Toronto-Dominion Bank (TD) 2003 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Toronto-Dominion Bank conference call. During the conference call all participants will be in a listen-only mode. Following the presentation we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) I would like to remind everyone that this conference call is being recorded and we now place the lines back on music hold until your conference begins.

Perhaps we could get started. Welcome to the TD Bank Financial Group third quarter 2003 investor 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. After the formal presentations we will entertain questions from those present, as well as prequalified analysts and investors on the phones. Those viewing the webcast will be able to e-mail us questions.

With us today is Ed Clark, the Bank CEO who will give an overview of the quarterly results; following Ed's remarks I will cover our operating performance in more depth; also present today to answer any questions are Bob Dorrance, Chairman and CEO of TD Securities; Andrea Rosen (ph) President of TD Canada Trust and Bharat Masrani, Executive Vice President of risk management. This presentation may contain forward-looking statements and we draw your attention to the slide concerning forward-looking statements at the beginning of our formal presentation. Ed.

Thank you, Dan and good afternoon everyone. Let me start off the call by saying I am very pleased with our third quarter results. Operating cash earnings for the quarter are 91 cents. This result includes a $35 million after-tax benefit of interest on a tax refund. $13 million in other tax adjustments and a sacrum (ph) provision release of $40 million or $26 million after-tax. This was partially offset by the remaining $5 million restructuring charge for TD Waterhouse International, announced in the second quarter. The net impact of these items is about 10 cents per share.

I believe that our performance reflects the strength of our underlying core businesses and is further evidence that we are successfully doing what we set out to do. Deliver sustainable earnings and regain market confidence. As a result of our strong performance, we moved up the announcement regarding our capital plan. We are increasing our dividend payout ratio to 35 to 45 percent to be consistent with our change in business mix, lower risk profile, and higher degree of certainty around our earnings. As a result, we also today announced a 4 cent increase in our quarterly dividend. We have decided to continue our dividend reinvestment program because our retail shareholders like it. If down the road we find this program to be overly dilutive, we will buy back shares to offset the impact.

At the beginning of the year I set out a number of key objectives and I am pleased by our progress todate. One of our first objectives has been to improve our capital ratio through a disciplined review of our assets and stable earnings. Our Tier 1 capital ratio has improved 160 basis points since the beginning of the year to 9.7 percent at the end of this quarter. Our second objective was to permanently reduce the risk profile of the organization. We have achieved this in two initiatives. The creation of a non-core portfolio and reducing our exposure in our core portfolio. We are making good progress on both fronts. Non-core loans in (indiscernible) declined by $1 billion this quarter to 6.2 billion a reduction of 45 percent so far this year. Non-investment grade loans declined from $6 billion to $4.9 billion quarter-over-quarter and are down 28 percent year-to-date. Total net exposure which began the year at 20.7 billion dollars is now 10.9 billion and noninvestment grade exposure has been reduced from 10.2 to 6.9.

In the core wholesale business the portfolio has been declining and we are making good progress on reducing single name and industry exposure. Late in the quarter we doubled our existing credit protection to over $3 billion. Depending on the market we intend to make further purchases of up to another $1 billion. Our core drawn portfolio net of credit protection, now stands at $7.2 billion and is a very high quality. But growing capital and lowering our risk profile is just part of the story. It has to also be about growing and building our three main businesses for the long-term. Our personal commercial business remains central to our strategy. We have indicated to the market that while the long-term this business may be a 6 to 7 percent growth business, we believe that in the period covering this year, 2004 and 2005, we should be able to average 10 percent plus earnings growth rates. Year-to-date, earnings are up 15 percent well ahead of our target. In Wealth Management, we have set out equally straight forward objectives depending on the geographical jurisdiction.

In Canada we are prepared to invest for the future. ?We fill in the gaps of our offering and better exploit our huge assets, our brand, and our customer base and technology. In that context, our earnings goal have been modest in the short run and more demanding in the medium-term. For Waterhouse we have focused on eliminating the losses in the international sphere and lowering the breakeven points in the North American operations to position us for a return to more active trading. We have also insisted on maintaining technologies spend so that we can continue to upgrade our offering.

I am very pleased with our results. International Waterhouse lost only $1 million in the quarter, excluding restructuring costs, compared to $17 million in the second quarter. North American Waterhouse earnings more than doubled from 27 million to 61 million driven by a 43 percent increase in trades per day in North America. We are pleased with the operational leverage we have built into this business. Turning now to our core wholesale operations, I am also pleased with their results and the mix of earnings that they have obtained. We had a strong domestic underwriting quarter; in the Canadian market we made equity transactions for Rogers, Chum (ph) and (indiscernible)pipelines among others. On the debt side we completed a major transaction from Make Believe Sports and Entertainment and while the M&A market remained challenging in the third quarter, we continued our strong position advising medium cap oil and gas companies on transitioning to royalty trust. During the quarter we acted as lead adviser to Bonivis (ph) petroleum and Baytex Energy. We said we believed we could earn 500 to $550 million this year by focusing on two franchises. The domestic wholesale group and our global capital markets group. This was a very challenging goal given the amount of change that we have introduced in those business. We remain confident that we can meet that target for the year as a whole with earnings todate of $423 million in our core wholesale business. Excluding goodwill impairment and restructuring charges booked in the second quarter.

We also said we would restructure the equity options business. We have made some progress but we do have a way to go to eliminate losses. Earned quarter losses were $10 million versus 15 million last quarter. Let me now give you some brief comments on things that I see as issues in each of our businesses in areas where we will be directing our focus. In the personal and commercial banking clearly the number one issue here is the decline in margins. Margins dropped 8 basis points this quarter and we expect a further decline next quarter. About half of the margin decline relates to a change in mix, reflecting a change in customer preferences towards products with lower margins. The rest is attributable to competitive pressures. Some of the competitive pressures may be related to the normal ebbs and flows that have existed in this business and it is hard to predict how long this will take to play out. In any case, our task is clear. Restructure our expense base to process reengineering to permanently lower our cost base, so that we can meet our profit targets despite declining margins. This is what we have done so far this year and this is what we will continue to be our focus for next year.

