05/22/2014 08:07 EDT | Updated 07/22/2014 05:59 EDT

TD Bank CEO says 2014 better than expected so far; Q2 profit hits $1.98 billion

TORONTO - Toronto-Dominion Bank (TSX:TD) is reporting higher second-quarter net income of $1.98 billion, with solid results in Canada from its core business and recently acquired Aeroplan Visa credit card business.

The profit for the three months ended April 30 was up from $1.71 billion in the same quarter of 2013. Diluted earnings per share were $1.04 in the quarter, compared with 89 cents in the year-earlier period.

CEO and president Ed Clark told analyst that the first half of TD's current financial year — which began Nov. 1 last year and ends on Oct. 31 — has turned out better than management expected, citing positive developments on a number of fronts.

In particular, he said the Aeroplan portfolio "is operating ahead of expectations with respect to new account growth."

Clark also said TD's core businesses were showing strong internal growth, credit conditions were better than expected and a higher U.S. dollar against Canada's currency boosted contributions from its retail banking operations in the United States.

"It all added up to a very strong first half and we are feeling good about our progress," Clark said in an afternoon conference call with financial analysts.

Still, Clark said, the environment in which TD operates remains challenging, particularly in the United States, where it has a significant minority stake in the TD Ameritrade online stock brokerage and an extensive presence in retail banking along the Eastern Seaboard.

"Our business challenges with respect to operating leverage are in the United States. Our Canadian retail and wholesale operations, which account for 66 per cent of our expenditures, have delivered strong operating leverage — with expense growth well inside of excellent revenue growth."

In the United States, revenue growth is expected to be more modest because of lower securities gains and tighter loan margins but TD believes it would be a mistake "to cut deeply into our U.S. investment to try to achieve better operating leverage outcomes there."

TD said its adjusted net income was up 14 per cent at $2.07 billion, or $1.09 diluted EPS which beat analysts' expectations of $1.02 per share.

The company's shares closed Thursday afternoon at $53.25, up $1.35, after setting an intraday record high of $53.32 during the session. Royal Bank of Canada (TSX:RY), which also reported higher earnings on Thursday, also set a new record share price during the day.

TD said its Canadian retail segment had net income of $1.3 billion for quarter ended April 30, an increase of 12 per cent on an adjusted basis compared with the same quarter last year.

The bank said earnings in the retail segment were driven by such factors as growth in wealth assets and the new TD Aeroplan credit card portfolio.

Travel rewards company Aimia Inc., which owns and operates the Aeroplan rewards program in Canada, now has TD Bank as its main partner as the issuer of Aeroplan credit cards.

In its U.S. retail operations, TD generated a net income of US$495 million, an increase of 15 per cent compared with the second quarter last year. Excluding the Bank's investment in TD Ameritrade, the segment generated net income of US$425 million, an increase of 13 per cent.

"The U.S. retail segment delivered impressive results, with solid fundamentals driven by improving credit," said Mike Pedersen, group head of U.S. Banking. "While there are signs of improvement in the U.S. economy, we are also facing challenges, including ongoing low interest rates and increased competition. Moving forward, we will continue to invest in growth while managing expenses."

TD Bank's return on common equity was 15.9 per cent, up from 15.3 per cent year-over-year.

Its provision for credit losses in the quarter was $238 million, a decrease of $7 million, or three per cent, compared with the second quarter last year. The personal banking provision for credit losses was $208 million, a decrease of $4 million, or two per cent, primarily due to better credit performance and low bankruptcies. For business banking, the provision for credit losses was $30 million, a decrease of $3 million.

Barclays analyst John Aiken said TD had no problem beating analysts' expectations.

"Overall, TD reported a solid quarter and continues to execute in areas that we believe will remain a focus for a long time," Aiken said in a research note.

"While not overly dramatic, we believe that the second-quarter earnings demonstrate TD's operational strengths and should find support with investors. While the true upside leverage awaits a firmer U.S. economic recovery, there is very little to complain about in TD's quarter, and we would expect to see its shares outperform today on the basis of its results."