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Toronto Dominion Bank (TD) Q4 FY07 Earnings Call November 29, 2007 3:00 PM ET

Executives

Tim Thompson - VP of IR

W. Edmund Clark - President and CEO

Colleen M. Johnston - EVP and CFO

Bernard T. Dorval - Group Head Business Banking & Insurance and Co-Chair TD Canada Trust

Mark R. Chauvin - Credit Risk Management

Bharat B. Masrani - President and CEO of TD Banknorth Inc.

Robert J. Dorrance - Group Head Wholesale Banking Chairman, CEO and President, TD Securities and Vice Chair TD Bank Financial Group

Analysts

James Bantis - Credit Suisse

Brad Smith - Blackmont Capital

Mario Mendonca - Genuity Capital Markets

Robert Sedran - National Bank Financial

Shannon Cowherd - Citigroup

Sumit Malhotra - Merrill Lynch

Andre Hardy - RBC Capital Markets

Darko Mihelic - CIBC World Markets

Presentation

Tim Thompson - Vice President of Investor Relations

Good afternoon and welcome to the TD Bank Financial Group's Fourth Quarter 2007 Investor Presentation. My name is Tim Thompson and I am Vice President of Investor Relations at the Bank. We will begin today's presentation with strategic remarks from Ed Clark, the Bank's CEO. After which, Colleen Johnston, the Bank's CFO will present the Bank's fourth quarter operating performance. We will then entertain questions from those present as well as pre-qualified analyst and investors on the phones.

Also present today to answer your questions are Bob Dorrance, Chairman and CEO of TD Securities; Bernie Dorval, Co-Chair of TD Canada Trust; Bill Hatanaka, Chairman and CEO of TD Waterhouse; Bharat Masrani, President and CEO of TD Banknorth; and Mark Chauvin, Chief Risk Officer, TD Bank Financial Group. Tim Hockey, Co-Chairman of TD Canada Trust is away ill today. Please direct all questions on Canadian P&C to Bernie.

We are trying to keep the call to about one hour with Ed and Colleen's remarks taking up about half our time. As well, we are asking those participating in the question-and-answer session portion of the call to ask one question at a time, so that everybody has an opportunity to contribute.

Please turn to page two. We know that this presentation contains forward-looking statements and actual results could differ materially from what is discussed. Certain material factors or assumptions were applied in making these statements. For additional information, we refer you to our 2007 MD&A. This document includes a description of factors that could cause actual results to differ and can be found on our website at td.com. We also refer you to the SEC filings of TD and Commerce and TD's filings with the securities regulators in Canada.

Please note that the discussion of the Commerce transaction during this presentation has been addressed in the preliminary prospectus and proxy statement filed with the SEC and we urge you to read it as it contains important information. Ed, over to you.

W. Edmund Clark - President and Chief Executive Officer

Thanks Tim and thanks everyone for joining us this afternoon. Colleen is going to be up shortly to give you more detail on the fourth quarter and on the year overall, but I'd like to start by summarizing 2007 commenting a bit on the current financial situation and on our outlook for the Bank.

From my perspective, we had a great fourth quarter, ending a spectacular 2007. Every TD business grew at double-digit pace year-over-year. Our strategies were validated, our franchises were reinforced. The most important of all, our people, the heart and soul of our organization, delivered as they always do.

What makes our results so meaningful is that they were not built on short-term gains or risky strategies which paid off. Rather, they represent our consistent focus on growing franchise earnings and constantly investing for the future to extend our competitive edge. The focus played out for us as the number highlights for this year.

We launched even longer branch hours, 50% longer than our peers. We opened 38 new branches including our 100th, branch in the province of Quebec. We added 139 client-facing advisors and hundreds more customer-facing employees. We continued to hold the number one or two market share position in almost all retail products.

TD Canada Trust was recognized by J.D. Power and Synovate for being the number one bank in customer service in Canada. We know retail banking.

