As he prepares to take the chief executive job at TD Banknorth Inc., Bharat B. Masrani is painting a less than rosy picture of the Portland, Maine, company's profit outlook, but he said he is taking steps to improve operations and cut costs 5% to 8%.
"We do not see the revenue challenges we face lessening anytime soon," said Mr. Masrani, the $40.2 billion-asset company's president, who is set to succeed William Ryan as the CEO in March. Mr. Ryan will remain the chairman until 2010.
Mr. Masrani spoke Wednesday on a conference call to discuss fourth-quarter results.
For the quarter, TD Banknorth reported adjusted earnings of 51 cents a share, which met analyst earnings estimates with help from its acquisition a year ago of Hudson United Bancorp. of Mahwah, N.J. Mr. Masrani did not give full-year guidance but said that first-quarter earnings are likely to be a penny a share lower than the results last quarter.
TD Banknorth plans to refrain from making acquisitions this year, he said, "unless a compelling opportunity were to arise." Meanwhile, he said it is focused on reducing costs to bring its efficiency ratio to around 50% by sometime next year. The fourth-quarter ratio rose 4.4 percentage points from a year earlier, to 56%.
"We are committed to maintaining positive operating leverage," Mr. Masrani said. Noninterest expenses dropped 1% from the third quarter but rose 33% from a year earlier, to $288 million, largely as a result of the addition of Hudson United.
Total fourth-quarter revenue fell 1.3% from the third quarter but rose 40% from a year earlier, to $423.9 million, because of the Hudson United acquisition. Noninterest income rose 114% from a year earlier, to $128.8 million, and net interest income rose 21%, to $295.1 million.
When adjusted for several unusual items, net income rose 9%, to $117.8 million, but earnings per share fell 11 cents, to 51 cents.
Mr. Masrani said Wednesday that TD Banknorth has already started cutting costs; it reduced its head count 5% in the second half of last year. In an interview, he said it has managed staff reductions "through attrition, and we are continuing on that path."
His company also expects to save money and improve customer service by looking at product delivery, call centers, and making sure "our branch resources are more aligned toward the customer traffic patterns instead of the normal banking hour patterns," he said.
It is "premature to give any specifics," and the effort will "not dramatically change the profile of Banknorth and how we deliver to our clients," Mr. Masrani said. "It might take more than '07 to realize all of it, but we are focused on trying to get as much of it as quickly as possible."
The company is still digesting another recent deal. Last weekend it completed the system conversion of Interchange Financial Services Corp., the Saddle Brook, N.J., company it acquired Jan. 1 to expand the branch system in New Jersey that it got through the Hudson United deal.
TD Banknorth's weak performance in recent quarters, including elevated expenses and sluggish loan, deposit, and net interest income, has not gone unnoticed at Toronto-Dominion Bank, the $351 billion-asset company that acquired a majority stake in TD Banknorth in March 2005.
W. Edmund Clark, Toronto-Dominion's chief executive, said in October, "We have dug ourselves a ROE hole here that is going to take a lot of work" to eliminate. However, he has also described the Portland company as a "long-term play."
In November, Toronto-Dominion announced plans to acquire the remaining shares.
TD Banknorth said at that time that weak business fundamentals were a factor in its decision to sell the remaining stake. That deal is expected to close in March or April.
On Wednesday, Toronto-Dominion said it expects TD Banknorth's fourth-quarter earnings to translate into about $54 million of net income in its fiscal first quarter, which will end Jan. 31, for its U.S. personal and commercial banking business. That figure would be a drop of 2.9% from a year earlier and 3.6% from the previous quarter.
James Ackor, an analyst at Royal Bank of Canada's RBC Capital Markets, said that TD Banknorth's revenue outlook is not unique.
"Most of the banks that we look at in the Northeast are suffering similar consequences, to the degree that you have heightened competition for both high-quality lending opportunities and deposit gathering, and you have an inverted yield curve that is pressuring margins, and you arguably have a turn in credit," Mr. Ackor said.
New York Community Bancorp, which
At TD Banknorth, loans were $25.5 billion at the end of the fourth quarter, up 27% from a year earlier and flat from the third quarter. Deposits of $27.3 billion were up 34% from a year earlier and up 1.2% from the third quarter.
