TORONTO Toronto-Dominion Bank (TD.TO) is ramping up its expansion in the United States, announcing on Thursday its second deal in two months with plans to acquire Epoch Investments, while TD's CEO said it would consider doing larger deals than in the past.
TD announced the $668 million agreement to buy the U.S. asset manager as it released fiscal fourth-quarter results that disappointed investors. In particular, its Canadian retail banking results came in softer than expected as the housing market cooled and Canadians scaled back on borrowing.
The $28-a-share offer for Epoch Holding Corp EPHC.O sent shares of the target up 26.4 percent to just shy of the offer price.
Shares of TD, which is Canada's No. 2 bank and runs a 1,300 branch U.S. network as well, fell 1.8 percent due to caution about the acquisition and concerns about the bank's profits, particularly with loan growth expected to slow next year.
"The earnings mix was disappointing relative to what the Street expectations were," said Paul Harris, portfolio manager at Avenue Investment Management.
The acquisition of Epoch will add $24 billion in assets under management to the $207 billion already overseen by TD Asset Management. The deal will both strengthen TD's U.S. wealth management business and grow its product offering for Canadian clients, the bank said.
The bid is among several small acquisitions by TD since the 2008 financial crisis. In October, it agreed to buy Target Corp's (TGT.N) $5.9 billion U.S. credit card portfolio.
While TD has focused on small "bolt-on" deals over the past two years, TD Chief Executive Ed Clark said the bank would consider larger deals to bulk up its already sizeable U.S. bank.
"We are seeing improvement in the U.S. economy that make larger deals more feasible," he said during a conference call.
However, Clark, typically a cautious speaker, said the bank did not see any promising targets at present and did not feel it had to make more acquisitions.
"It would be a mistake to believe that we have a bias towards doing a large deal," he said.
TD has held informal discussions with Royal Bank of Scotland (RBS.L) about its Citizens U.S. bank unit, according to the New York Post in August, but TD has refused to comment.
National Bank Financial analyst Peter Routledge said the bank's strong capital position - it's Basel III Tier 1 capital ratio of 8.2 percent is well in excess of minimum levels - frees up the bank to consider larger takeovers.
"I think the language (on acquisitions) over the last two years has been constrained by the capital situation and I do expect that they would, if the opportunity arose, try to build out their U.S. platform in a material way," he said.
TD earned C$1.6 billion ($1.62 billion), or C$1.66 a share, in the fourth quarter that ended on October 31. That compared with a year-earlier profit of C$1.6 billion, or C$1.68.
Excluding a C$37 million charge related to Superstorm Sandy and other one-time items, TD earned C$1.83 a share, slightly ahead of the C$1.81 that analysts expected.
The result was powered by higher loan volumes and capital markets revenue, and offset by weaker wealth management income and a jump in provisions for bad loans.
As with TD's rivals this quarter, investor attention was on bank's Canadian retail bank business, where income rose 6.9 percent year over year, falling slightly shy of estimates, according to Routledge.
A slowing housing market and signs of more cautious borrowing by Canadians has the banks bracing for slowing loan growth next year, with the impact to be made worse by narrowing loan margins as mortgages renew at current low rates.
CEO Clark acknowledged the bank was facing a tougher environment in 2013.
"In the last few months consumer loan growth in Canada has slowed, and the housing market has cooled. We are already seeing the impact on our Canadian retail bank," he said.
Even so, he reiterated TD's goal of 7 to 10 percent annual earnings-per-share growth and said he still expected TD's U.S. retail bank to reach its goal of $1.6 billion in profit next year. The unit earned C$1.1 billion in 2012.
While TD's peers have shown reasonably strong profit growth this quarter, it has been on the back of capital markets-related profits that are not a good indicator of future earnings.
In their core lending businesses, loans growth has been steady, but profits have been eroded by margins that narrowed during the year and are expected to continue to shrink in 2013.
Of the other Canadian banks reporting on Thursday, Canadian Imperial Bank of Commerce (CM.TO) topped estimates with a 13 percent rise in fourth-quarter profit, while National Bank of Canada (NA.TO) posted a 20 percent profit gain and raised its quarterly dividend.
($1 = 0.9894 Canadian dollars)