TD Securities solidified their position as a top three dealer in Canada and had no write-downs to report. Our Canadian retail businesses together earned over $2.75 billion during the year, up 16%. More importantly, every year since 2002 we've grown the earnings at double-digit rates, more than doubling our bottom line from $1.2 billion.

In 2002, TD's Canadian retail earnings made up 21% of the total Canadian retail earnings of the top five banks in Canada. Our 2007 TD share was 25%, a remarkable shift. Complementing this retail base in Canada is a growing retail franchise in the United States. This year, we earned $620 million on an adjusted basis in United States.

TD Ameritrade successfully transitioned to new Waterhouse USA clients to its platform and privatized and repositioned TD Banknorth and we announced our intention to acquire Commerce Bank, setting the stage for a unique U.S. growth franchise flow on the same winning factors in place in TD Canada Trust.

In light of recent market events, the most noteworthy success of 2007 has been the performance of our wholesale bank, which includes to earnings 24%. TD Securities stock to the business strategy, they solidified their position as a top three dealer in Canada, they delivered great trading results, then they produced new record earnings. They also avoided the hazards which hurt many banks around the world. Let's put this outcome in context.

Our out performance in wholesale did not happen by accident. We were today... where we are today reflects specific decisions that were consistent with our view on risk reward and transparency that we promised and delivered to our shareholders. The result for TD Bank as a whole, 23% adjusted EPS growth for our shareholders, topping off a 5 year run of 21% earnings per share compounded growth on the same basis and a 23% total shareholder compounded return.

Our dividends have grown almost 14% annually over the past 5 years and increased by 19% this year, a clear indication of the Board's confidence and TD's ability to consistently grow earnings over time.

Now let me anticipate an obvious question about this morning's announcement of Citadel's investment in Ameritrade [ph]. Obviously I am not going to comment on another company's business decisions. What I can say is that we have backed TD Ameritrade's consistent position that it will make acquisitions which makes sense for its shareholders. They have to make sense financially, in risk terms and strategically. TD Ameritrade has a great organic growth strategy, which continues to gain traction and has no need to do an acquisition. But it does remain open to opportunities, but only those which meet these three criteria.

Let me also briefly comment on recent financial market turmoil. The markets continue to be disturbed by an ongoing series of write-offs at financial institutions. The press characterize the markets has been hit by a credit crisis, I characterize it as a subprime credit crisis leading to a liquidity crisis in the financial industry, driven by a lack of transparency about the risk banks were taking, were passing on to their clients and customers.

Now current write-downs are part of the cure. What is understandably disturbing the market is the extent to which many institutions relied on these various activities as a source of income. The market has combined this realization with the lack of visibility on the ultimate fall out in the housing market in the United States. And therefore is concerned with the usable future write-downs and slower underlying growth. Today the market is punishing all banks in a similar fashion. Over time, the markets will begin to differentiate between banks on the basis of the quality of their earnings.

The TD Bank is a positive outliner because our business philosophy guide us to avoid third party asset-backed paper, to ensure that we have no exposure to U.S. subprime lending and exit the structured product businesses. Now these decisions cost us income at the time. But they were in line with what we had promised the market, consistently growing franchise earnings without taking long-term risk. As a result, we have no write-downs this quarter. Going forward, our wholesale bank is not looking to replace lost income.

The financial turmoil's had an effect on our businesses as Colleen will describe. But on a net basis, it has not been material. So, what about 2008? Well it's easy in these markets to get spooked by both turn events and the lack of visibility in the penny of too pessimist view of the outlook. That said, there are number of issues that we are following very closely. The most difficult to predict is the economic impact of the financial turmoil. The subprime crisis threatens you as well compounded the impact on Canada as we are already trying to cope with the strong Canadian dollar. Given what's going on in the markets, we believe that Canadian economy will slow down.

Having said that, strong employment growth has continued here in Canada and in the United States and our non-performers are quite contained. And while we see our business is slowing, they are showing from what really have been spectacular results. Clearly if the United States and Canada hit a major down turn, which we are not assuming, results could be worse.

