Toronto-Dominion Bank (TD) 2003 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Toronto-Dominion Bank fourth-quarter results conference call. (OPERATOR INSTRUCTIONS).

Okay. I think we will get started now. Welcome to the TD Bank Financial Group's fourth-quarter 2003 investor presentation. My name is Dan Marinageli, and I am the CFO of the Bank. The meeting is being webcast in audio and video as well as the 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's CEO, who will give us an overview of the quarters results. Following Ed's remarks, I will cover our operating performance in more depth. Also present to answer your questions are Bob Dorrance, Chairman and CEO of TD Securities; Andrew Rosen, President of TD Canada Trust, and Bharat Masrani, EVP of Risk Management.

This presentation may contain forward-looking statements, although I have to say that it is our intention not to give you forward-looking statements. We draw your attention to the slide concerning forward-looking statements at the beginning of our formal presentation. Ed?

Thanks, Dan, and good afternoon everyone. I would like to start off by saying that in terms of the fourth-quarter results, I am very pleased with our operating results. Reported operating cash EPS for the fourth quarter is 90 cents. This result, though, does include a number of revenue and expense items that net to about 10 cents, including general and sectoral loan loss allowance releases.

As I indicated before, every quarter for the next year we're going to run through a disciplined process to review the adequacy of our sectoral allowance, and to the extent we are overprotected, we will release reserves. We will also continue to be absolutely transparent on reporting so that you can adjust our results accordingly.

Similarly at the start of the noncore bank, I indicate the possibility of releasing some general reserves as the noncore bank wound down. Again, we believe it is important to be transparent about these earnings so you can adjust them as you deem appropriate.

Our reported results also include a charge to address a previously unhedged nontrading U.S. dollar exposure related to our U.S. dollar Visa product and a charge for technology real estate legal provisions associated with the wound down of the noncore portfolio. The charge for the noncore wound down expenses is not unexpected as we withdraw from business activities that are no longer part of our strategy. However, I am disappointed that we had an operational error leading to a foreign exchange loss. This is not the operational excellence we are targeting. We have reviewed our procedures and will be undertaking process changes to prevent reoccurrence of this in the future.

Since Dan will go over the quarter in detail, my remarks, although applicable to the fourth quarter, will be more focused on the year as a whole and the outlook for 2004. But before I turn to that, I would like to comment on a report that was released on Monday by the Enron bankruptcy examiner. There is no doubt that what happened at Enron is utterly deplorable. A Fortune 100 company imploded under its own corporate malfeasance, and as a result, employees and investors lost a tremendous amount of personal savings. In addition, a great number of companies have had their reputations negatively impacted by what happened at Enron, and we have not been immune from that. Had we had the benefit of hindsight, we obviously would never have entered into any relationship with Enron.

But I do want to take this opportunity to be clear about the facts with regard to TD on this issue. As was stated in the examiner's report, we were not involved in putting together the structure deals. Enron put them together without our input and then presented them to us, which is where our involvement began. The deals were very similar to others that had been executed by other very reputable financial institutions.

Secondly, when our employees were interviewed by the examiner's counsel, they stated categorically that they did not know that Enron was managing earnings to mislead investors.

And finally, the examiner whose mandate is obviously to try to build a case for fault clearly stated, and I quote, "a fact finder might draw alternative or contrary inferences from the same evidence." The examiner's observation that the facts could also point to contrary inferences have not been widely reported. I believe it is important to recognize the examiner had acknowledged and has acknowledged that is even in hindsight is not a black and white case.

But more importantly, what have we learned from this? We have learned that it is not sufficient to rely on the assurances from clients that their intentions are legitimate. We have also learned that it is not sufficient to rely on the assurance of the clients internationally known auditors that their reporting and accounting regulations are being adhered to. We are quite understandably now operating under a different approach of what I would call enhanced due diligence, as I am sure all other financial institutions are. And I now guarantee that this will never happen to another company. No, of course, I cannot do that. But I can commit to our doing our part in asking questions and flagging potential issues. We now recognize it is not enough to take the word of just the company or its auditors. We recognize that in order to protect our reputation that our employees work so hard to build and maintain, we need to make sure that the intentions of our clients with which we are associated are above board. It is a lot to do, but given the alternatives, it is, indeed, worthwhile.

You're undoubtedly wondering whether or not we have adequate provisions to cover potential losses associated with Enron. The short answer is yes. Like all financial institutions, we continually assess our situation for potential expenses and exposures. In addition, Enron is a noncore asset, and the risks associated with it will be assessed before releasing any sectoral provisions.

I would now like to move to discuss the financial results. Our fiscal 2003 was actually a great year for TD. Coming off a very tough year in 2002, we had lost a lot of credibility in the marketplace, and we have our work cut out for us. We knew that in addition to actually turning the business around and demonstrating that we could deliver high-quality and sustainable learnings, it was equally important for us to re-establish our credibility through greater transparency. This means telling it like it is, anticipating as much as possible issues, and dealing directly with problems such as our losses in TD Waterhouse International and TD Securities Equity Options business.

Overall we accomplished more in a shorter space of time than I originally expected. The bank is now repositioned, and we have made considerable headway toward out desired business mix of 80/20 retail to wholesale. Excellent earnings and a focus on economic profit helped us to grow our Tier 1 capital from 8.1 percent at the end of fiscal 2002 to 10.5 percent at fiscal year-end 2003. We have reduced our risk rated assets on our core portfolio and wound down our noncore book faster and with more value than we anticipated a year ago. This had allowed us to release both general and sectoral allowances.

