Trained in the USA: Masrani Pick Signals Where TD's Growth Plans Lie

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While U.S. banks have their problems, running one offers a great proving ground to take over a major Canadian financial company.

That appears to be the thinking at Toronto-Dominion Bank (TD), which on Wednesday said U.S. chief executive Bharat Masrani would be its next leader. Masrani, who has overseen the Canadian bank's U.S. operations for about six years, still has a while to wait for his promotion; he will become CEO in November 2014, when current boss Ed Clark retires.

"This is the right thing for the company," Clark said in a joint interview with Masrani on Wednesday. "You also want to do it in a way where people say, 'Ah, at its core, it will stay the same thing.' "

Under Clark, Masrani has overseen an aggressive expansion of TD's U.S. businesses and physical presence. The bank is building branches, especially on the New York home turf of larger rivals JPMorgan Chase (JPM) and Citigroup (NYSE:C). It has also snapped up auto lending and credit card businesses from Chrysler and Target (TGT).

"We started relatively small and now are a major player. We now have a top ten bank in the U.S., with 1,300 locations from Maine to Florida," Masrani said in the joint interview. Now TD must "make sure not only that we adapt to the environment that we find ourselves in, but take the best of the best in each of the markets that we operate in, and apply it" to the larger company.

By promoting the head of its U.S. operations, TD is signaling that this country is "where they're looking for the most growth going forward," Morningstar analyst Dan Werner says.

Masrani has "been good at executing what Ed Clark has wanted to do in terms of where the U.S. is growing," Werner says. "One thing TD has done well is that they don't just acquire other banks, they also have grown organically and done a pretty good job of penetrating the commercial business. … They've done a good job of hustling and blocking and tackling."

Growth of both the organic and inorganic varieties remains a firm priority for TD, Clark and Masrani said, though they acknowledged that finding cheap, worthwhile acquisitions remains a challenge. Last month Clark told investors that TD was not interested in buying Royal Bank of Scotland's U.S. operations, because a deal would not meet its "criteria" for M&A.

"Right now with the larger U.S. banks, there still is a wide disparity between what buyers are willing to pay and what sellers are willing to sell at," Werner says. "It's not for lack of trying … but I'm not sure they've found the right partner at the right price."

In both the interview and an earlier conference call with investors, Clark said that TD is generally interested in - but hardly desperate for - acquisitions. When the bank first started expanding south of the Canadian border, "we were convinced that our business model worked … but you had to get large enough that you're not strategically threatened. Now we believe that we're there, we are large enough," he said in the interview.

"We run an aggressive organic growth strategy — we don't need to do anything," Clark added. "We're always looking at acquisitions to say, 'Can that do stuff that's cheaper than anything we can do ourselves?' "

Deals for specific assets, like the Chrysler auto finance arm or the Target credit cards, might make more sense than whole-bank M&A, he and Masrani said.

"We continue to build up that side of the balance sheet, but you want to make sure you're creating value when you're doing that," Clark says. "We're at a very different stage when we first went into the U.S."

Masrani, 56, is a native of Uganda and a TD lifer. Since starting at the bank in 1987, he has worked in Europe, India and Canada, and held the role of chief risk officer before taking over its U.S. operations.

But TD's immediate future is still very much in Clark's hands. Masrani will move back to Toronto and will become chief operating officer in July, continuing to serve under Clark for the next 18 months. It is an almost comically long CEO transition period, especially when compared with October's dramatic overnight ouster of Citigroup CEO Vikram Pandit.

Analysts on the conference call questioned the length of TD's handover, and Werner called it less than ideal.

"I don't think it really does Masrani many favors having quite that long of a [transition] period. How can you get a vision in place?" he says. "Transitions over six months seem to work best. … It is a long lame-duck period."

But Clark — who says he waited 2 1/2 years to become TD's CEO after being named for the succession in 2000 — joked that he's practically rushing Masrani into place by comparison.

"This is a short transition compared to what I went through, and it works," he says. "Our priorities don't really change because there's a succession. We're in a more difficult environment because of low interest rates and increasing regulatory complexities — the business issues don't really change."

And, at least while giving a joint interview with his boss, Masrani agreed.

"From a U.S. perspective, it may look different, but everything we do is measured and well considered," he said. "The key message here is this is being done in an orderly fashion, it's well laid out. … We are not looking at a transition that results in a change in strategy."

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