So what's the view that's embedded in our operational plans for 2008? We see 2008 as a good year within our target 7% to 10% earnings per share growth range, but perhaps at the lower end of that range because of the earnings dilution resulting from the Commerce acquisition. And while we have contingency plans for expense reductions, we will continue to reinvest in our franchises in order to ensure continued strength in 2009. All in, we are feeling rather good about 2008 at the TD Bank.

So let me turn to each of our businesses. While we've publicly outlined what we hope to achieve in 2008 in the United States, we are targeting the total U.S. retail earnings approaching $1 billion coming from TD Ameritrade, TD Banknorth and Commerce facility if closes. This result will be up almost 60% from 2007 levels. The main worry for us here is the Canadian, U.S. dollar and that we may experience some modest pressure on PCOs. An average exchange rate above par could make it challenging for us to achieve that growth.

Our domestic retail businesses should slow down from the very high levels of growth we've seen over the past few years. And we do face the real risk of rising PCOs in the later half of 2008. But overall, we feel good about the strength of our position moving forward I know our teams are focused on delivering us close to $3 billion in earnings despite these challenges. Together with our U.S. earnings it wouldn't be... we could be earning close to $4 billion in winter earnings alone, a strong anchor for any franchise and on top of that we would have the earnings from outstanding wholesale business.

Speaking of wholesale, although we're going to start the year with relatively strong security gains, we do expect to slow down in TD Securities earnings from a near record pace this year. And finally, for corporate, Colleen has previously indicated our expected earnings range.

Looking at our immediate future upon the successful closing of the Commerce deal, we'll be focused on integration and getting it done right. I know we have the expertise and the best people from both sides to make it happen in a way that preserves the best features of both banks. We've got an unbelievable opportunity to transform TD into the first North American bank, a high growth customer focused bank owning the brand position of North America's most convenient bank.

In closing, we obviously had a tremendous 2007. When you look around the world, there are few banks that look like TD Bank. There are few major banks with no write-downs in 2007. Our domestic retail operations and our wholesale bank delivered spectacular results and we've established a great platform in the United States.

We continue to invest in our leading franchise businesses and the results have shown. We are confident we can take the best of this model to grow in the United States and be the North American leader.

On that note, I will turn things over to Colleen.

Colleen M. Johnston - Executive Vice President and Chief Financial Officer

Thanks very much Ed. Let me first take you briefly through the full year 2007 results before we address the fourth quarter.

Please turn to slide 4. 2007 was another exceptional year. Total bank adjusted net income was $4.2 billion, up 24% from last year, while adjusted EPS of $5.75 was up 23%, well above our 7% to 10% goal. And we increased our total dividend by 19%, in line with earnings growth. On an adjusted basis, all business segments posted double-digit earnings growth this year. Canadian retail was up 16% generating record earnings of $2.8 billion on broad based revenue growth. U.S. retail was up 43% on an adjusted basis benefiting from additional ownership through the privatization of TD Banknorth which was completed in April.

Earnings from TD Ameritrade were $261 million versus 180 last year, up 45%. Full year earnings of $824 million in wholesale were well above expectations, up 24% from prior year adjusted results. Our corporate segment was up $90 million on an adjusted basis, driven primarily by reductions in corporate support expenses, favorable tax items, lower U.S. brand advertising and capital tax and GST recoveries. We continue to be very pleased with our productivity performance. At the all bank level adjusted revenues grew by 6% versus last year, while expenses on the same basis were up just 2%, a gap of 400 basis points. This gets our adjusted efficiency ratio to 59.6%, an improvement of almost 300 basis points.

Please turn to page 5, Moving on to the quarterly highlights, total bank adjusted net income was $1,021 million, up 17% from last year. This translated to adjusted earnings per share of $1.40, up 17% from last year, all of our businesses contributed to the growth. Our Canadian retail businesses continue to perform very well increasing 16% versus last year to $691 million for the quarter, net income from our U.S. retail businesses TD Banknorth and TD Ameritrade was $199 million, up 72% from last year.