To do so will require spending money to save money but our results in the personal commercial business could be somewhat lower in the fourth quarter than they were in the third. We are delighted with our acquisition of 57 Laurentian Bank branches which makes us use of two of our key assets, a proven ability to integrate and a strong capital position. We welcome the employees and customers to the bank and promise to deliver them the customer experience that is the heart of our brand.

Turning to Wealth Management. I think it is appropriate for me to repeat what I said at the last meeting. I like the discount brokerage business. While as some of you have noted, its value is clearly not reflected in our stock price, I am not running this company to generate short-term gains from stock price. Waterhouse's earnings power will eventually show up in our consolidated earnings and our market value. Some analysts have also wondered whether I have the stomach for the volatility inherent in Waterhouse's earnings stream. The short answer is, yes. We are comfortable with volatility which in this case is transparent to the market, predictable, and tied to a high-growth high-multiple business. What we want to avoid is a year of negative earnings. That is why we have aggressively driven down our breakeven points. Businesses that are overexposed to periods of negative earnings in effect borrow from the stability inherent in the predictable and not volatile earnings stream of our retail and other wealth management businesses. Such volatility has a risk of robbing these earnings of the premium multiple they deserve. This also reflects my view of the wholesale business. Property structure is a good business and one that leverages the overall strengths of the bank and provides earnings diversification. It has to be run however, on the basis of the capital we have assigned it, operated in a manner that makes annual losses such as we suffered last year, extremely unlikely.

This has been our focus this year and our management team has done a superb job in carrying out what is a top assignment. Executing a disciplined ROE focused business model that maximizes shareholder value. My hat is off to the team. At the start of the year we told you we have built into our plans a forecast for PCL and PCL-like expenses in the core portfolio of $100 million per year. This number was based on roughly 100 basis points loss over the credit cycle. You will note that again this quarter there was no core wholesale PCLs. And we did not highlight a significant increase in expense for credit mitigation in our core book, even though we said earlier that we had doubled our protection. The cost of credit protection is amortized over a longer period and therefore the incremental expense over last year's run rate has not been significant. With this latest purchase we are now running at an annual run rate of $28 million per year.

As I noted earlier, depending on market factors, we are looking to add a further billion dollars in credit protection in the fourth quarter or sometime next year. If this occurs our annual run rate for credit protection expense next year could be $40 million. So does that mean that the total PCL-like cost is likely to be only $40 million? That obviously depends on what happens to the unprotected part of the portfolio which is very high quality. Sixty percent of the net outstandings are investment grade, 83 percent of the total net exposure is investment grade and the total net exposure is 30 percent lower than it was at the beginning of the year.

Looking to next quarter and the following year it is difficult to provide guidance. There may be actions but there is nothing in the portfolio that is currently causing us to have any real concerns. There are, of course, in addition separate accounting issues surrounding the treatment of credit protection. We will ensure complete transparency and explain any impact the pending changes in accounting rules may have. I should also comment on the sectorial (ph) provision release. When we set the sectorals we indicated to you that we were confident that we were adequately provided but we were not overconfident. We had a number of very large exposures where the companies had to be restructured. Liquidity in the secondary market was very weak. Many companies based dim prospects and their ability to refinance. Much has changed since then. Many of you have pointed out that there has been a definite improvement in these markets and we have clearly been the beneficiary. We have a very disciplined process to review the adequacies of our reserves. We have been transparent in setting up the sectorial reserves and in indicating the quarterly drawdown of those reserves. We will be equally transparent in reviewing any sectorial releases in the future.

Obviously with $698 million in sectorals and approximately $300 in generals allocated to the noncore bank, we are very conscious of how leveraged we still are to changes in the credit environment. Evolution of that environment will obviously be the key determinant of the amount of and the speed with which sectorals are released in the coming quarters. In conclusion, I am very pleased with the quarter. We have managed to transform the company to deal with our business issues faster and more thoroughly than I originally expected. We have clearly been helped by the environment. But the management team has been very focused; our people have worked very hard, and they all deserve a lot of credit.

We are now a repositioned company with excellent positioning in each of our three main businesses. We are not without our challenges but we understand those challenges and they are the challenges of any company operating in these three business sectors. We have a strong capital position, a lower risk profile, and high leverage to continue strong credit environment. And finally, in my view we have a management team focused on the key issue, operational excellence and doing what we say we will do. With that, I would like to hand it over to Dan.

Looking at the third quarter and overview, earnings per share fully diluted cash offering basis 91 cents. That compared to 43 cents last year. Before the sectorial provisions and 69 cents last quarter. We would be up 111 percent over last year if you disregard the sectorial provisions. On a reported basis, 73 cents a share, the difference being the amortization of identified intangibles. Record results from TD Canada Trust $335 million, up 19 percent from last year. Wealth Management also very strong results, 82 million this quarter versus only 18 last year. On the wholesale side, net income of $172 million about the same as the first two quarters of this year. Up very substantially from the loss reported in Q3 last year. We did reverse 40 million of sectorial so our net PCL came in at 59 million, it is 99 million in the retail bank and a 40 million dollar credit in the Wholesale Bank. Tier 1 capital ratio up 200 basis points over this quarter last year to 9.7 percent. Ed mentioned increase in our payout ratio and a 14 percent increase in our quarterly dividend common shares.

Giving you an idea of what the earnings reconciliation looks like, you can see that our reported GAAP earnings of 73 cents $480 million, 18 cents representing the amortization of intangibles. The four items that Ed listed both pre and post tax totaled about 10 cents per share. So if you want to be looking at perhaps more recurring or more likely to recur earnings, you would perhaps wish to discount or exclude those earnings from this quarter's results.

On the sectorial release, we did release 40 million this quarter; the after-tax impact was $26 million or 4 cents per share. 99 was the other part of the PCL all in PNC Bank. The sectorial release is really a reflection of a number of factors and Ed mentioned some of these. We did receive a significant amount of repayments in our debt portfolio. (technical difficulty) restructurings which helped our position there was a lot of liquidity in the market. There is really increased market confidence and higher secondary prices in our overall portfolio. You compare the amount of losses you expect to incur in the portfolio, you compare that to the sectorial balance and any significant difference is to be adjusted for, up or down in this case sectorial balance came down.

