TD Bank CEO Ray Chun on Monday committed to regaining market leadership on metrics such as return on equity and profit growth.Galit Rodan/The Globe and Mail
Ray Chun just broke hearts among the dealmakers at TD Securities Inc., while winning the affection of Toronto-Dominion Bank’s TD-T shareholders
On Monday, TD’s newly appointed chief executive officer used his first investor day to roll out a much-anticipated strategic plan aimed at restoring the lender’s lost lustre – in the form of a premium stock market valuation.
Going into the exercise, many of TD Securities’ 6,900 investment bankers had reason to believe Mr. Chun’s path to success would include putting far more cash behind their business.
The parent bank is awash in excess capital, with roughly $8-billion to deploy after selling its stake in U.S. discount brokerage Charles Schwab Corp. earlier this year. And TD’s U.S. retail expansion strategy, which consumed considerable amounts of capital over the past two decades, is on hold until the bank works its way back into U.S. regulators’ good books.
Andrew Willis: Why TD can get its mojo back by snapping up a wealth manager
Traders and corporate financiers seldom lack confidence. TD Securities employees will say, with some justification, that if Mr. Chun channelled some of that $8-billion into more loans to corporate clients, or larger positions on trading desks, they would bring in far more revenue. And earn far larger bonuses.
Mr. Chun and newish TD Securities chief executive Tim Wiggan went with a far more investor-friendly strategy.
On Monday, Mr. Chun started his presentation by committing to regaining market leadership on metrics such as return on equity, or ROE, where TD currently ranks third among peers, and profit growth over five years, where the bank is also running third. The bank’s goal is to boost adjusted ROE from 13 per cent to 16 per cent by 2029.
TD Securities cannot meet those lofty targets by lending more money to corporate borrowers, or taking a bigger swing on the trading desk. Capital markets are a more competitive, higher risk, lower ROE business than TD’s other core sectors, including wealth management and Canadian retail banking.
TD Securities chief executive Tim Wiggan on Monday committed to boosting returns to 13 per cent by 2029.Christopher Katsarov/The Globe and Mail
When Mr. Wiggan took the stage on Monday, he echoed his boss’s goal of improving performance. TD Securities earned an 8.9 per cent adjusted ROE in fiscal 2024. Mr. Wiggan committed to boosting returns to 13 per cent by 2029.
If TD is earning considerably less than its 16 per cent target ROE in its investment banking group, then every dollar of capital committed to the business makes it harder for the bank to achieve its financial targets.
Mr. Wiggan outlined a strategy for making $1-billion a year in additional revenue simply by doing more business with existing corporate customers. His presentation showed TD Securities earns 35 per cent less in fees per client than comparable platforms.
When it came to TD Securities’ approach to corporate lending, Mr. Wiggan put up a PowerPoint presentation featuring the words “prudent” and, twice on a single slide, “disciplined.”
In 2022, TD put serious money into its investment bank by acquiring Wall Street brokerage house Cowen Inc. for US$1.3-billion. On Monday, it was clear Mr. Chun expected the dealmakers to keep expanding the global platform they’ve got, rather than asking for more.
On Mr. Wiggan’s watch, TD Securities is focused on building up capital-light businesses including prime brokerage services, which cater to institutional investors such as hedge funds, and taking advantage of the cost cutting that comes with automated trading.
While Mr. Chun’s strategy at TD includes significant cost cutting, the bank is also hiring. However, the priority is recruiting more wealth managers, not mergers and acquisitions bankers or bond traders. TD plans to add 1,700 financial advisers in Canada and the United States. They generate the consistent fees that drive premium valuations.
The $8-billion in extra capital on TD’s balance sheet, along with a significant portion of the bank’s profits, will be returned to investors through share buybacks and dividends.
Dealmakers at every major lender, including domestic market leader Royal Bank of Canada and U.S. powerhouse JPMorgan Chase & Co., face the same disappointment that TD Securities staff encountered on Monday. They are highly skilled professionals working on landmark transactions. Yet their ROE trails what tellers and advisers generate for shareholders.
Mr. Chun did the right thing for TD shareholders by causing a little heartache at TD Securities.