Our wholesale net income of $157 million was up 8% versus last year, in our traditionally weak fourth quarter. The corporate segment posted a loss of $26 million on an adjusted basis, which is with our targeted range of minus $20 to minus $40 million per quarter. Our capital ratios remain strong with our tier one ratio at 10.3% and the tangible common equity ratio at 7.4%.

Let me provide a short update on Basel II, Canadian banks are subject to the requirements of Basel II as of November 1, 2007, the beginning for our fiscal year. We fully expect to receive our approval to use the advanced internal ratings base model approach for credit risk in Q1 of 2008. This approval should have a favorable affect on our regulatory capital requirements in 2008.

On page 6, we see reported net income was $1.094 billion or $1.50 per share and adjusted net income was $1.021 billion or $1.40 per share. I will comment on three of our items of note this quarter. First, amortization of intangibles was $99 million this quarter or $0.14 per share; second, general allowance release. This item driven by revised loss rate assumptions gathered through new Basel II processes, totaled $39 million or $0.05 per share.

Third, Visa gain on restructuring previously announced represents a one-time gain realized as a result of the Visa Global restructuring. The amount... the income was $135 million or $0.19 per share.

Let's take a look at our businesses starting with Canadian retail on page 8. We include a basic P&L for our Canadian retail business which combines both Canadian P&C and Canadian wealth results. We are very pleased with our 16% year-over-year growth in this business.

Turning to page 9, we show results for the Canadian Personal and Commercial Bank TD Canada trust. Net income of $572 million was down 4% from Q3 but up 14% from last year. This is our 20th consecutive quarter of double digit earnings growth in this segment, quite an achievement.

On page 10, we show revenues for TD Canada Trust of $2.2 billion, a new record, up 10% from last year. The increase was supported by strong broad based volume growth and higher fee revenue. Strong volume growth contributed to the $113 million or 9% year-over-year growth in net interest income.

In terms of volume growth, real estate secured landing was up 11%, while Visa cardholder was up 18%. On the business side, small business deposits were up 8%, commercial loans were up 11% and commercial deposits were up 9%. Other income was up $91 million or 14% from stronger sales and service fees and higher FX commissions. Insurance revenues also rose on contributions from both TD Life and from TD Meloche Monnex. Overall we continued to experience strong top line growth in TD Canada Trust. For 2008 we expect to see revenue growth in the high single-digits.

On page 11, we show our net interest margin for the quarter at 3.03 down 4 basis points from last year and last quarter. The decrease was largely attributable to a tightening of the prime BA spread due to volatility in credit markets shifting product mix and intense competition for high yield savings deposits accounts.

Looking to 2008 its tough to predict margins with certainty given current market conditions that said we do expect margin declines but likely they will be modest.

Turning to page 12, provision for credit losses increased $44 million from last year to $176 million and $25 million from last quarter. Our personal banking provisions increased $54 million year-over-year primarily due to changes in credit granting criteria and higher personal lending and credit card volumes. Although we've already taken action on credit scoring we expect continued PCO growth as time is needed for changes to work through the system.

In addition, continued volume growth in cards will continue to exert upward pressure on PCO. Reflecting the higher loss rate experience, our PCL as a percentage of average assets is up 4 basis points versus last quarter, but remains in the mid range of our peer group.

Small business and commercial banking provisions remain at historically low levels with new... with low new formations. If the Canadian dollar remains strong we could see an increase in formations in the second half of 2008.

Please turn to page 13. Expenses of $1.1 billion were up 4% over last year and 6% quarter-over-quarter. At 51.8%, our efficiency ratio improved by 300 basis points compared to last year, but was not quite as strong as the record level achieved in Q3. The increase in cost reflects mainly investments in growth. These include investments in initiatives such as new branches and extended branch hours. Our hours are now 50% greater than the average of our peers. Compared to Q4 2006, we have increased staff levels by 4% with over 500 people added in the fourth quarter, primarily sales and service personnel in our branches and call centers.