If you look at the time trend of our capital ratios, you can see that after the purchase of Canada Trust our capital ratios went down to 7.2 percent and since then they have been rising fairly steadily with the exception of the loss quarters last year. We are quite happy with the 9.7 percent Tier 1 this quarter. That puts us firmly in the middle of the major 5 banks in Canada in terms of Tier 1 ratio. Our tangible common ratio 7.3 percent. That is up from 6.7 percent last quarter, again quite a good result but still being at the low-end of the comparables with our peer group.

We had an uptick of formations of impaired loans this quarter. Corporate to noncore part of our corporate portfolio, there were 292 million of new impaired loans up from 122 million last quarter. Half of that related to one name. It was an energy company and we were expecting that company to go impaired this quarter and it did. The formation of new impaired loans in the retail part of the Bank was about the same as in the previous quarters. Impaired loans on a gross basis declined considerably this quarter because we took significant write-offs where you collapse the allowance against the actual amount of outstanding loans. The net balance deteriorated very slightly from 742 million credit to 643 million credit.

We enhanced the segment performance measurement disclosure this quarter. After discussing with some of our major investors it became clear that return on invested capital was the prime metric that a lot of people used to determine success in the banking business, that is the metric that we use. Invested capital includes all expended capital for goodwill and identified intangibles. Whether those amounts have been amortized or not. Though we now report invested capital on a segment basis. Return on invested capital is cash operating earnings divided by the total invested capital numbers. Economic profit is cash operating earnings plus the charge for invested capital. We now disclose that on an operating business unit level. We think this increases the transparency for each segment's real economic performance.

The other change we made is we up until this quarter, we have been reporting the efficiency ratio in TD Canada Trust on an adjusted basis. We have adjusted for funding cost inherent in the original purchase of Canada Trust. We realize that this funding charge was effectively uniformly changing the efficiency ratio over a long period time, so we decided this quarter to simplify the reporting and we will simply report the total expenses divided by the total revenue of the segment. You can see that the effect over a long period of time is not distorted and we restated prior periods. Though the efficiency ratio this quarter is reported at 58.3 percent.

Looking at the personal commercial bank in more depth. We did recognize 2.7 percent in revenue growth this quarter. We had good volume growth in the range of 5, to 6 to 7 percent depending on the product. We had good insurance revenue growth as well. This is offset by the margin decline that Ed mentioned down 8 basis points this quarter, 14 basis points year-over-year. Looking at the quarterly provision for credit losses, very stable results. Year-over-year the total provisions are down by 20 percent, but very similar of the results that we reported in the second quarter.

The improvements in our personal process relating to granting credit are flattening out somewhat. We had significant improvements over the last part of last year and into this year. We would expect those numbers to be stable for a while until we can invest further in the process and drive those losses down further. Total expenses and efficiency ratio. Expenses are down about one percent year-over-year, 0.7 percent in fact. Mainly because of lower FTE's down about 1650 FTE's or 6 percent from last year's total. We did absorb some higher severance and expenses relating to the Wal-Mart store branch closure program which we announced over a quarter ago. Over this period though,the efficiency ratio improved by 200 basis points and that is a result of the 3.4 percent gap in the growth rate of revenue versus expense reduction.

Finally, looking at the net income balance and return on invested capital. Record results, very strong results in total. Return on invested capital at 19.3 percent is up considerably from the 16.7 percent reported in the same quarter last year. Economic profit is has gone from $111 million same quarter last year to $174 million this quarter. Looking at some market share data and volume growth data. We did get fairly robust growth in volumes for personal loans both real estate secured and non-secured 6.9 percent year-over-year. However, in total, between the nonsecured personal loans and the real estate secured personal loans, our market share was down 21 percent -- or 21 basis points year-over-year. On a personal deposits, on core deposit up 3.1 percent year-over-year and on term deposits were up 4.8 percent despite this fairly robust volume growth, our market share is down both in core and term down 51 basis points in core and 35 basis points in term.

Moving on to business loans and deposits. Very robust growth in business deposits. Ten percent year-over-year and a continuing decline in commercial business loans and BAs down 5.3 percent year-over-year. There is really no demand for commercial loans currently. Looking at Wealth Management. There are two views here. This is the view with the goodwill write-offs and restructuring costs inherent in the second quarter of last year. Probably makes more sense to look at the underlying trend which backs those items out. We did have revenue growth in TD Waterhouse part of Wealth Management, about 11 percent. That actually understates the growth in revenue because of the foreign exchange effect, a large part of that revenue comes from the U.S. and is translated at rates that are lower in terms of U.S. dollar than in the previous year. You can see that in total Wealth Management outside of Waterhouse re-established its benchmark of about 25 to $30 million being at 27 million this quarter, and $60 million being the underlying trend of the TD Waterhouse component of earnings, excluding the $5 million restructuring charge inherent in the UK.

Looking at the split between the North American businesses of Waterhouse and the international part, in this case now virtually all in the UK. You can see that the losses in the international part have shrunk considerably, 17 million last quarter down to virtually zero this quarter. $1 million before the restructuring cost. Those revenue numbers for Q3 and Q4 of last year include write-downs in the Japanese joint ventures that were about 10, $11 million each, so it tends to understate revenue on a trend basis and likewise on the actual earnings impact on international you can see that they are much worse in Q3 and Q4 of last year than you might have expected and it is because of those joint venture write-downs.

I'm looking at some of the operating statistics in Waterhouse. The key metric here would be trades per day. 110,000 trades per day, up 16 percent from last year but up more substantially from last quarter which was probably one of the worst quarters we had in terms of volumes for Waterhouse for many years. You will also note that the marketing spend in Waterhouse is down quite substantially from the previous quarter. That is one of the other reasons why earnings in Waterhouse are so strong this quarter. Typically after a bad quarter you tend to reassess whether marketing expenses are really working and we did that and cut back on marketing expenses. I am not sure that that 16 million would be viewed as a run rate going ahead, perhaps a little light.

Customer assets rebounded very nicely $215 billion up from both last quarter and last year, obviously the market impacted that as well as new customers bringing in new funds. Assets under management, up slightly from last quarter. From $110.5 to $113.2 billion. This is mostly market-driven; there is not significant effects of new money in here. Relatively stable result. Looking at the mutual fund market share data. We had volume growth year-over-year of almost 3 percent. In the total share basis we are up 16 basis points year-over-year, and on long-term share we are up 38 basis points year-over-year, so good results there in terms of market share.