We indicated at the start of the year that we hoped to grow our personal commercial net income at an average compound rate of 10 percent for the year for 2003, 2004, and 2005. In fact, the business grew this year by 14.6 percent despite a challenging revenue growth environment. This growth was accomplished by realizing the remaining integration synergies and maintaining a 3 percent gap between revenue growth and expense growth. As a result, our efficiency ratio dropped nearly 2 percentage points from 60.7 to 58.8. At the same time, we were able to achieve this efficiency improvement while still investing in streamlining processes and re-engineering our infrastructure to permanently lower costs.

Within our North American Wealth Management operations, rising trade volumes allowed our discount brokerage business to demonstrate the benefits of the hard work they have put into lowering their breakeven point and creating huge operating leverage. As we promised earlier in the year, our restructured operations outside North America are now breakeven.

TD Waterhouse continues to be well-positioned in the U.S. market to take advantage of the renewed investor interest in direct investing. As I have said before, I like this space and intend to stay in it. In Canada, we are continuing our efforts to invest in (inaudible). These efforts should pay off over the next two years.

I am quite pleased with our success on the wholesale side, and I am particularly pleased to announce the promotion of Bob Dorrance to the position of Vice Chair TD Bank Financial Group effective immediately. Bob retains his title as Chairman and CEO of TD Securities and now will be some responsible for leading the overall Wholesale Banking operations. I know that Bob and his team will continue to drive forward into two areas of growth, as a leading full-service domestic franchise and a strong niche player in global capital markets. I have full confidence that Bob will be successful in leading the Wholesale Banking team, and I continue to look forward to working with him.

When we started to reposition that business, there was some skepticism that we would stay the course. I believe the market is now convinced that we are determined to follow our strategy. There is also real concern that the fallout from repositioning our lending business outside of Canada would impact businesses that we continue to want to grow, our domestic wholesale franchise and our global capital markets group.

Our domestic franchise actually has done extremely well. We have strengthened the business. It is one that we intend to aggressively grow. We are going to do so within our (inaudible) framer, which involves reducing our single name and industry concentrations, but we expect this business to successfully take market share in Canada. Our Global Capital Markets group has had to adapt to the reality of a reduced lending franchise abroad. It has also adjusted its strategy to the risk parameters that we have imposed on this business. Again, the response has been excellent, and despite the challenges of these adjustments, they continue to be leading global players. The net result has been that the core businesses demonstrated a capacity to earn in the $500 million range with greatly reduced risk. Fiscal 2003 earnings were $549 million, including 50 (ph) million in credit protection expense and 0 (inaudible) CLs. Importantly, return on investment capital was 18.8 percent.

We have made great progress in reducing the size of our noncore portfolio, ending this year at $4.2 billion in assets versus 11.2 billion when we started a year ago. The overall improvement in the credit environment helped to facilitate our speedy wind down in the noncore portfolio, but the group managing this portfolio has really done an outstanding job.

So what is in store for next year? As I said before, we are not in the business of forecasting. We work at executing our strategies and growing economic profit. Our two challenges now that we have repositioned the bank are to strategically grow income and economic profit in each of our businesses and secondly to redeploy our excess capital in a way that maximizes shareholder value over the long run.

Let me talk about the near and longer-term hurdles I see facing us as we set out to accomplish these two challenges. In our personal commercial bank, I believe I first expressed concern for margin compression almost six quarters ago. As we head into 2004, we continue to see environmental factors that may continue to put pressure on margins. However, we do see signs that the trend may be changing and the rate of compression de-accelerating. We expect to see some margin decline next year, but perhaps less than this year.

I continue to worry about loan-losses, and we have been reiterating quarter after quarter throughout the year that our loan-losses have been abnormally low. While commercial PCLs did increase this quarter, we cannot say it really is any indication of any major negative trends that we see. Personal PCLs also experienced an increase this quarter, but not because deliquencies are increasing, but rather from a combination of an uptick in bankruptcies and fewer collections in the quarter in part attributable to seasonal factors.

So in looking at the fourth-quarter run-rate, I would have to say that while the fourth quarter may be slightly high, I also think it's important to view that the second and third quarters were probably unsustainably low. Consequently we do not see lower PCLs contributing to earnings growth in 2004.

Despite the low revenue growth environment, we are still targeting average annual compounded earnings growth of 10 percent in our personal commercial bank. To achieve this goal, we will look for modest revenue increases as enhanced sales systems continue to contribute to volume growth, and we once again focus on holding the costs in line. In fact, we would expect relatively flat expenses if it were not for the addition of the Laurentian branches.

With regard to Wealth Management in Canada outside of discount brokerage, 2004 will be another year of reinvestment. We see a huge opportunity for growth in long-term for Wealth Management, and we are methodically investing to have all the components in place for the future. We are not looking for major benefits in the coming year, but will continue to enhance and buildout this business. Overall for Wealth Management total, we have started this year with excellent trading numbers, which if sustained will enable this business to see modest earnings growth next year despite a vigorous reinvestment program.

The focus for core wholesale business will continue to be economic profit. In terms of next year's profit, it should be noted that our current run-rate expense for credit protection is $28 million for the year, and we do not expect PCLs to continue to be zero. However, while PCLs may be higher next year, we did absorb a number of expenses in 2003 associated with refocusing the business that will not be repeated in 2004 and should at least partially offset higher PCLs. Our objective continues to be to earn our return on invested capital for this business in the range of 18 to 20 percent. The noncore portfolio will continue to be wound down as quickly and as in shareholder friendly a way as possible. We remain very aware of this portfolio's leverage to the credit environment.

As for our growing capital position, our objective is to find that optimum balance between making investments that truly add shareholder value, giving capital back to shareholders to reallocate where appropriate, and continuing to grow the bank so that we do not become strategically vulnerable. I would like to believe there are simple answers, but there are no simple answers to what the right balance is. I do not intend to be rushed into making major capital decisions until I fully explore our strategic options.