We also added 14 branches in the quarter for a total of 38 new branches in 2007, more than any of our peers. Over the last 4 years we have opened 101 new branches compared to 138 new branches for the other five banks combined. Even with investment related spending this quarter, we have strong operating leverage of 6%. Going into 2008, we will continue to grow our revenues faster than our expenses. We remain committed to investing for the future to widen our lead versus the competition and have made strategic decisions to build more branches and extend our hours. These decisions mean expense growth will be slightly higher in fiscal 2008 relative to last year. So, if revenue growth slows, you may see a revenue expense gap of less than 300 basis points in the year ahead.

Page 14, market share. Personal lending share was down 10 basis points versus last year, while deposit share is down 56 basis points. Our deposit volume growth did not keep pace with the industry especially in the term deposit category, where pricing was much more competitive as other financial institutions experienced difficulty raising longer term funds in the wholesale market.

We continue to see market share gains in our credit card business with our Visa market share up 35 basis points year-over-year to 841. Market share for small business lending rose 44 basis points versus last year, while other business loans are up 32 basis points. Our commitment to business banking is paying off as we are continuing to see good progress in the growth of these businesses.

Let's turn to Canadian Wealth Management on page 14, which excludes TD Ameritrade. This business generated net income of $119 million, up 25% from last year, another very strong quarter

Page 16. Total revenues of $581 million were up 15% from last year with strong growth across all businesses. This growth was 13% excluding the mutual fund methodology change implemented part way through Q1 of '07. Mutual fund revenue increased largely due to 15% growth in assets under management to $56 billion. Revenues from the advice channels grew from last year, and is attributed to a 15% growth in assets and an increase of 139 client-facing advisors.

Discount brokerage revenues were up year-over-year on higher net interest income, mutual fund trailers and foreign exchange. Higher trades per day were offset by lower average commissions. Expense growth of 12% or 8% excluding the mutual fund methodology change to $399 million was mainly revenue-related

On page 17, we provide a breakdown of the TD Mutual Fund business as a percentage of both the Banks and larger industry group. First of last quarter, market share for long-term mutual funds is up 5 basis points for the industry and down 13 basis points for banks. For 2007 TD Asset Management ranked second overall in long-term fund net sales at $3.5 billion.

On to U.S. retail. Page 19 shows our U.S. retail business which consist of TD Banknorth and TD Ameritrade. Net income was up 72% from last year.

Next slide, here we see the contribution made by the U.S P&C segment to TD Bank Financial Group in both Canadian and U.S. dollars. TD's fourth quarter U.S P&C Banking segment net income was $100... CAN$124 million, up $15 million from last quarter's result and up $61 million from Q4 of '06. This result is slightly ahead of the CAN$123 million we projected at out TD Banknorth Investor Day this past June. Although we earn through a strengthening Canadian dollar once again, we do face some headwinds given this current strength of the dollar and intense competition in the U.S. The increase from Q3 was due to higher average ownership, up from 91% to 100% and improved core earnings.

Please turn to slide 21. U.S. P&C U.S. dollar revenue was US$457 million this quarter, up 2% quarter-over-quarter and 7% year-over-year. Contributing to the revenue improvement was good growth in other income mainly resulting from fee initiatives. The margin improvement of 14 basis points was the result of some non-recurring items. Going forward, we see modest continued pressure on our margin from the Q3 level due to sustained competitive pressure in the U.S.

With respect to volume growth versus last quarter, loan balances were flat due to the slow real estate markets. Growth in personal deposits was offset by seasonal declines in government banking deposits. The introduction of Earn Smart, TD Banknorth's high-yield money market account has helped reverse the decline in personal banking deposits. To-date over US$2.8 billion in deposits have been generated by the product, of which $1.1 billion is new money. As we reiterated last quarter, our revenue initiatives will continue to focus on the customer experience, including longer branch hours, filling products gaps in the retail business lines, investing in new and renovated branches and tailoring our compensation programs to align incentives with revenue growth and an improved customer experience.