Moving on to the Wholesale Bank. Again we have two views of the wholesale results and you will guess that I would rather look at the view that did not have the write-downs and restructuring costs of last quarter so if you don't want I will switch over. You can see that very stable earnings, we have improving return on invested capital as capital exits this business. Economic profit is also improved this quarter from previous quarters. In fact, economic profit last year was a very negative number and it is quite a solid improvement this quarter over that period.

In summary, we in the core part of TD Securities we had strong results from investment banking as Ed alluded to. I think this is a record underwriting quarter for the Bank. We recorded about $75 million in underwriting revenue. We also had very good results in credit products. However, weak results, exceptionally weak results in convertible arbitrage where we lost money and fixed income trading which you will be surprised at some of our competitors announced that they did very well in fixed income. I guess they were trading with us because we were on the other side. Both return on invested capital and economic profit in the core business year-to-date has been very strong, it is 18.7 percent return on invested capital and $125 million in economic profit. Much higher than previous periods. There is a little bit of a difference in the way that the profitability is split between core and non-core this period. You can see that in the 172 million, 62 of that was represented by the non-core portfolio. We have the $40 million reversal in PCLs reflected in this number. We also have much stronger trading and fee income revenue in the non-core bank, and this is really the result of lower lost lower derivative write-downs that we have in the first two quarters. We actually had some write backs. We have an overhold syndication portfolio which is held on a mark-to-market basis, and we had taken significant write-downs over the past several years and we saw a little bit of that market coming back. So there were some write backs in those amounts which helped the trading and fee income line.

As Ed mentioned, we did not actually record any credit losses in the wholesale part of the Bank. Other than the 40 million reversal in the sectoral. If you look out at what the trend of specific loan losses have been over the last five quarters, you can see very clearly that the trend that peaked in the fourth quarter of last year and since then has been coming down quite rapidly. The 58 million that you see here is net of two numbers, it is the 95 million usage of sectoral towards impaired loans offset by a $37 million recovery of previously written off loans for a net of 58.

Portfolio composition, suffice to say that since the beginning of the year, our drawn loans and BAs are down by $5 billion and our exposure is almost cut in half from 21 to $10.9 billion. All of the decrease in the drawn loans this quarter related to noninvestment grade; in fact the investment-grade balance went up slightly as investment-grade customers drew on their loan lines. Looking at the continuity of the loans and BAs and the exposure for the non-core bank, you can see that the sectoral usage for specifics at $95 million comes off the balance. We had a foreign exchange effect of $92 million for a net reduction of $731 million to get down to $6.2 billion drawn.

Looking at the continuities of allowances both specific allowances and sectoral allowances, you can see that there is a significant write-off happening in this quarter in the specific allowance amount of $83 million were written off. We are anxious to exit this business or anxious to take these loans off our balance sheet. We are, in this case we are writing off loans faster than we normally would have. You probably know in the past we have written off loans mostly at the end of the year. We will be writing off loans now quarter by quarter as we deem them to be noncollectible.

Reserves against our non-core portfolio. This is the total reserves after adding back impaired loans. Compared reserves previous write-offs. We are covered by 39 percent this quarter. Last quarter we were 35 percent covered, so our coverage ratio is also improving quarter to quarter. If you look at the reserves against selected non-core portfolios in this case, Telecom and Power generation loans and other classified accounts, our coverage is 45 percent. That would compare to 42 percent last quarter and improving there as well. Market risk and trading related revenue this quarter, versus VAR usage, we did have two or three days where we had small trading losses, never once getting close to our VAR usage number. (indiscernible) on distribution of daily market losses, there are two very small losses and one quite small loss recorded in the quarter.

The rest of the material is supplemental. I won't go through it. It is the same material we presented last quarter. If you have any questions on the supplemental please feel free to ask them and I guess at this point, Ed, we will take some questions.

Who would like to start? Heather (ph).

I am wondering if Bob can fill us in a little bit on what happened on the equity and fixed income trading side and what you are looking at for this quarter?

On the equity trading side, I think the fall off that you see in that number in your schedule relates to the convertible arbitrage business. So on a sequential basis the convertible arbitrage business which had done very well in the first half had a very poor (ph) quarter related to a lot of factors that I think everyone is aware of in the marketplace, a reduction in volatility and an oversupplied market in the U.S. With respect to the interest rate side, I think as Dan mentioned, we had a very strong first half in fixed income and a weak third quarter on the trading side. So those differences would make up or explain the fall off quarter over quarter or quarter over first half.

Can you talk a little bit about the current environment and what you are thinking for this fourth quarter?

I think we made $432 million year-to-date in the core bank, so we are confident that we will meet our objective of making 5 to 550 for the year. Just not really seeing a lot. I am hesitant to annualize quarters and say this is what our current run rate is. We did not annualize the first half which was put us in the 600's and of course you can do the math, and annualize the third quarter, we would be 440. I think the feeling is that strongly believe that we have some key simple strategies on which to execute, we have the human resources, the capital behind those strategies that we believe that through a cycle will make the 5 to 550 in the businesses that we want to focus on. We have to continue to work hard on that. We have more costs to take out of the business. We have taken out quite a few expenses this year and are running those through the income statement so we would expect that we will benefit from the reversal of that next year. However, we are investing as well in processes and systems to improve our business. So we feel that we continue to work on our strategies. I think we have the right resources. This business is always market dependent to some extent so I feel very comfortable that with the $2.5 billion in invested capital that we have currently in the business, that we can earn (technical difficulty -- lost audio connection)

Well, I guess as the noncore portfolio liquidates itself, the sectoral provision (multiple speakers) will be used or will be released?

The surplus of the allowance over the gross impaired loans will come down. So, my question is, overtime where do you want to be in terms of level of allowance in relation to gross impaired? Secondly, when we, if we remain in the sweet part of a loan quality cycle, and there are not a lot of formations, would you run your provision on that basis at such a low really low level against historic sort of standards for provisions, does that explain it?