Our acquisition of the 57th Laurentian Bank branches is a good example of investment that truly adds value for our shareholders and also contributes to the strength of the franchise. This acquisition represents a boost of 30 basis points in market share and helped cement our leadership position as the number one personal retail bank in Canada.

To wrap things up, from my point of view, I am very pleased with where we are today, and I am extremely appreciable of all the hard work and efforts that have gone into repositioning the bank. We are ahead of where I thought we would be. We have three businesses, each with strategies I am fundamentally comfortable with and that are generating solid results. The leaders of these businesses know their strategies and they know their challenge is to execute them and grow economic profit.

As an enterprise, our major task is to take a look at the kind of capital we are going to be accumulating over the next year, which is really going to be quite significant and decide what the best use of that capital is in terms of creating shareholder value. Thank you very much.

Thank you. One moment for your first question.

We have not finished our formal presentation just yet. That was a little long, but not that long. Okay. So looking at the quarter in overview, we are reporting 90 cents a share earnings. Last year or last quarter was 91 cents in earnings. We had a loss in the fourth quarter of last year caused by sectoral provisions. On a reported basis or a GAAP basis, earnings per share were 73 cents. Operating cash basis net income for TD Canada Trust $327 million; that is up from 287 million last year same quarter and down slightly from the very strong third quarter which we reported in net 335. Up 14 percent almost from last year, so very strong results.

Wealth Management reported $104 million in cash operating earnings, up from 21 million last year and 82 last quarter. The 82 did include a $5 million restructuring charge in the international part of TD Waterhouse, and wholesale operating cash basis earnings came in at $148 million. Core represented 122 of that and the noncore business was $22 million.

PCL for the bank as a whole this quarter was a credit of $83 million representing reversals of general allowances of 157 million and sectoral provision rehearsals of $40 million with the balance being the loan-loss provisions in TD Canada Trust which came in at the consolidated level, 114 million with a 14 million effect of securitization for a sector reported PCL of 128. As Ed mentioned, Tier 1 capital ratio increased from 9.7 last quarter to 10.5 percent this quarter, up 2.4 percent from last year -- I think a remarkable increase.

Just to let you know what some of the items included in the 90 cents are. There are four items that we are breaking out for you to consider separately. The two items I have already talked about -- the General loan-loss provision, that is 157 pretax, 100 post tax and 15 cents per share on a post tax basis. Sectoral provision release 40 million, 4 cents a share to the plus side. We had an operational error this quarter, quite disappointing, relating to our U.S. dollar Visa business, lack of a hedge on that position. A $61 million loss, 39 post tax and 6 cents per share impounded in these figures, and finally we wrote off some systems, vacated some space and took a legal provision in the noncore part of TD Securities for a total of $29 million pretax representing 3 cents per share. When you add up those four items, you will notice there are 10 cents per share. So if you wish to exclude the impact of those items in our earnings, that would get you down from 90 to 80 cents per share.

For the full fiscal year 2003, cash, operating earnings, $2.26 per share. This includes the 95 cent a share write-down and write-off of goodwill recorded in Q2, so perhaps a figure that you would recognize more would add that back to earnings. We also described in Q3 11 cents of perhaps non-recurring or nonrepeatable earnings, and we have just talked about 10 cents being perhaps special items in Q4. When you exclude and include all of those items, you will get back to a figure you probably all recognize at $3 per share. That is the figure most of you have been quoting or thereabouts quoting in terms of expected earnings for the year.

The general allowances release talked about briefly, that still leaves us with 97 basis points in terms of risk-weighted assets. After the release, it does not really compare that poorly to the 100 basis points we had at the end of last year. Obviously this is a result of risk-weighted assets declines within the bank, as well as the general release. We have a model that has been approved by the regulator, and the model indicates what the balance in general reserves should be. We will apply that model on a regular basis, and any impact on general reserves will either hit the income statement or not, whatever the case will be.

I am wanting to draw your attention to Accounting Guideline 13, Hedging Relationships. We have implemented the new accounting policy. Nontrading derivatives have been designated in hedging relationships. We expect these hedges to be effective in 2004. But there may be some slippage in terms of earnings. We will disclose these amounts of slippage each quarter so you can assess the impact on the earnings.

There is one particular aspect of hedges which are not designated hedging relationships. We talked about this before, but our credit derivative protection program that Ed mentioned is not viewed as an effective hedge against the accrual loan books. So we will be marking the credit derivatives to market each quarter. They will not be offset by comparable marks on the accrual book. So that will certainly introduce an impact of volatility in our earnings. We will certainly disclose that effect and the gain; you will be in the position to exclude or include those items as you see fit. It is obviously more important to us that we economically hedge our positions and our business rather than worry about an extra amount of accounting volatility in our earnings.

Going to capital ratios, 10.5 percent on a year-over-year basis. This was achieved obviously through two means. We were able to reduce our risk-weighted assets from the end of last year by 10 percent, and we were able to increase our Tier 1 capital by 16 percent. I think sometimes people forget the leverage the bank has through an increase in regulatory capital because of the very leveraged aspect of the deduction from regulatory capital relating to identified intangibles and goodwill. So the combination of those two items ended up with a very significant increase in our Tier 1 ratio.

Also, tangible common equity now stands at 6.9 percent. We have displayed this now on a very conservative basis where all goodwill and all indemnified intangibles are deducted from regulatory capital. So this is the most conservative view of that ratio. Total capital ratio very high at 15.6 percent.

Looking at new formation of impaired loans, fairly consistent this quarter over last quarter. We saw a decline in the noncore creation of impaired gone from 292 last quarter to 262 this quarter. Saw an uptick on the commercial portfolio. Creation has gone from 52 last quarter to 84 this quarter and a slight uptick in the personal portfolio from 174 million in new formations to 182 million in new formations this quarter for a total of about the same as last quarter, 5.8 versus 518.

