Executives of the Toronto-based bank told analysts Thursday that they were pleased with the third-quarter results but raised some red flags about the current quarter that will close out TD's 2014 financial year on Oct. 31.
"Overall, our businesses performed well in the third quarter," said Bharat Masrani, who will become the bank's chief executive when Ed Clark retires in November.
"We are pleased with our results, but also mindful of several factors that are likely to affect our earnings in the fourth quarter," Masrani said. "As we approach year-end, we remain focused on finding ways of running our business more efficiently and there could be costs associated with this."
He said that TD expects credit losses to be higher next quarter — although credit quality remains strong — and there may be pressure on profit margins as competition for assets intensifies in the United States where TD operates an extensive retail network in the U.S. Northeast and Southeast.
TD's tax rate will also likely rise to a more normal level and expenses will likely be higher in the quarter ending Oct. 31 from the quarter ended July 31, Masrani added.
The bank's adjusted effective tax rate in the third quarter was 14.7 per cent, which was below the 16.1 per cent reported a year before and 19.5 per cent in the second quarter of 2014, mostly because of higher tax-exempt income from Canadian corporations and the resolution of certain audit issues.
Its corporate segment, which covers the part of TD's business outside of its core retail and wholesale operations, posted an adjusted net loss of $53 million, up from $11 million in the same period last year, as a result of ongoing investments in enterprise projects and initiatives.
"For the fourth quarter, we expect that net corporate expenses will increase over the Q3 level — driven by continued investment in projects and initiatives and reduced level of favourable tax items," said Colleen Johnston, TD's chief financial officer.
She also noted that TD's quarterly margins on its operating activities "will bump around" depending on product mix, seasonality, the competitive environment or changes to rates.
"For the fourth quarter, we're expecting a decline in margin of roughly five basis points (half a percentage point) as we expect the combination of these items to generally work against us."
However, the fourth quarter will be compared with an exceptionally strong third quarter for TD and most of Canada's other major banks.
TD earned $1.11 per share, compared with $1.52 billion, or 79 cents per share, in the same quarter last year. Adjusted net income was $2.167 billion, or $1.15 per share, up $583 million or 37 per cent compared with an adjusted net income of $1.58 billion, or 82 cents per share in the third quarter of 2013.
Analysts had been expecting $1.09 in adjusted earnings per share and about $7.07 billion of revenue, according to data compiled by Thomson Reuters.
Total revenue was $7.5 billion, up from $7.1 billion a year earlier and also better than analyst estimates.
"As a customer and a shareholder, I couldn't feel happier or more confident about TD's future," said Clark, who noted the Thursday conference call was his last as TD's chief executive. "Obviously it's nice that we ended up on a high note. It wasn't destined to be that way but it turned out to be that way."
TD's Canadian retail operations had $1.4 billion in adjusted net income for the third quarter, a 54 per cent increase from the same quarter last year.
In addition to the positive impact of the Aeroplan credit cards business acquired early in 2014, TD's personal and commercial banking experienced good loan and deposit growth.
Lending volume at TD's personal banking operations in Canada grew by $13 billion or five per cent from a year earlier, with average real estate secured lending volume up $7 billion or three per cent, auto loans up $1 billion or eight per cent and other types of personal lending up $4 billion or 14 per cent — mostly due to the addition of Aeroplan.
Average personal deposit volumes from Canadian retail increased by $4 billion or three per cent while average business deposits increased by $4 billion or six per cent.
Loyalty rewards company Aimia Inc., which owns and operates the Aeroplan rewards program in Canada, now has TD Bank as its main partner for Aeroplan credit cards but CIBC, Aimia's previous banking partner, continues to offer Aeroplan under a three-way agreement reached last year.
The bank's U.S. retail operations generated net income of US$518 million, an increase of four per cent compared with the third quarter last year.
Its wholesale banking segment, which provides services to corporate clients and financial institutions, had net income for the quarter of $216 million, an increase of 46 per cent compared with the third quarter last year.
Provisions for credit losses were $338 million compared with $477 million in the same quarter of 2013. Insurance claims fell by $369 million or 32 per cent from a year earlier to $771 million. Last year's third quarter included higher reserves for automobile claims and heightened levels of claims related to severe weather in the summer of 2013.
Assets under administration increased $15 billion or six per cent compared with the third quarter of 2013 while assets under management rose $31 billion or 16 per cent, mainly driven by higher market values and growth in new client assets.
The bank's return on equity was 16.3 per cent versus 12.8 per cent year-over-year.