Let me try to explain it. I don't know that (indiscernible) your discussion -- we have some target of what sort -- I think it really means what is your net net nonperforming number is. I think the issue that you are raising and it's an issue that we are scared of the numbers ourselves. You run the noncore bank out and if we run it off and it doesn't cost us as much as we are currently paying, then it will be releasing sectorals along the way as we get more confidence that we can run it off at whatever number it is going to cost to run it off. Meanwhile we put in place credit mitigation against a big chunk of our portfolio and we are disclosing what charge we have with that. So then you have this right now $7.2 billion of unprotected portfolio, and you don't have any impairs going on it. So then you have produced an anomaly every quarter we come and say, sorry guys, we would love to have some PCLs but we cannot find any basis. The accountants -- if I had my dream world I would be socking reserves away against that number. But, you would send me to jail or whatever for doing that, and so they will not let you do that. And so you are sitting there, you can buy more keep buying more credit protection, but it will not show up as PCL's and so there is really no practical way to just load up PCL's against a rainy day from the works. And so we're doing everything we can which is to say let's buy as much protection as we can reasonably buy but that will not show up in the PCL and that is why we said why don't we disclose it cause it is really a PCL like number. But, that will not show up against impaireds if we don't put that against impaireds, that shows up against the performing portfolio.

The main reason why we have run such negative PCL numbers recently is the sectoral. Prior to that we ran negative numbers in that statistic because of general reserves. So you got the factors of about general reserves which by their very nature are not applied against specific loans. I'm not sure if we can answer your question. We like to have our impaired loans fully provided for. Other than that--.

It was Ian and Quentin and then we will come back to one other one --.

I guess my continuing on the scene of allowances on the sectoral, I guess my question is for Bharat here. You got 700 million in sectorals with restructured telecommunications sector with restructured the whole power sector, you have what is left to impair?

Are you just sandbagging us?

I wish to go back six months -- I guess some could have taken the view that we were not adequately provided at the time and some can now take the view that everything is restructured so what is going on. There is a methodology to this. We look at adequacy of our sectorals very seriously every quarter it goes through disciplined processes as Ed mentioned. And the main drivers are we have assumptions such as what is going to be our formation from a satisfactory state to an impaired state? And what kind reserves we had to take on that? The level of repayment of certain loans and our loan sales are losses so we take on those. So those are the three drivers that determine the adequacy of sectorals. If markets continue to be strong and I think yes, we should have those drivers in working for us. If they turn a little soft then perhaps the speed may slow down. So, yes we have had a lot of improvements and hence the release. But I don't think we can say that this market is totally done yet.

Is there a particular sector that you think about from here that could get worse?

There are -- we do have as Dan's slide showed, we do have exposure still in the utility sector where continued restructuring goes on. There are and in the telecom side as well there are pockets of it around the world that will continue to go through restructurings. Signs are positive but I don't think we can say that all of these restructurings are complete.

So that $14 million number that you decided that has come back out, can you talk us through the methodology on that 14 million coming out as opposed to 50 or 60?

Basically we run statistical models on portfolio to come up with an expected loss embedded in the portfolio. We look at migration of watch accounts to nonperforming status, we look at likely losses on loan sales for a portion of the portfolio. We then create the amount of sectoral that is required against the portfolio. And then compare that to the amount that is actually in the sectoral reserve, in this case there was a relatively modest difference. We do have embedded in the model some component of conservatism. You might expect that we would and we do. It turned out that the 40 million was the difference between what we thought we needed on a conservative basis, and what we had.

Two questions I guess philosophically, as you bought and continue to buy protection and I think you have now drawn your core book actually below National Bank's corporate loan book which some might find kind of interesting. At what point do you stop? I mean, could you envision in the expectation of reduced exposures to zero if you buy enough protection to reduce exposure to zero, that is question one. Perhaps for Andrea, just looking at margins going down, share going down, and this focus on expenses, is there an opportunity to lose the revenue the view on revenue and growth as you try to pull back on and pull in expenses?

I think on the first question, no, I don't think it is practical when you're buying protection the rate of return that you have to pay, in effect to buy the protection is significantly higher than the rate of return you can earn in the lending business. I don't think the economics works. And so I think if you want to stay in the lending business, you have to believe that you have some credit granting capacity that you can discern good credits from bad debits and if you don't think you should do that, you probably ought to get out of the corporate lending business. We have not decided to get out of the corporate lending business. We have decided to dramatically pull back to basically to build around Canada (technical difficulty) a set of clients that we know as opposed to get further away from Canada with your clients that we know less well. And where we are the lead Bank rather than to be the stuffing for other lead banks. So, I think we have indicated that we will probably buy another million dollars of protection, but I would not see us buying significantly more than that. What we're doing is less trying to get that total number down than to deal with the inevitable problem that everybody has in this business is that you don't have a diversified portfolio. So by the nature of the fact that you are -- you want to have a relationship with clients -- we love to have a relationship with everybody but we don't have a relationship with anybody and so everybody ends up by the nature of this business with concentrated portfolios. So it is a combination of taking the total down, but it is more directed towards taking large exposures single name or industry concentrations down so that we have less concentration than we have. That is what is really driving us rather than having bragging rights that we do less corporate lending than the National bank. Andrea do you want to?

A couple of questions embedded in that. Let me try to start with the revenue growth. Despite the pressure on margins and despite the fact that our expense performance was very good this quarter, we have actually improved our revenue momentum if you look quarter-on-quarter-on-quarter. I know that its not a big hockey stick but it is good, steady improvement in light of all those pressures. So, it shows you can keep improving revenues even though you are being very careful on the express front. Also our volume growth is pretty good. A little over 5 percent overall. So I think again that supports the proposition that people can be focused on selling well, managing expenses well and I want to just address the expense question itself. Managing expenses is about managing expenses, not necessarily slash and burn. That relates to allocating your spend to where it does you the most good. Reducing your efforts in areas where they are not really adding much value and I keep saying Rosen's log big. We have a $3.5 billion expense base and in that expense base there are some items that are not clearly not really adding a whole lot of value to growing revenue or to our customer strategies. The idea is to do a lot less of those and to do more of the things that generate revenue. Does that answer your question?

Michael and Steve and then we will go to the phone.