I think the real story here is not the formation of new impaired loans but the balance of gross impaired loans. The balance of gross impaired loans continue to drop this quarter. It has gone from 1 billion 095 last quarter to 1 billion 371, a decline of $530 some-odd million.

It has declined for a couple of reasons. We had write-offs, of course, which brings that total down, but the prime reason is that we have sold a lot of impaired loans, and it had had an impact on the total outstanding in our noncore portfolio. But it also had a very big impact on the amount of gross impaired loans outstanding. We were able to do that within the context of a very very similar amount of net impaired loans. We have gone from -643 to -641, so we have been able to hold our coverage equal and reduce our gross impaired loans by a very significant amount.

Moving on then to a discussion of the Personal and Commercial Banking segment. The trends here continue pretty well as they have for most of the year. We see a continuing decline in margins. Another 8 basis points came off the average margin this quarter. Therefore, revenue is quite constrained in terms of growth, up only $2 million from last quarter and up only 2.3 percent from the same quarter last year. For the year as a whole, total revenue at $5.889 billion is up 2.1 percent, so we are tracking in around slightly higher than 2 percent revenue growth.

We are seeing fairly healthy margin or volume increases offset by the margin decline, and as Ed mentioned, we are seeing the decline in margins slowing down. So the decline in the fourth quarter really hit us early in the quarter and then slowed down throughout the last half of the quarter. So if that is any indication of the future, perhaps the decline in margins is slowing down somewhat.

So I have broken out the net interest margin here for the first time between deposit products and lending products. You can see that over this period -- now these are average margins for the quarter, over the last five quarters -- you can see that most of the declines in our margins have come from the deposit products, not the lending products. That probably would have been a little counterintuitive. Most of you would have thought that margin declines were coming more on the lending side. We have had some decline in lending margins, but really less then you are seeing in the deposit side. Over this period, only a 3 basis point decline in lending versus the 18 basis point decline in deposit products.

The same reasons for decline continue. The absolute level of interest rates, the mix of business between short and long-term and between high and low margin products, and the competitive environment that we are in continues quite strong.

The provision for credit losses in the Personal Bank -- our Personal and Commercial Bank -- increases in both categories, up 10 million in the Personal side and 13 million on the Commercial side. When you look at the previous two quarters, that looks like quite a big increase, but when you go back to the same quarter last year and even the first quarter of this year, it is not that significant in terms of increase. Obviously as Ed said, Q2 and Q3 were very low quarters for credit losses and likely unsustainable in the longer-term. For the year, credit losses went from 505, down to 460, so quite a good improvement. The securitization impact, i.e. taking credit losses and converting them into an offset in other income, was 14 million this quarter versus 11 million the same quarter last year.

I think we have done an excellent job on expense control in the Personal and Commercial Bank. You can see here that expenses are constant from the third quarter; that is quite unusual in banking. I think most banks have the same impact of fourth-quarter expense bulges as people trueup their expense amounts and effectively cleanup their files. We were able to offset that bulge which did happen through other expense reductions, so we came in at the same level as last quarter and down but 1.5 percent from the same quarter last year. This did maintain our 3 percent gap in growth rates between revenue and expenses, revenue up a little over 2 percent and expenses down 1.5 percent gave us a 3.8 percent gap of quite strong. This allowed the efficiency ratio, of course, to come down 58.2 percent. I believe that will be one of the best efficiency ratios in the retail banking sector in Canada this quarter.

So the net result is a good earnings figure of $327 million. Return on invested capital at 18.8 is only down slightly from the very strong results we had in the third quarter, but up quite strongly from the 16.9 percent we reported last year same quarter. For the quarter, the earnings are up 14 percent, 13.9 percent, and for the whole year, it is 14.6 percent, so well in excess of our target double-digit growth.

Looking at some market share data, here we bought both real estate secured and other personal loans. You can see that the total balances are growing quite well, 7.5 percent year-over-year, but despite that, we are seeing a decline in our total market share of these products. It is at 20.54 percent, and that is down 20 basis points from the same period last year.

The loss in market share is weighted toward the non real estate lending component of this product grouping. Again, we have deemphasized the growth in our non-real estate secured personal lending business as we develop better routines and better systems to both manage portfolios and grant credit in the first-place.

On the personal deposit side, we split it out here between core and term deposits. On the core volume, we have seen a healthy growth year-over-year, 7 percent increase in core deposits. On the terms side, not as robust; only 1.9 percent. On the core side, our market share stands at 22.69 percent. That is down 17 basis points year-over-year but up 25 basis points since May. On the term side, quite a dramatic decline in market share. I think at 19.88 percent gone down by 63 basis points year-over-year, but again it is pricing driven, and we are quite pleased that the result has not been a further decline in market share, and we are not that worried that in order to buy market share by uneconomic pricing on the term side.

Finally, moving on to business loans and deposits, we have seen reasonable growth here in terms of total volume growth on business deposits, up 9.3 percent year-over-year.

On the loan side, it continues to run down 8.7 percent decline. We have given some market share data here. We have given loan marketshares with small business and commercial loans. The first time we presented this data. We've done quite well in small business loan market share statistic. We are at 16.58 percent. That is under our normal branch share, but still up 54 basis points year-over-year.

On the commercial side, our market share is 8.96 percent, and that is down 58 basis points year over year, but flat since March.

Moving on to our wealth business. The results in our Wealth Management business, very strong this quarter. You can see the components of revenue here. We are 410 million in revenue from TD Waterhouse and 192 from the other parts of Wealth Management. This has resulted in a quite strong earnings result, the result of 77 million from TD Waterhouse, up from $55 million last quarter. Keep in mind that there were some special items booked in Q2 and Q3, so if you want to look at the underlying trend, as I would hope that you would, you can see that although our revenue was only slightly different for the Q2 write-off of the international joint ventures, the Q2 and Q3 results on the process side are quite different.

