TD Bank third quarter net profit rises 29% to $1.18 billion

While the results were higher than the $4.4 billion in profits booked in the same 2009 period, the banks took a major hit from weakness in their capital markets divisions as economic uncertainty affected returns on stock markets.

Overall, the third-quarter results were mixed with three of the five banks missing analyst expectations for the period.

The economic recovery in the last year and continued growth in the housing market helped boost the banks’ main lending businesses to ordinary consumers, homeowners and companies. As well, the healthier economy reduced the number of bad loans.

TD Bank chief executive Ed Clark said Thursday the bank saw the best credit quality and lowest credit losses in seven quarters across all of its businesses, adding he expects to see further declines in losses next year.

“The continued strength of the housing market drove strong volumes in real estate lending and business deposits also became a very good source of growth. As was the story last quarter the tailwind of improving credit led to lower pcls (provisions for credit losses,)” he said on a conference call with analysts to discuss the bank’s strong third-quarter earnings.

However, it was hard to ignore some of the potential dangers that still threaten Canada’s banking industry, which has often been championed as one of the best in the world after surviving the financial crisis with little significant damage.

One key weakness was on full display, in each of the Big Five banks’ capital markets results. Overall, earnings for the divisions were nearly halved to $1.05 billion, as trading revenues declined from lofty heights last year when the economy was first showing signs of a recovery.

“Wholesale earnings continue to normalize, as we have been indicating,” Clark said.

“Last year, we were seeing unsustainable market activity and positive valuation adjustments, given a broad rebound following the financial crisis. Today, we’re generally seeing softer capital market activity and earnings declined 45% versus last year.”

Troubles in Europe and the continued weakness of the U.S. economy eroded global economic optimism and with that stock markets have taken a hit. That has led to lower corporate financings and weaker profits on stock and bond trading.

The capital markets decline has put a major pressure on overall results when compared to the second quarter of this year, when big banks’ profits were a beefier $5.09 billion.

TD Bank (TSX:TD) was the last of the Canadian banks to report its third-quarter results, saying that its profits grew 29% to $1.18 billion, narrowly missing analyst expectations.

The results released Thursday were equivalent to $1.29 per diluted share for the quarter, and compare to a net income of $912 million in the same period a year ago.

On an adjusted basis that excludes certain items, earnings were $1.43 a share, falling a penny short of analyst expectations according to Thomson Reuters.

Revenue rose to $4.74 billion from $4.66 billion a year earlier.

Provisions for credit losses dropped to $339 million versus $557 million in the comparable period of last year, as more of the bank’s corporate and retail clients paid their loans back on time. TD said it expects credit losses on personal loans will remain stable for the rest of this year.

In its wholesale banking division, TD’s profits dropped about 45% to $179 million on weaker trading results as economic uncertainty affected stock markets, leading to lower corporate financings and weaker profits on stock and bond trading.

The bank expects a loss in its corporate segment to continue into the fourth quarter. However, it says it could announce changes in the first quarter of 2011 aimed at address the size of its corporate segment loss.

Those changes could including re-examining its reporting principles or allocating more costs out to its businesses.

TD’s North American retail banking operations were the high point of its results with the Canadian division’s profits increasing 24% to a record $841 million.

The bank expects to see continued credit performance improvement in 2011 across its portfolios, assuming there is no double dip recession.

However, the bank warned that a slowdown could be afoot in the domestic retail division which handles mortgage lending, credit cards, consumer loans and other financial services aimed at ordinary Canadians.

A weakening Canadian housing market and a competitive environment continue to put pressure on margins, TD said.

While credit performance in Canada is expected to remain strong, the bank is cautious about the outlook for its U.S. portfolio as the economic recovery stateside appears far more uncertain than in Canada.

However, U.S. retail operations reported a profit up 30% to US$271 million, as the bank continued to grow its operations in New England and parts of Florida.

TD now operates about 1,300 branches in the United States and bills itself as the bank with the widest presence across North America, having roughly 1,000 branches in Canada.

In July, new regulations took effect in the U.S. that ban banks from charging overdraft fees, which charge customers for spending more than they have in their accounts to consumers without first getting their permission.

However, Clark said he expects more robust change in the U.S. banking system, which offers free banking to a majority of customers, but charges a minority of customers high overdraft fees.

Bank of America has already decided to stop the practice of allowing those transactions to go through altogether.

But Clark said in a few years, he expects the overdraft fee system will largely come to an end in favour of a more Canadian style system, in which people pay for basic banking services.

Barclays Capital analyst John Aiken said that TD’s results are unlikely to surprise the market considering that it’s relatively close to expectations.

There’s “not enough of a disappointment to generate a significant decline in valuation, but not enough positives to produce near term valuation outperformance,” he wrote in a note.

TD Bank has more than 74,000 employees across its retail operations in both Canada and the United States.