JVs in the corporate line. Can you tell us what that was? Because the corporate loss looked quite a bit higher than it normally is.

There were a number of things that went through the corporate line, Ian. One of the biggest items is the fact that we issued some Katz, Katz 2 in the first quarter, and that increased the portion of minority interest going through the other. The rest of it relates to, as has been the case in the past, basically unallocated expenses. There were some executive severance expenses in that number that were not allocated.

I think in the narrative it said there was 14 million in writedowns in JV in the corporate line.

Last year.

Oh, last year. OK.

Last year, it wasn't a writedown, it was a gain actually, a gain on the sale of our mutual fund business that went through other. And that was 14 million post tax went through that line.

So normal run rate on the corporate -- 10 million negative on ...

I would say that's a little higher than we'd likely see in the future but that it's not unusual.

In terms of the goodwill issue, whenever I (inaudible) back in the intangibles, I'm only referring to intangibles with respect to Canada Trust, so I'm not putting back any goodwill in any of the other acquisitions, so it's only -- because I think Canada Trust has matured to the point where I think it's proven that it's not zero in terms of its income that's flowing from that acquisition and, therefore, some credit to the investment ought to be given. In terms of the equity options business, I think we're too early in its business life to make an assessment obviously towards the end of the year, we would relook at that goodwill and decide what the appropriate thing to do.

If you wanted a quantification, if you look at the schedule on goodwill, you'll see it's in Q2 of last year, virtually all of that number, 325 million, does relate to (inaudible) purchases.

Back to the phone, we'll take -- any more questions?

We do have a question from Nick Savelli.

Just assess whether we should be expecting further write-offs -- is there any material derivative contracts with non-investment grade counterparties on the books?

Tom?

Well, yes, I guess the short answer is yes. I mean, we have active derivatives business with both investment grade and non-investment grade counterparties.

And do you have any concern on further writedowns?

We're talking the non-core bank specifically now, I assume, and I think we've taken a reasonably close look at that, and what we've decided, at least our assessment at this point, if we talked about the $150 million of PCL-like expenses we would have in the non-core bank this year, that any losses we would experience in derivatives related to non-core banks could be accommodated within that.

Great. Thank you.

I think we'll call it. Thank you very much.

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