We had particularly strong results in TD Waterhouse in Canada this quarter. The profitability in the Canadian business was up 28 percent over the previous quarter. On the revenue side, there were two factors going on. You can see that up $16 million -- I think you would expect that because of the weakening of the U.S. dollar there would be a tendency for revenue to be down because of the revenue from the U.S. business. In fact, the U.S. business was able to maintain its level after the foreign exchange effect, and the international part of Waterhouse was up slightly, and Canada represents a vast majority of the increase in revenue between Q3 and Q4.

Moving to the Waterhouse business between the International and the North American business, you can see that as Ed mentioned the international business broke even this quarter, and all of the 77 million was made in North America, and you can see the effect of revenue as well. The international revenue was up by $4 million quarter over quarter.

Operationally, you can see the figures on this slide, active accounts continue to decline slightly from quarter to quarter. New accounts about the same level as the previous quarter. The marketing spend is up slightly, but still represents I think a lower marketing spend than might be the norm over a full four quarter period. So you might expect the marketing spend to go up and be part of next year.

Trades per day is fairly consistent, up only slightly to 111,000 trades a day from 110,000 last quarter, and customer assets up through new accounts and market impacts from 215 to 222.

One of the things that you don't see on this chart is the level of margin loans, and they are up quite significantly, although the gain is from a fairly small base. When you look at the data that we have disclosed, it runs to the same $5 billion that it has been for a number of quarters. So although you cannot see a significant rise in that statistic, margin loans are up a fairly hefty percentage quarter over quarter, and it has had an impact on NII revenue.

Assets under management, very consistent with the previous quarter, $113.4 billion, really no significant movement. The retail mutual funds are up slightly, and the Waterhouse Asset Management in the U.S. is down slightly. Otherwise, fairly constant quarter over quarter.

Market share data. This is total industry, not just for the banks but total industry. On a total basis, our market share is 7.48 percent. That is down 3 basis points year-over-year, but on the long-term side, 5.50 percent, that is up 23 basis points year-over-year. That is the better part of the market share graph to be on if you have a choice.

And moving on into Wholesale Banking. Operating cash basis earnings, as I mentioned before, $148 million; revenue about $507 million, down slightly from the last quarter and down from last year. What you really want to look at, though, is the underlying trend excluding the write-off in the second quarter of the Chicago options goodwill and other restructuring costs. If you look at those numbers, and we are talking now only about the core business as well, you can see that the core revenue at 493 has been relatively stable now for three quarters -- increased slightly over last quarter -- and the profitability in the core part of the wholesale bank, $126 million, up from 110 last quarter but down from quite strong quarters in the first part of the year. Interesting that in the core part of the Wholesale Banking 19.2 percent return on invested capital is an excellent result, and for the year would be in the 19 percent, 18 to 19 percent range, which is the target for next year. We are employing about $2.6 billion of invested invested capital in the core part of the wholesale bank.

In summary for the core part of the wholesale bank, we saw very improved results from convertible arbitrage and the Canadian investment banking businesses. That was offset by reduced results in credit products and corporate lending. We have seen a continuing decline in the revenues from profitability for corporate lending during this period as the demand for corporate lending is quite weak and as we have incurred expenses on credit default swaps.

The total year ROIC at 18.8 percent, quite good, and there is 164 million in economic profit for the full year. The equity options business, almost broke even this quarter. A slight loss, about $1 million, so they are on there way to breakeven, which was the goal for next year.

Giving you some actual credit loss numbers for the business, you can see here that although we have not recorded any credit losses in the wholesale bank, we have used sectoral reserves. We have used sectoral reserves this quarter to the tune of $56 million. That is actually a use of 76 million against the sectoral loss set by a $20 million recovery of previously written off loans.

And the outstanding balance in the non-core portfolio continues to decline from 6.2 billion at the beginning of this quarter to 4.2 billion at the end of the year. The split between non-investment-grade and investment-grade is interesting. We have seen fairly modest decreases in the investment-grade part of this portfolio over the last two quarters, but fairly significant declines in the non investment-grade part of the portfolio.

A continuity of the portfolio, both in terms of loans and VAs and in terms of total exposure, started off the quarter at 6.2 billion. The sectoral usage was 76. Foreign exchange impact of a weakening U.S. dollar was $213 million, and the net reduction otherwise through loan sales, collections, was 1 billion 745 for a balance at the end of the quarter of 4.212 billion.

Looking at the allowances for credit losses both specific and sectoral, allowances you can see the continuity here. I won't go through it in detail, but the sectoral balance started off at 698, and it has ended the period at 541. The foreign exchange end losses on loan sales came in at $61 million, the 40 million release of sectorals we talked about and the drawdown of sectorals that I mentioned before at 76, recoveries at 20.

Looking at the coverage ratios we have against certain aspects of the non-core portfolio, the first one is against the total portfolio. We add back a number of items to get a comparative ratio. On the non investment-grade portion of the portfolio, you can see that we have coverage now of 45 percent. That is up from 39 percent last quarter, and on the total portfolio, coverage of 36 percent, up from 32 percent last quarter. You will also note that general allowances have been reduced as coverage against the non-core portfolio by the $157 million released this quarter.

If you move onto perhaps the riskier parts of the portfolio, being the telecom, non-North American cable, power generation and other classified accounts, our coverage ratio has gone from 45 percent last quarter to 50 percent this quarter and on a total basis, investment and non investment-grade gone from 42 to 47 percent. So as we run the portfolio down, I think it is -- and release reserves -- I think it is very comforting to note that our reserve balances are actually going up as a percentage of the outstanding amounts.

