TD misses estimates as U.S. retail hit by interest rate cuts

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The Federal Reserve’s interest rate cuts have taken the steam out of Toronto-Dominion Bank’s earnings momentum, making it the only large Canadian lender to post fiscal first-quarter results that missed analysts’ expectations.

Canada’s second-largest bank by assets saw lending margins in its U.S. retail division fall to their lowest level in almost three years. That, along with a drop in TD Ameritrade contributions, led to the first earnings decline in Toronto-Dominion’s key American operations since 2012.

“The impacts from the three Fed rate cuts last quarter did result in margin compression, and the contribution from TD Ameritrade was down as expected following the elimination of trading commissions in the U.S.,” Chief Financial Officer Riaz Ahmed said Thursday in a phone interview.

Toronto-Dominion’s earnings miss comes after Canadian rivals including Royal Bank of Canada, Bank of Nova Scotia and Bank of Montreal topped analysts’ estimates on gains in their capital markets and wealth management businesses. Toronto-Dominion also saw significant gains at its TD Securities operations, as well as on higher trading and investment-banking fees.

Those results, however, were overshadowed by the decline at the bank’s U.S. retail operations. The division, with a branch network that stretches from Maine to Florida, saw earnings fall 7.6% to C$1.15 billion (U.S. $859 million) for the three months ended Jan. 31. Ameritrade contributed C$201 million to the division in the quarter, down 35% from a year earlier. Net interest margins in the U.S. operations sank to 3.07% from 3.18% in the fourth quarter and 3.42% a year earlier.

Ahmed said the bank can work through the margin compression.

“Banks adapt through increasing interest rate environments and decreasing interest-rate environments,” Ahmed said. “A strong and resilient franchise constantly adapts to its environment and keeps focused on customers.”

Toronto-Dominion’s domestic retail division posted a 30% jump in profit from a year earlier, when earnings were hurt by charges tied to a wealth management acquisition and an Air Canada loyalty program. Excluding those items, earnings from Canadian retail slipped 2.3% to C$1.8 billion, hurt in part by higher provisions.

Also in Toronto-Dominion’s earnings report:

  • Profit at the bank’s TD Securities capital markets division totaled C$281 million (U.S. $211 million), compared with a C$17 million loss a year earlier, when results were hurt by lower trading revenue and higher costs.
    • First-quarter net income rose 24% to C$3 billion, or C$1.61 a share. Adjusted per-share earnings totaled C$1.66, missing the C$1.68 average estimate of 12 analysts in a Bloomberg survey.
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