TORONTO - TD Bank (TSX:TD) needs to focus on controlling its costs as the low interest rates that have kept pressure on the bank's margins are expected to continue for some time, chief executive Ed Clark said Thursday.
"We have to pour some more money into how do we actually permanently lower the cost structure of the bank to operate in a low-interest-rate environment," Clark told a conference call with financial analysts.
"We continue to maintain that we like the seven to 10 per cent target rate for our earnings growth, but as I indicated last quarter, we're going to have to work hard in this environment to get there."
Clark's comments came as TD boosted its quarterly dividend four cents to 72 cents per share and reported earnings ahead of expectations. TD earned a first-quarter profit of $1.48 billion or $1.55 per share, down from $1.56 billion, or $1.67, a year ago. Revenues grew to $5.64 billion from $5.46 billion.
However, the results included a number of one-time items including costs associated with the acquisitions of Chrysler Financial and MBNA's Canadian credit card portfolio and a $285-million provision related to a series of lawsuits over a Ponzi scheme in the U.S.
Earnings adjusted for one-time costs totalled $1.76 billion or $1.86 per share, up from $1.61 billion or $1.73 per share a year ago, and 10 cents better than then average analyst expectation, according to those surveyed by Thomson Reuters.
"TD's adjusted quarterly earnings reached a new record, up nine per cent over the same period last year, with our North American retail businesses leading the way," Clark said.
TD's results continued the trend of better than expected results among its peers. Like BMO (TSX:BMO) and Royal Bank (TSX:RY), which have already reported, TD reported higher trading revenues, said Barclay's Capital analyst John Aiken.
"TD's strong earnings were a result of continued focus on costs, with its operating leverage showing strength as a result of greater than anticipated declines in expenses while still managing to grow revenues," he said.
"On this basis, we believe that TD's earnings were stronger than (Royal Bank's) or BMO's. The results of the first three banks reporting set a fairly high bar for the remaining half."
Despite the dividend raise and improved adjusted profits, Clark said the bank is aware it faces challenges. Like its rivals, TD is contending with investor insecurity, low interest rates and a slowing housing market in Canada.
"While we're seeing some promising signs of an improvement in the economic outlook, especially in the U.S., the challenging landscape means we remain cautious," Clark said.
During the first quarter, income in Canadian personal and commercial banking — which includes credit cards, personal banking, auto lending and business banking — rose seven per cent to $826 million, driven by good volume growth in commercial lending. Personal deposits and loans held up but growth was slightly slower.
Despite warnings of a slowing housing market, real estate secured lending volumes grew seven per cent. As the automotive market recovers, auto lending volume grew by 19 per cent. All other personal lending volumes, excluding MBNA, were relatively flat.
Business loan volume grew by 14 per cent and average business deposit volumes were up 12 per cent from the year-earlier quarter.
Provisions for credit losses — or the money set aside to cover bad loans — grew 32 per cent from the first quarter last year, entirely due to the acquisition of MBNA. Excluding the new credit card portfolio, provisions actually fell by nine per cent due to better credit performance.
However, the bank said it expects the operating environment to remain challenging with continued modest declines in margins and slowing personal loan growth, partially offset by good deposit growth.
Income in its wealth and insurance division grew by 14 per cent to $349 million from the first quarter of last year. But the bank noted that the recent economic uncertainty has put pressure on trading volumes in the division.
U.S. personal and commercial banking net income — which included a provision for new banking regulations and a $285 million charge related to a lawsuit over a Ponzi scheme — fell by 43 per cent to $172 million, but rose eight per cent to $352 million on an adjusted basis as loan and personal deposit volumes grew.
In January, a U.S. federal jury ruled TD owed Coquina Investments US$67 million for its role in the scheme that was operated by a now disbarred lawyer, Scott Rothstein. The lawsuit was the first to go to trial of several pending cases filed by wronged investors against TD and others.
TD has said it would consider all options including an appeal and intends to defend itself vigorously in the other cases, but the litigation provision was the prudent move.
Meanwhile, provisions for credit losses sank by 25 per cent to US$155 million as the quality of its credit portfolio improves.
The bank expects loan volumes to grow throughout 2012 and modest earnings growth in its U.S. operations.
Earnings in TD's wholesale division, which includes capital markets and corporate lending, fell 17 per cent to $194 million, largely due to smaller gains from its investment portfolio and fewer clients making trades.
The wholesale banking division had 3,538 full time staff, down from 3,626 in the previous quarter, but up from 3,388 in the year ago quarter.
TD Bank is one of North America's biggest retail banks, with operations across Canada and in several parts of New England and the U.S. northeastern and mid-Atlantic states.
Shares in TD added $1.02 to $81.85 in midday trading on the Toronto Stock Exchange.