Finally, looking at the market risk, we did have I think it was four days of losses in the quarter. We had a surprising loss the last day of the quarter, again it resulted from some hedging adjustments on the last day of the quarter and other adjustments to bring back into balance some of our strategies. It was an unusual event. The loss was a little over $5 million, $6 million, but is not indicative of any trend. The histogram, the number of days for each result is here as well, and there are basically I think four loss days booked in the quarter.

So that concludes my formal presentation. I think now we will take some questions. Robin?

The TD Waterhouse, the revenues -- basically the profit seemed to go up about the same amount revenues when up. Therefore, I question what was the expense control, the expenses of TD Waterhouse? Did they actually drop substantially?

If you look at the efficiency ratio of the Wealth Management business, we don't break it out between the two businesses, the Wealth and the Waterhouse. But you'll see the efficiency ratio did get better; it did go down by about 5 percent. So there was a reduction of expenses in relation to revenue growth. It is a little misleading when you look at our revenue growth because of the foreign exchange effect. A large majority of our revenue and expenses are in U.S. dollars, so although it does not look like you got a very good increase on the topline, it turns out that that also means you did not very much increase on the expense line. So -- there was an improvement in expense control during the quarter.

(multiple speakers). Bottom line, I would not keep extrapolating that we are getting better and better at operating, but there is Canada versus the U.S. Exchange Rate, lots of things going on there. But I think we did see some flow-through of cost control that eventually said, well, we can go up another notch without adding expenses, but I don't think we are not going to keep on doing that forever. We're going to run out of that, and I think you're going to see we are now moving back into the season where we start to up the marketing. The marketing is quite seasonal. So in the first two quarters, the marketing number will go back up. So I think you have to take that into account in your numbers. Michael?

A couple of questions. First of all, let me stick with this question on Waterhouse. Last quarter you also said that we should watch for an increase in marketing spend this quarter. It was up $3 million. So when you say higher marketing spend in the first quarter, are we talking about the same quarter of magnitude type increase, or is it a different level that you would be looking at?

My second question -- I will just get them both out of the way -- is how much actually was sold in the non-core portfolio, and how did prices that you realize compare with book?

On the marketing, I think there's also an exchange rate because the marketing increase is -- the volatility in market is all in the U.S., not in Canada. So I don't have a number in my head. I think you would probably see a more rapid increase in the first quarter and second quarter then you did into the third and fourth quarter. Bharat, you want to talk to that?

We had substantial sales impact on a notional basis, so this is not allowances we have against the loans. We sold approximately 1 billion 4 of loans.

As far as prices are concerned, on the impaired loans, we came in well within our allowances. And on what we call unsatisfactory accounts, once again it is a very good market and our losses were relatively small. In fact, if you look at Dan's slide with respect to the sectoral reconciliation, there is other item under Other is about $30 million of loan sale losses booked to the sectoral that will be unsatisfactory.

So overall that figure on my slide was $61 million, and it was classified as foreign exchange and loss on loan sales booked for sectoral. About half and have would have been the way that split.

There is one other aspect of loan losses that gets booked, and this gets disclosed separately on Page 3 of the supplementary. We disclosed losses on derivatives and loan sales not booked to sectoral. And these are loan sales in the non-core portfolio, which are virtually investment-grade. So there is a very small amount of that 19 million loss recorded that related to losses on those sales (inaudible).

So you said the notional amount was 1.4 billion?

Approximately 1.4 billion.

What do you mean by the notional amount?

The gross amount of the loan.

Just gross amount. And what would have been the split between investment and non-investment-grade?

I don't have that split, but in our analysis, we have satisfactory and unsatisfactory, and about a billion was in the unsatisfactory category. And when I say it is in the satisfactory category, it is largely investment grade.

So there is a close comparison between satisfactory and investment-grade and unsatisfactory and non-investment-grade?

It is further than non investment-grade. There are classified loans as well and impaired loans as well under unsatisfactory.

Michael, perhaps I can clear this up a bit. We look at our loan portfolio in the non-core portfolio. We basically put it into three types of loans. There are the impaired loans, there is the classified loans (multiple speakers) -- not impaired but we worry a lot about those -- and then there are the ones that are not classified nor are they impaired.

The ones that are not classified nor impaired, if we sell them and we get a loss, it's not credit related. So it gets booked to other income and is shown separately on Page 3 of the income statement. If it is a classified loan and we sell it at a loss, it is usually almost all because the credit quality. Those losses on loan sales get booked to the sectoral balances. And, of course, impaired loans are the same, but we have taken provisions against those. So 30 million loss approximately booked at the sectoral, and it is a 2 million loss for non-classified loans booked to other income. (multiple speakers). Pete?

I think this was asked last quarter, Dan, but the DRIP is still in place and adds about 3 million shares per quarter. I don't really see a need for it right now with the Tier 1. Is there any plan of a million in the DRIP program?

We announced today that we would be reducing the discount on the DRIP program from 2.5 percent to 1 percent. We're quite cognizant of the fact that we are doing a low better on the capital front, so we don't have the same incentive to get our investors to reinvest, but it is an investor-friendly program.

Our retail investors, in particular, they think it's a great thing to have, and I think we would continue with it. The issue would be what the discount could be. We can make the discount anywhere from 2.5 to maybe even 5 percent down to as low as zero.

One more for Bob. The expenses at securities this quarter looked a lot higher than normal, beyond the 29 million pretax that was referred to in the press release. Were there other expenses that while maybe considered to be operating, won't rematerialize in future quarters?

Yes. I think it's fair to say that we did a lot of -- when we talk about repositioning and restructuring, that there are a fair number of expenses throughout the year in the core TD Securities that hopefully will not reoccur in 2004, and they are probably more weighted toward the fourth quarter than on average in the previous three quarters. So.

