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5 Years After the Crash – TD: A Case Study in Solid and Prudent Business Practices

With total current assets of $835.1 billion, up from $563 billion in 2008, TD is fast approaching RBC to become Canada’s largest bank by assets.  But TD is not interested in growth for the sake of growth.  The bank is focused on profitable growth with high returns.

As we know, all banks were tested in 2008 and 2009, and never before was strong risk management more important.  This worked very well for TD, as theirs was already a culture of prudent risk management.  TD’s strategy has been consistent since well before the crisis.  The company has been expanding and growing its North American retail businesses to deliver a consistent and reliable revenue stream, and this helped it to avoid many of the revenue challenges that other banks faced.  While CIBC had to learn the hard way and suffered major losses during the crisis, TD was on the right path all along.

TD’s culture, strategy, and execution before, during, and after the crisis have been impressive.  This is evidenced by how the stock has performed in recent years.  Not surprisingly, the stock has climbed by a stellar 222% since the lows of February 2009.

TD Bank chart

Strategically Exiting Business Products

In 2005, well before the crisis, TD exited the structured products business.  According to management, they “just didn’t like the risk embedded in all those complex, financially engineered investment vehicles.”  TD also refused to sell asset backed products because they deemed them to be too risky.  They also avoided sub-prime lending in the US, only lending to creditworthy clients in areas of the country that were relatively stronger.

A Truly North American Bank.

TD’s strategy is to focus on the lower risk retail side of the business and continue to expand in the US.  The success of TD’s strategy is evidenced by the fact that in 2012, TD opened its 1,300th US store and that it is the 5th largest bank by total deposits in New York City.  TD’s goal in New York City is ambitious, and simple.  They want to be the largest.

Segmented Revenue Review

The change in revenue contribution from the different segments compared to 2008 tells the story of how TD’s focus has evolved.

Segmented Revenue

 

2012

2008

 

$ mlns

% of total

$ mlns

% of total

Cdn   P+C Banking

9,501

44.5%

8,060

59.2%

Wealth   + Insurance

4,019

18.8%

2,328

17.1%

US P+C   Banking

5,352

25.1%

2,771

20.4%

Wholesale   Banking

2,607

12.2%

1,144

8.4%

Corporate

(152)

-0.7%

(697)

-5.1%

 

21,327

13,606

Canadian Personal & Commercial Banking

The % of revenue derived from this segment has declined since 2008, as opportunities for expansion in Canada have slowed.  Ten years ago TD, which was focused on the commercial and retail side, merged with Canada Trust, which was retail focused.  The combined entity was complementary with lots of room to grow on the commercial side.  TD has therefore deliberately been investing in the commercial side since this merger.  TD is reaping the rewards of this strategy, as commercial loan growth has been strong recently.

Wealth and Insurance

The bank is also stepping up its focus on wealth management.  Revenue from the wealth management business as a percent of total revenue has risen since 2008.  In the latest quarter, earnings increased 18% versus the same period last year and Assets Under Management (AUM) was boosted from the Epic Partners acquisition, which significantly enhanced US and global capabilities.  The integration of this acquisition is going well, according to TD, and we can expect this acquisition to add to earnings in 2014.

United States P+C Banking

We have touched upon TD’s successful and aggressive expansion strategy in the U.S.  Seven years ago, TD had no retail presence in the U.S.  They recently opened their 1,300th U.S. store and they are still looking for small bolt-on acquisitions.  TD is also looking for new revenue sources.  In 2012, they acquired MBNA’s credit card portfolio and Target’s US credit card portfolio.  We can expect more such deals from TD going forward.

Wholesale Banking

TD’s capital markets business is small relative to its peers.  But as we touched on previously, this was a strategic decision that the bank made.  They exited the structured business and refused to sell asset backed investments.  So management sees no problem with having a relatively small wholesale business.  The bank wants a 15-20% return from this segment in the medium term.  It is not about growth for them, it is about returns generated.

Bottom Line

TD’s strategy has been based on sound and prudent business practices.  This is what got them through the crisis and helps to ensure the bank will continue to thrive.

The Canadian banks are a go to source for yield in this country.  In 2012, TD alone raised its dividend twice and has increased its target payout ratio range to 40-50% from 35-45%.  The Motley Fool has created a special FREE report that will help you fill your portfolio with even more solid dividend stocks just like the Canadian banks.  Click here now and we’ll send you “13 High Yielding Stocks to Buy Today” at no charge!

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Fool contributor Karen Thomas does not own shares in any of the companies mentioned above.  The Motley Fool does not own shares in any of the companies mentioned above. 

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