Turn to slide 22, you can see U.S. dollar PCLs were up slightly in the quarter totaling US$34 million versus US$31 million last quarter. Net impaired loans as a percentage of total loans of 0.76%, was flat to the prior quarter. We remain cautiously optimistic regarding our overall asset quality, but the portfolio is still vulnerable to any further weakening in the U.S. economy.

Please turn to slide 23. In U.S. dollars, non-interest expense was relatively flat compared with Q3 of '07. This expense control reflected staff reductions due to branch optimization and process improvements offset by investments to increase future growth. We continue to target the upper end of our 2008 expense reduction goal of 5% to 8% or $50 million to $80 million.

Slide 24. On October 2nd, we announced the acquisition of Commerce Bank. With this transformational deal, assuming shareholder and regulatory approval, we would have achieved critical mass in retail banking in the United States. We believe that we will accelerate our U.S. growth... our organic growth plans by bringing together the best of TDBFG, TD Banknorth and Commerce. We formed an executive committee chaired by Bharat Masrani, President and CEO of TD Banknorth and an integration office. We also appointed team members of integration committees who are responsible for key deliverables. Members of those... these various committees have been announced.

In addition, we've established our guiding principles and objectives for the integration. These include delivering an outstanding customer experience centered on service and convenience, cross-selling more products to our customers, delivering on our financial commitments and ensuring we maintain a positive employee experience. Given the breath of integration experience we developed at TDBFG, ranging from the merger of TD and Canada Trust to the 27 acquisitions and integrations completed by TD Banknorth, we are confident of our success.

We'll keep you posted on a quarterly basis as material events warrant. We now expect the proxy statement and prospectus will be mailed to Commerce shareholders in December. And as a result, the transaction should close in the February or March 2008 time frame, subject to shareholder approval and approvals from U.S. and Canadian regulatory authorities. This is about a month earlier than originally anticipated.

Turning to U.S. Wealth Management, TD Ameritrade reported fourth quarter earnings of US$200 million, EPS of $0.33 per diluted share, net revenue of $575 million and average trades of 278,000, client assets of $303 billion, all records, what a tremendous quarter.

TD's investment in TD Ameritrade generated CAN$75 million of net income for the quarter, up 42% from the fourth quarter of last year. The increase was attributable to higher TD Ameritrade earnings and an increase in economic ownership, partially offset by higher TD funding cost allocation to the segment. Quarter-over-quarter earnings from TD Ameritrade were up $16 million. This was due to higher base earnings, partially offset by the impact of the stronger Canadian dollar.

Recently released October trend show a 27% increase in trades per day from September, a very strong result.

Let's now turn our focus to the wholesale business. On slide 27, we see wholesale generated net income of $157 million up 8% from last year. Let's look at the details on slide 28. Wholesale revenue of $525 million was up $32 million or 6% from last year. Trading revenue was up from last year, a strong revenue in equity derivatives, foreign exchange and fixed income was offset by... or partially offset by weakness in the vanilla credit products due to credit spread widening as well as diversions in normal pricing relationships in bond, loan and credit default swap markets.

Our total domestic franchise revenue was up slightly from last year, as syndication, M&A, equity bond trading and trade finance continued to generate good results. Investing revenue was down this quarter as security gains of $61 million were down from the prior year. Unrealized gains at over $1.2 billion were up from the end of Q3 '07 driven by gains in the merchant banking portfolio.

Looking forward, our unrealized gain number will likely decline, tracking the weakness in public equity markets and the realization of these merchant banking gains. Provision for credit losses of $4 million reflects the cost of credit protection on the lending portfolio, reduced by a recovery in the quarter. Expenses of $274 million decreased 6% due to good expense control.

During the quarter, we announced that we would provide global-style liquidity to our bank-sponsored ABCP, which was responsible for about half of the growth in wholesale RWA this quarter. Of note, the market for bank-sponsored ABCP continues to improve.