We have downsized in a number of areas, specifically in the corporate portfolio and outside of Canada. So those expenses are being run through the income statement as we go.

Maybe one quick one finally. Bharat, we saw a bank today boldly come out with a 40 to 50 percent payout ratio range. Is that something that TD Bank -- I know you are reevaluating the sudden wealth of excess capital, but is that something sometime in the future that you might look at as being something appropriate for shareholders?

Well, as you know, we increased our dividend last quarter, so I don't rule out looking at anything. But I am going to take my time looking at the options that are available to us. Heather?

The guidance that I think you're giving on TD Securities looks to be approximately in line with the core run-rate this quarter. But you have said that the provisioning will increase again next year, and expenses may partially offset that but not fully, which implies that you are looking for a revenue lift, and I am curious if you can talk about which areas you are expecting that lift to come from?

Bob will be delighted to explain all that.

Well, I do think we work hard at offsetting through expense reduction as well, so I would not necessarily imply that we would have revenue growth. We are investing in some areas I think we mentioned previously we are growing in energy trading business, which on a net basis should add nicely to revenue.

We have been experiencing increasing market share in some of our less than appropriate market share businesses, specifically the equity-related businesses in Canada. So those marketshares have been improving. It's hard to forecast what the market will be, but all things being equal that has trended up during the year.

As well, we have spent a lot of time during '03 repositioning the capital markets and derivatives businesses globally more towards the investor-focused business, as opposed to corporate-focused business. Some of those areas have started to ramp up very nicely in terms of sales. So there are areas that are market dependent, but we do see a combination of improved market share in Canada and better growth in some of the capital market businesses globally that there is room for improvement in revenue as well.

Can you comment on the decline in fixed-income trading and some of your other fixed income activities that may offset that?

I think we had a good year in fixed-income with a really strong first-half; it trailed off somewhat in the second half. Notwithstanding general moves in interest rates, unless there was some short trend that we were on the wrong side of, we're looking for improvement in fixed-income revenue this year overall globally.

Thanks.

Quentin?

A couple of housekeeping. In the non-core, the NII continues to be at 40 million despite the significant drawdown of the actual loans, but just understanding what is happening there. And then talk to the taxes in the core wholesale which look to be low versus the run-rate of previous quarters? We have seen it up and down, so can we just get a sense of run-rate on the tax rate?

Finally, I asked the question last time, Ed, in terms of capital, you said rest assured it is not being thrown away. But we have seen allocated capital go from 14.4 billion down to 13 billion in the various groups, which means it is going into Other. What is happening in there in terms of your allocation of that capital on a go forward basis, and are you harvesting it there to then be put back into the groups as they prove business plans?

You want me to answer that while you guys figure out the answers to his technical questions. I am just here to dance to keep you occupied. You know the way we run the world here is that everyone is measured on economic profit. We allocate economic capital down to the businesses, and then to the extent to which we have more capital than we need to run our operating businesses, as we say, that sits at the center. In a sense, there is a negative economic profit charge for the enterprise as a whole as you sit with capital that is not earning its true rate of cost. So we just segregate that there, and we are prepared to take that economic profit drag in order to have capital that lets us do strategic things going forward, because we won't cash in (inaudible) in some of these situations, and we want to be in the position to do that.

From the business' point of view, we do not penalize them; we don't charge down to them the cost of strategic capital accumulation if you will. They get measured on the operating capital that they actually use.

Three reasons for that. As we reduce impaired loans, the drag on the rest of the portfolio reduces because when it is a impaired loan, not only do we not recognize the spread, but there is a funding cost to it. Secondly, it is only loans that get restructured; the spreads are better than what we had them originally, and as well, there are some NII type of fees we earn on those restructuring, so those three combined result in having our NII relatively constant.

On the tax question, Quentin, actually if you look at the non-core page, Page 9 of the supplementary, I am surprised you did not ask the question why would the tax rate be negative? We had 14 million in pretax earnings and $8 million of tax credit. This is because we are using the sectoral, and the sectoral is being used at a faster rate than we had thought. So it's being used when rates are higher than we thought, and it is also being used in jurisdictions where the tax rates are higher than we thought.

So what that means is when you adjust your deferred tax balance, your deferred tax debit at the end of the period, it has an impact on the balance of the deferred tax, and that ends up having a negative affect on tax.

Suffice to say, if I could just summarize that by saying, it is not replicatable. If you exclude that impact from the total Wholesale Banking segment, I think you'll find that the tax rate isn't out of whack in the core part of the portfolio.

Michael and then Ian and then we will go to the phones.

I don't know if this is covered by the non-core tax question that you so clearly answered. But just on a consolidated basis, it appears like your consolidated tax rate is unusually low in the fourth quarter. Is that the same thing, or is there anything else that is going on there? Is that rate replicatable, or could you give us some idea of what sort of an ongoing tax rate in 2004 we should be looking for?

I think almost every quarter somebody asked me what they should use for their next few quarters' tax rate. I must admit that it's very difficult even for us to forecast that. But I can tell you that the reason why the fourth quarter tax rate is low is, indeed, partly because of that credit in the non-core bank. It is also because of we have a slight affect as we are having some profitability in parts of the bank that have previously not recognized the tax reductions when they had losses. So that tends to -- what happens there is you earn that income without accruing any tax expense.

The third reason, the fall-back reason in all of these case, is you know it is mix of business, where the business gets booked; if it's booked in a high tax jurisdiction versus a low tax jurisdiction. That is the part we have trouble forecasting. I think the tax rate is lower than you would expect going ahead. If you look at the year as a whole, I think that is much more representative of what you might get in the future periods.

There is just maybe one item in there that maybe can be pulled out a little more easily is the amount of the tax loss carryforward element that you mentioned. How much would --?