I want to stick with retail and just getting at again that share specifically maybe if you could elaborate on what is going on in mortgages? And in personal loans? In mortgages I mean you are basically flat in dollar terms. Personal loans, you are way up. At the same time, margins have narrowed and Ed you sound the most pessimistic about margins in this business that I have heard you sound in a long time, so I am not sure that I understand why you think this margin, there is a risk this margin may be lost forever. So maybe you could elaborate on that? Just one final one. Again coming back to the mortgage side, whereas I said you are flat, are you having any second thoughts about your strategy in mortgages which looks like an everyday low price type strategy?

The core thing I think is that we have seen a significant shift of our business from mortgages to HELOCs -- and HELOCs are in personal loans and not in mortgages. And so, these numbers don't tell you what is happening in the secured lending area. We are not unhappy with -- our basically while we did lose some marketshare earlier in the year, in the lending business, we are not unhappy with what is happening to our marketshare in the lending business and particularly in the secured lending business. We have had a mix shift where we are doing more secured business and less unsecured business. And so generally on the money outside we are not unhappy with what is actually going on. If I sound -- I don't mean to sound too pessimistic but I do need to be realistic with what I think is going on. To be honest with you I cannot fully understand what is happening in the margins of my competitors. We run, as you know, a very simple transparent system so we hedge everything and so in a sense you can see pretty clearly what is happening to product margins when you look at what is happening to our margins. And I am not sure that that is equally true for everybody. Clearly what is happening to us is that we are getting a mix shift so our clients, maybe not incorrectly, are tending to fix their borrowing costs and so they are tending to go to fixed longer-term products from short-term products and we generally on fixed products earn thinner margin than we do on floating-rate products. And as I say there is a mix shift going on where we are doing more secured lending than unsecured lending and we tend to earn bigger margins in unsecured as you would expect than unsecured. So there is a whole set of mix changes going on so we would think about half of the shift in our margins just reflects this mix change, which will go on for a while in this particular interest rate environment. But, may not be permanent if interest rates start moving back up, people believe the cycle is over and people may then shift in how they behave. The second issue that is going on is that across the board, we are seeing a fair amount of competitive pressure. My own view is and there is differing views within the organization on how true this is and how true -- I think margins over the last couple of years that a number of commodity products (technical difficulty). Good economic profits in products where people could enter that marketplace relatively easily and the banking system saw a lot of non traditional players starting to gain marketshare. And so we're in a cycle where each member of the major banks is in their saying, I don't want to lose that, and I can still make some economic profit in these areas and maybe I am prepared to give up some economic profit and take margins down. So, that combined with -- which I have been through several cycles now -- I don't like corporate banking anymore, I love retail and I will be a retail banker for three years before I go back to being a corporate banker -- we are in that cycle again. So those two forces combined I think are driving this to be a very competitive industry. So, I do think that may last for -- that is not necessarily permanent, but in the eyes of most analysts, something that is going to last for a year or eighteen months is permanent. And so I am just warning you that I don't think this way we are running the bank is to say, let's assume this battle goes on for a while and therefore you better figure out how as Andrea says -- not to tell everyone, don't buy pencils. How do we go back to our cost structure? We have the advantage in a sense. We've gone through the merger, and when you go through a merger you are focused on let's just get the bank together. To get it operating. Now we have said okay, let's go over the whole bank all over again and say do we really need this many of this? And is there a process that we could substantially reduce the costs and we are prepared to spend money in the next few quarters to do those things so that we drop our costs another whole level anticipating that this battle may go on for a while.

I am going to switch gears over to TD Waterhouse. I want to talk about sensitivities a little bit with you Dan. 64 million of revenue increase in the quarter brings about $50 million in profit increase. So maybe if I could ask you just a couple of questions to try to get a sense of where to go with my model on this. Marketing expenses reduced 13 million in the quarter if we tax adjusted maybe it is 10. If we were to assume, roughly the same volumes as we saw in Q2, in Q3, we could assume that -- would there be any sort of increase in profitability? What I am trying to get to is were there further cost reductions?

Excluding the market you mean? Certainly we used marketing expenses.

Another way I could ask that is maybe let's assume you have 110 million trading volumes, let's assume that you have the Q2 trading volumes what would the profits have been?

Well you have to exclude the international as well. So the results would certainly have been better than they were in Q2. We did reduce expenses other than marketing and international losses. Trying to quantify those, I think it is difficult given the change in the environment from one quarter to the other. You should just realize that we are very levered into an uptick and volumes, and there could be special items buried in some of the lines, expenses may be higher or lower in any given quarter based on certain things and so forth. So, we consider whether we give you an actual financial model to predict the profitability of Waterhouse from quarter-to-quarter and we decided that it was quite different between Canada and the U.S. and it was, there were a lot of noise items coming through on the model. So, we did not and I am not going to give you one now I guess is the bottom line.

The 110, let's say if we get 110 next quarter, are we going to have 60 million in profits roughly?

If we spend the same amount on marketing. Yes.

So this is a reasonable run rate? Actually, I'm not saying -- if you don't mind can I keep on hitting on this, thanks. It would be good if you want to get the value of Waterhouse within TD to give us the model, here is a couple more for you. Despite the 16 million, the return on invested capital, was still low 11.7 percent. So, I was actually surprised by that. What is the reason?

Because the invested capital number is so high, so all of the goodwill that we incurred in the original purchase of Waterhouse, we we are getting close to making an economic profit in that business but we're not there yet.

The one thing that is worth noting cause the management team of Waterhouse would want it noted is there are a number of things when we acquired Waterhouse that we then sold off, and they had been recorded in previous quarters as huge gains and economic profit. We did not reduce the goodwill by that amount, we took it as economic profit and kept the goodwill against those. You could have artificially lowered the economic capital assigned by this by just subtracting the two but we did not do that.

So you got a 9.7 percent Tier 1, and you have not sold TD Waterhouse U.S. it is still there? Is it still a platform for future growth with your excess capital into the retail market in the U.S.?

What I said is I like the business. I can live with the volatility, and it is obviously producing -- we worked hard over the last couple of years to get these costs down so that we can enjoy the benefits of it. I'm enjoying owning it right now.

Is expansion to the USV acquisition into the retail banking sector a possibility for your management team moving forward?

