TD Bank expects slower growth in second half

TORONTO — TD Bank (TSX:TD) expects its profit growth will pull back in the second half of the year as consumer borrowing slows and banks compete more fiercely for their business.

TORONTO — TD Bank (TSX:TD) expects its profit growth will pull back in the second half of the year as consumer borrowing slows and banks compete more fiercely for their business.

Canada’s second-largest bank reported Thursday its profit grew to $1.33 billion in the second quarter as revenues strengthened and provisions for bad loans decreased.

But TD president and CEO Ed Clark told analysts he doesn’t expect growth to continue at the same pace.

Growth will be “great” but no longer “spectacular” as consumers rein in their debt and banks face continued margin pressure in its personal banking sector, Clark said.

“I can live with that,” Clark said on the call with analysts, adding that he remains confident about maintaining the bank’s earlier predictions of seven to 10 per cent growth in earnings this year over fiscal 2010.

Canada’s banks are competing fiercely for business from consumers as the housing market cools off and they focus on paying down household debt.

That puts pressure on bank margins because a significant portion of their revenue comes from credit cards and auto loans. That means they have to compete on price to attract the customers, a factor that ate into TD’s quarterly profits.

Other major Canadian banks that have reported earnings, including Bank of Montreal (TSX:BMO) and National Bank (TSX:NA), have also noted pressure on margins as consumer borrowing slows.

TD’s second quarter earnings were equal to $1.46 per share, compared to $1.18 billion or $1.30 a share in the same period a year earlier. However, the results missed analyst expectations, with TD posting adjusted earnings per share of $1.59. Analysts polled by Thomson Reuters were expecting profits to be a penny higher per share.

Revenue increased to $5.12 billion from $4.77 billion.

Provisions for credit losses, or the money put aside for bad loans, were reduced to $343 million compared with $365 million a year ago, as fewer clients defaulted on loans. That was the lowest level reported since 2008.

John Aitken, an analyst at Barclay’s Capital noted that the results were largely in line with estimates, as lower than anticipated provisions were offset by margin compression.

“As a result of margin compression, contributions from retail banking on both sides of the border were likely below the markets’ expectation, however, we point to increased volumes in Canada (with strong commercial lending growth) and in the U.S. (including 12 per cent year-over-year organic growth) as a positive,” Aitken wrote in a note.

In its Canadian banking division net income grew 11 per cent to $847 million from $761 million as it experienced strong volume growth in certain areas including business loans and deposits as well as growth in personal deposits, mortgages and indirect lending.

“This was the second best quarter on record for Canadian personal and commercial banking, despite fewer days in the quarter and, as expected, some slowing in personal banking volume growth from the exceptional levels seen in 2010,” said Tim Hockey, head of Canadian banking.

However, he added that competition to attract Canadian consumers will remain fierce, which will continue to put pressure on margins.

In the United States, personal and commercial banking profits rose 31 per cent to US$315 million from $241 million.

TD had steadily expanded its U.S. operations in recent years, up and down the East Coast.

It also owns about 40 per cent of TD Ameritrade (Nasdaq:AMTD), a discount brokerage based in the U.S. Midwest. The bank now has more than 1,000 branches throughout the Northeast, Mid-Atlantic, Florida and Washington D.C. area.

TD has also been pushing to grow its retail business in Canada by introducing Sunday hours are more than 300 retail branches across the country.

Wholesale Banking income fell 18 per cent to $180 million, largely due to lower revenue in equity derivatives and fixed income trading.

It also booked a $3 million after tax hit relating to its acquisition of Chrysler Financial.

National Bank and CIBC (TSX:CM) also reported earnings Thursday.

National just beat analysts expectations with diluted earnings of $1.69 per share, up 13 per cent from the same quarter of 2010. Revenue increased to $1.14 billion from $1.05 billion in the year-earlier period.

CIBC said its profits rose in the second quarter, but came in short of analyst expectations. The bank reported net income of $678 million or $1.60 per share for the second quarter, compared to net earnings of $660 million or $1.59 a year ago.

Shares in TD fell 1.5 per cent or $1.28 to $84.01 Thursday on the Toronto Stock Exchange.

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