Not a significant amount. It would be single digit millions for the year; it is not a lot. Ian?

Coming back on the Waterhouse, Dan, you indicated that Canada was up 28 percent, but the overall Waterhouse was up 26. So the U.S. business is still up pretty strongly. I just want to understand if the revenues are not up that much and the expenses are not down that much, with virtually no volume change, how does it uptick that much? Maybe I misunderstood the answer.

The expenses -- if you look at the efficiency ratio -- I will try this again -- that is okay -- if I did not explain it very well the first time, I will try again. If you look at Page 7 on the supplementary, you will see the efficiency ratio has gone from almost 80 percent down to 73 percent. That would be including the uptick in marketing expenditures. So you see an actually little more than 6 percent improvement in the efficiency ratio. So I think it is obviously between the relationship between revenue and expenses.

The reason why the efficiency ratio improved so much partly is because we had a mix change between the two major businesses, the Canadian and the U.S. business. They do run on different business models. The inherent business models are quite different in terms of ratios. Because of that mix change, you id see an improvement in the efficiency ratio, even though you did not see a significant increase in the number of trades per day. The geographic origination of where those trades happened was quite different one quarter to the next.

The second thing is the securitization. Are the banks still as heavy in the securitization market? Isn't one of the uses of securitization to give you capital relief? Isn't sort of an easy use of some of your capital to securitize less and maybe buy less insurance on mortgages and stuff like that? Isn't that sort of a gimme on NII?

It is certainly a consideration. Most of our securitization arrangements are not just for capital; they are for funding sources. Some of our securitizations actually result in net positive results to the bank because of lower cost of funding. There are some that I think over an extended period of time you would wonder why we continue to do.

We have looked at the mortgage insurance program for instance, and we have determined that that is an economic use of funds. It is worth doing for any regime of capital that would be in place, even the new Basil Court (ph). So I doubt we would be scaling back on that front.

There could be a few securitizations we decide not to continue with, and there could be, in fact, some securitizations to come back on the balance sheet in '05 when the new VIE rules come into play. So we are looking at that. I think all of your points are valid, but we are thinking about them.

Let's go to the phones.

(OPERATOR INSTRUCTIONS). There are no questions from the phone at this time. Please continue.

Dan?

Your card service number is down quite a bit in the quarter. I know you (inaudible). Why would that be?

That is a straight result of the Visa securitization we did at the end of the third quarter. We securitized 1 billion 5 worth of Visa receivables, and that had an impact on the fees earned in our Visa business. You look at the securitization revenue, which is only a line or two away, and it has gone up. If you add those two numbers together, there are the same quarter over quarter.

(inaudible). Michael, Quentin and then Stephen, and I think we will call it a halt.

October 21st you closed the Laurentian Bank, adding the 57 branches on the date. But looking at your sub-pack, it looks like you were down about 70 branches from the beginning of the quarter to the end of the quarter. What are you doing as far as branch closures?

We closed a number of in-store branches during the quarter, in fact during the month. Over 100.

Can you talk about why?

The Wal-Mart.

It was the Wal-Mart? How many were the Wal-Mart brand?

I think it was 118. We also merged 30 branches left over from the integration during the year, and I think 10 of those were in the quarter.

Just if I can go back to the Visa slipup, or the U.S. dollar Visa slipup. I did not quite understand where it comes from. If this comes from U.S. dollar-denominated Visa cards where you have had large balances that have gone unhedged, and if that is the case, obviously the movement in the year, the full movement in the year where you now had this impact of 15 to 18 percent on full balances. Then what systems, or what I guess, went astray that resulted in your not taking this up before today?

I will make it simple. The way this was set up operationally is it should have been hedged. Our hedging is done in the treasury, but it was setup in a way the treasury was not aware operationally that it was setup. They catch those U.S. dollars, so there was a series -- it sat there unhedged, and our systems to catch it -- and treasury did not get it, but it shouldn't have been setup in the first place and the way it was setup. It was just a straight classic operational error that we are pretty confident now having gone through that there are not other ones like it, but it was obviously not something we are proud of.

To understand the balances underlying this, could we simply look at the change in foreign exchange Canada/U.S. exchange rate over the course of the year against the charge, and that reflects the balance you have been running?

Pretty much. There was no net amount prior to this year. All of the write-down related to foreign exchange movement this year.

It was just the float on the U.S. dollar card. Steve?

Just a follow-up on Michael's question. Were there any Wal-Mart expenses in the quarter?

Yes.

And are they now gone?

Yes.

Is it possible to quantify it?

I think it is about 28 million that we incurred in Wal-Mart expenses.

Pretax this quarter?

No. In total.

In this quarter?

About half of that.

Ed, I know you're not in the forecasting business and I think you're a pretty conservative kind of guy, but if you take a look into 2004, if you say to yourself what are the three areas that you say to yourself you can have growth next year -- do watch to quantify it -- but what are three areas you look at and you think you can have earnings growth and revenue growth?

What we are saying is we've got three businesses. We have been pretty open on what Andrea's target is for her business. We said it's pretty 10 percent compounded over the three years. She did better than 10 percent this year. I guess I would be delighted if she did 10 percent this year, but her target is for the three years to have averaged 10 percent per year.

What we are saying and what I said in my opening remarks is on the Wealth Management business we want to reinvest in our domestic operations, but if we continue to have the kind of numbers that we are seeing in Waterhouse on our trade volume, then we ought to have reasonable growth again in earnings in the Wealth Management business for next year.

And then for our core business, what we are basically saying it that we would be pleased if they continue to generate 18 to 20 percent greater return on the $2.5 billion of capital that we have in that business, but there may be possibilities to do better than that if they can have some revenue growth there.

Thank you.