I think clearly our position would be we have now come out of the repositioning of the institution. We obviously have a strong capital base. We obviously have huge potential capital growth whether it is just earnings or through sectoral releases and things like that. So, we are now going to enjoy the luxury of actually looking at things that we can do now that we're in that position including whether or not we give the money back to the shareholder because as you know, I don't care whether I am the biggest. I just want to have the best running company and look after what is right for the shareholder. So go to the phone.

Rob Wessel of National Bank Financial.

Good afternoon. I just wanted to ask you a question about the sectoral release. I just went to make sure I understand Dan's earlier comments. Are we to assume then that every quarter, The Bank will sort of measure what they think the expected losses are, the necessary reserve, compare that to what they have booked and then take the difference in? And if the (indiscernible) was a positive one or continues to improve, I should say, that we should expect sort of a steady stream of these releases coming into earnings over the next, say, six quarters?

Well, Rob, it really depends on the environment and if things do improve, we will compare the available reserves to the required reserves. If the performance during that period is positive, then there would be a release of reserve. It's hard to predict how big that will be or when that will be.

Let me try again. What we're saying is that we have a model that says here is what remains in the non-core bank. We built into that model certain assumptions about loans that would go bad and what we would lose on those loans. And we've said here's assumptions about loans that will get repaid and here are assumptions on loans that we would sell and the cost of selling those loans.

Every quarter we will say, well, what actually happened and did those things that happened cause us to have a different view of what happened versus what we said would happen and a different view of what we would expect to happen. In order for the accountants to be satisfied, we have to have this as fairly mechanical, although obviously in picking the parameters it would not surprise you to say we have no incentive to pick parameters that would cause us to release money today and then come back next quarter and say, oops, we released too much money and we're going to have to now add.

So, obviously, as I said, there is a degree of conservatism as we start down this process of picking the parameters. And so we will see as events turn out how fast we get this down, what it costs us to get it down, how bad the loans turn as we run out the environment. That will determine the pace of the release and how much the release is each quarter.

So, if we have say two, maybe three more good quarters of improving credit quality, would The Bank consider collapsing the sectoral reserve feeling that they don't need it anymore and bringing it back into their accounting more in line with your peers?

Well, I think we would -- I wouldn't rule out -- we got this down to such a small amount. When we think about doing that we might look at doing that, but I think in the end right now, for the next year we are going to run this disciplined process to make sure that this thing goes down. And that we are adequately protected but that when we are obviously over protected that we acknowledge that and release the reserves and when we do that, we will be absolutely explicit, we will put it right upfront and say here is what our results, here is the adjustment for those results so that we're not trying to play some game and putting it into some income. We are just saying here it is, it is going to add to the book value of the bank. Real dollars for us as shareholders, we don't really care (indiscernible) dollars come these are real dollars to us. But we know the analysts are particularly nervous that we are not trying to sneak it in as operating income and that is why we separated it out.

So with that the difference is that we have a portfolio that we have identified and we are running it down and it is going to zero at some point. If we were satisfied that the losses embedded in that portfolio were now zero, then we have no choice but to reverse the whole sectoral. But I don't anticipate that will be the case.

One more question on that line. I hate to be too persistent, but to the extent described as real dollars is it not a fair characterization to say that last year you booked north of $1 billion of a non-cash charge because all of the loans were performing? And then now we are getting into the period where it's a little higher it was conservative which is fine, so now you're bringing those in and is it not really bringing in -- neither are really cash oriented? It was not a cash charge last year bringing in the recoveries and not really sort of pure recoveries -- sort of more just accounting entries?

I don't think we can ask Dan to go there. I think the reality is what we try to do is be explicit, we try to tell you what our operating earnings are without this adjustment and what they are. I think our whole view and we had a lot of debate about what items to display for you and not to display -- I keep on saying we get paid to run this company so that every year this company is worth more than it was the previous year and you get paid to try to figure out where the market is over or undervalued. And that is sometimes great companies can be overvalued and terrible companies can be undervalued, and what we are paid to do relative to you is give you all of the facts like a delicatessen and you can decide how you want to treat this, as long as we have transparently told you, here is what the sectoral is, here is how much we have drawn against it, here is what our recovery is (indiscernible) here is how much we are releasing and then you can figure out how you want to value the company on the basis of that. That is your job, that is not our job.

Great. Thank you very much.

James Keating, RBC Capital Markets.

Ed you referred in the past building some businesses in your retail where you might have been under represented and I hope I am hitting the right areas, but the retail brokerage area which is not exactly the same division but may benefit from it had a good quarter it appears, the insurance flipped up sharply as best I can tell. I just wonder if that is usual, thought maybe you can describe what is going on there, what looks favorable and any other updates you could perhaps around commercial banking, although as Dan says, a little premature. Can you talk to the issue a bit?

I will let Andrea do the insurance and the commercial. On the retail brokerage I think we are in an investment phase there. Is what we're doing. We're trying to get that platform to be up to a position that we say from a quality point of view is a very attractive platform. We obviously as an organization have some huge assets in this, we have a customer base that is extremely large and demographically attractive relative to the (technical difficulty) number of people investment advisors (technical difficulty) we have a strong brand, we have a proven capability of knowing how to pick out of our regional customer base, customers that would be suitable for Wealth Management and how to manage the compensation and motivation issues of transferring those customers there. But, we have not been satisfied that we have a platform that is best in class. Because we ran a business model and that business that tended to have us under invest in that platform relative to our competitors. So, we have been in the process as you know last year we adjusted the compensation so that in fact we had an incentive to spend more money on that investment platform. We brought in leadership there that is comfortable in the brokerage space and they have a mandate this year to invest rather than worry too much about what their expense line is, get this into a world-class platform so that we can attract growth in that area and that is what we intend to do. But you won't see that result for another 18 months or two years I would say because it is a slow process.

