TORONTO-DOMINION Bank Chief Executive Officer Edmund Clark's decision three years ago to dump subprime debt "that didn't make common sense" may pay dividends again this week.
Canada's third-biggest bank will probably avoid write-downs on securities linked to US home loans when it reports second-quarter results on Wednesday. That contrasts with five competitors, led by Royal Bank of Canada and Bank of Nova Scotia, which may report as much as a combined C$4 billion (US$4.04 billion) of markdowns and credit losses, adding to C$6.6 billion from the prior three quarters, Bloomberg News reported.
"Ed Clark is a smart guy," said David Baskin, president of Baskin Financial Services in Toronto, which manages about C$400 million, including Toronto-Dominion shares. "He's absolutely to be commended for not getting caught up in the subprime frenzy."
Toronto-Dominion's profit before one-time items probably rose 3.7 percent, while earnings at rival Canadian banks dropped by an average 5 percent, according to National Bank Financial analyst Robert Sedran.
Clark, 60, announced in May 2005 that Toronto-Dominion would exit structured products, which included collateralized debt obligations and interest rate derivatives. The move was part of the bank's strategy to focus on consumer banking after soured loans to telecommunications companies such as Teleglobe Inc and XO Communications Inc led to the lender's first annual loss in 2002.
"I'm an old-school banker," Clark told reporters last month in Calgary after the annual shareholder meeting. "I don't think you should do something you don't understand, hoping there's somebody at the bottom of the organization who does."
Clark, who holds a master's degree and doctorate in economics from Harvard University, said experts with doctorates in math met him for several hours each week to educate him on credit and equity products that were being traded by the group. Clark said he decided the business was too risky for a bank that relies on consumer lending and money management for about 80 percent of profit.
"The whole thing didn't make common sense to me," said Clark, who joined the bank through its 2000 acquisition of CT Financial Services Inc and was named CEO almost three years later. "You're going to get all your money back, or you're going to get none of your money back. I said, 'wow, if this ever went against us, we could take some serious losses here'."
It cost Toronto-Dominion about C$200 million over four quarters to exit the securities business, including expenses for job cuts.
"TD took a bit of flak because of the charges they were taking to get out of this business," said Genuity Capital Markets analyst Mario Mendonca in Toronto. "In retrospect, that sounds like a drop in the bucket" compared with the potential writedowns from holding those investments, he said.