On the commercial front, we have experienced actually very, very strong commercial deposit growth in the commercial bank that has not actually translated yet into great revenue growth. I would say 3 percent year-over-year. Revenue growth versus 19 percent year-over-year deposit growth. That is a function of a number of things, the margin compression in that business. Interest rates level of interest rates and some sort pricing anomalies we have. But, I think and you know the story on the lending side we're down on commercial credit side of function of the marketplace and also been pretty picky about our lending policies. As I look at Bharat. I think that kind of deposit growth augers well for the future just in terms of the number of clients and the amount of business and the mix of the business we're doing with them. On the insurance side, we have two insurance businesses, we have our life insurance business and our PNC insurance business. In both cases we have experienced strong premium growth year-on-year. Again translating that to the bottom line, we have been more successful this quarter in terms of (indiscernible)the PNC business of taking that to the bottom line and growth. In TD Life there is a bit of a lag in terms of premium growth and revenue growth. So, I would say just in terms of the overall question James on how we're doing on these businesses that we've highlighted. The answer is mixed in the sense that we are not showing a lot on the bottom line in all of these businesses right now. But, I would say very good in terms of the precursors, the indicators of future growth. The overall levels of deposit growth and the levels of premium growth.

Thank you.

Susan Cohen of Dundee Securities.

Thank you. You mentioned that you had record levels of underwritings in the quarter. Can you perhaps give us an idea of how the pipeline is looking right now?

I think it looks very attractive as we go into the fall quarter. There has been I think somewhat of a slowdown in August in the latter part of August, but with respect to how things look for the first quarter for the last quarter, I should say they look very positive. The market seems very strong in all markets.

Thank you.

There are no further questions at this time. Please continue.

Question, Jim? On credit in the commercial corporate core book, looking longer-term over full credit cycle, it is now difficult to I guess apply what you have historically been able to generate even if we back out sectorals. As your models, because I'm sure given you got the models for the sectorals there are models running on the core book as to what a full cycle credit provision might look like, once you get out of what is cleaned it all up, but clearly some of those loans will go battle for a full cycle. Can you give us some sense of with that might be and secondly the commercial book is outperformed your expectations. So, as you look at that going forward, is that a somewhat artificially low in terms of what your expectations might be?

Let me take the second first. I have said that every business -- the first one I have not so I am remiss and not saying that I am stewing about this number. So, I am -- we continue to be amazed at how well not just we have done -- I would say the banking industry in Canada has done in the commercial side given all of the things that have gone on. We keep pouring over our portfolio and saying it has got to happen, it has got to happen and it doesn't happen and I go to the next quarter and I have been saying the same thing. Only I didn't say it this time because I have been saying for four quarters in a row I got to see this number go up, and it does not go up. So I get tired of telling you I worry about things and then not having anything happen. So, I would say it's got to be a higher number as a run rate than we have been doing. But, you know I said to Andrea that is our best guess would be it can go up, and she still got to earn 10 percent year-over-year growth on average over this three-year period and so that is the business charges, declining margins, higher commercial loan losses. I still want 10 percent on average for those three years. I think she can do that. On the corporate side I think the answer is unless Bharat tells me he has got some magic numbers, and we have not really done that in the analysis, so I don't think we are confident given how dramatic the portfolio has changed but you may have that -- feel free.

I think Ed you made the point earlier the portfolio shrunk, it is of high-quality. We have bought protection against the portfolio. But, accidents in cycles are difficult to predict. There is a large portion in the book that is unprotected. So, today we feel comfortable but I think it would be difficult to predict exactly how some of these credits may behave in future cycles.

If I could ask the question a different way, in your pricing of loans, and/or your pricing of loans got to put in expect loss methodology I would assume to your IRR. You must be using something to figure out your expected loss methodology and price those loans.

I'm sure when all of the banks are prepared to reveal their internal pricing models we will be happy to follow suit in an act of transparency with them.

Understood, but the answer is you have a sense that there is an expected loss in there. But, you don't want to give us what that content you think is.

We obviously have a number that we use for all the purposes of doing how much capital and all that. To be honest, even I think what Bharat is saying is -- are we really convinced that that is the perfect number? I don't know whether it is the perfect number. Can we predict more importantly, the timing of when we are going to get hit with these things? That is what I think we're saying is. When we look at our portfolio right now there is no obvious, we've done so much cleaning out of it its not obvious where it could hit. But I might be back here next quarter saying I got surprised and we did get hit. That is where we are realistically.

I think what we are also saying is that credit cycle is good right now and we all know pricing is improved even though we are not realizing PCL's because we can't realize them, we will spend money and that we will now have two expenses running through the income statement both the PCL charges in the future when they happen as well as the cost of credit protection. So, yes there is an overall factor that we would expect that you might see and expected loan-loss over a cycle. We have committed to more actively manage the credit portfolio, and not wait for the PCL to happen only to be surprised at the magnitude of the PCL relative to what you expected.

Two more questions Jim and then Ian.

Just to follow up on one of your comments earlier in respect of not having the desire to be the biggest Bank or continue to expand in that context. I know this was the first dividend increase as well. But could we see that TD Bank could become the exceptional Bank in terms of the Canadian peers in terms of the exceptionally high payout ratio? Following perhaps Lloyd's Bank and some of their pure retail oriented banks in the U.S. as a way of driving the valuation shareholder value and are we of course.

I think what I am going to do is dock that question. I think what we have felt was, I indicated clearly this is all gone a little faster and a little better than we thought. It is nice luxury position to be in to be worried about exactly those types of issues and so I think we're going to take the next (indiscernible) to try to figure out exactly how we want to position ourselves in terms of are we going to be even more aggressive on the dividend side. Are we going to buy back shares? What are we going to do in terms of acquisitions? Those are all legitimate issues, but I think we want to take a little bit of time before we come down on that in July, having the problem of excess capital.

Question on securitization. It looked as if you securitized quite a bit in the quarter. Can you, I guess two things, what is your thinking behind all the securitization given the (indiscernible) on the balance sheet and the second is was the P&L impact of securitization meaningful vis-a-vis the other quarter?

The major securitization during the quarter was the $1.5 billion worth of VISA (ph) receivables we did near the end of July. We did recognize a gain on that and we disclosed in our MD&A that that was an $11 million gain on our house tax basis. We continue to securitize assets especially in the case of VISA because we got term funding on that, it was a very attractive source of funding for us, better than the kind of funding we would have had otherwise. We were careful to ensure that the entity that we securitized into was going to qualify for a securitization treatment next year when the accounting rules change. So, it seemed like a very attractive deal for us to do, so we did it in the end of July.

I think we will call it now. Thank you very much.

Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and ask that you please disconnect your lines.