Please turn to slide 29. On slide 29, we reconfirm our very limited exposure to certain products and structures that we presented in Q3. As with last quarter, TD has no exposure to U.S. subprime mortgages directly or through CDO structures. We've added three lines to this chart for Q4. One is in response to numerous questions on underwriting commitments. For clarity, we do mark-to-market all of our underwriting commitments on loans to be syndicated as required by the Financial Instruments Accounting Standards; but this did not affect our Q4 results. Two, we don't have any TD-sponsored SIBs. Three, there's a lot of interest in level three assets and liabilities, and we have disclosed our exposures in our MD&A, page 76. Our exposure is very low, at less than 1% with the major items in this category supporting normal course business. The two largest items relate to our mortgage securitizations and equity-linked GICs supporting our retail channel.

Slide 31. As I mentioned earlier, on an adjusted basis, our corporate segment posted a loss of $26 million this quarter, down from net income of $17 million last quarter, but in line with our target of minus 20 to minus 40 per quarter. The year-over-year variance was primarily due to lower interest on income tax refunds, lower securitization gains and lower earnings on excess capital.

In conclusion, we had a very strong quarter and an excellent year. For 2007 as a whole, we delivered adjusted EPS growth of 23%, way ahead of our 7% to 10% range; and our dividend is up by 19%. All of our businesses posted double-digit earnings growth, all have good momentum and are focused on executing their strategies in 2008.

And now back to Tim for your questions. Thank you.

Tim Thompson - Vice President of Investor Relations

Thanks Colleen thanks Ed. As I mentioned at the beginning of the call, we are asking those participating in the Q&A portion to ask one question at a time. Before ending the call today, Ed will offer some final remarks. So let's start with people in the room. Michael?

Question And Answer

Unidentified Analyst

Okay I am just wondering, given the volatility in structured credit as to Ameritrade, have you noticed any pick-up in new clients that you can speak about and one item that you can probably give me Colleen is the deposits in Ameritrade that come through to TD. What's that amount?

Colleen M. Johnston - Executive Vice President and Chief Financial Officer

While we come back to... I'll come back to that, Michael. Maybe we'll start with your first question. Let me describe that number for you.

W. Edmund Clark - President and Chief Executive Officer

I think right now obviously the client base is growing rather rapidly at TD Ameritrade so they are clearly benefiting as we are in TD Waterhouse in Canada from the current turmoil in the market.

Colleen M. Johnston - Executive Vice President and Chief Financial Officer

Yes. In terms of your other question, Michael, the deposits in TD Bank USA is 14.5 billion, that's in Canadian Dollars.

Unidentified Analyst

The great numbers out of the Canadian P&C business. One of the things we do see though is the loan losses continue to rise and I know there is a sort of a standard answer: it's in line with loan growth. But like it doesn't... the loan growth it's not a 15 to 100% and you're up 30% to 40%, so maybe you could try that but some parameters around it. I know obviously there's a mix component there on those types of things. But how much is due to the FICO scores moving around and those types of things, what about the seasonal?

Bernard T. Dorval - Group Head Business Banking & Insurance and Co-Chair TD Canada Trust

As you mentioned, there is a portion of this that is due to the volume growth, and since the volume growth has happened for us a lot in the Visa product, for example we are 20% year-over-year volumes in Visa and about 50% in VFC, that is... that explains a portion of the growth. However, a portion of the growth is a result of new scorecards or new... actually it's a new system to originate new credit origination system that we implemented in last year. And as these systems were quite forward-thinking, ahead of the market, what happened is the first group of the first cohorts or business that were originated, the model were not quite as well balanced as we thought they were. So we made a lot of adjustments to this, Tim has referred to that in previous calls, we made a lot of adjustments to our models this year and we're actually quite pleased now with the performance of the second generation of these new credit engines. In the mean time, we have to live with these underperforming codes that will have to work their way through as they mature. A code matures over a number of quarters and so that's what we are seeing right now. So that's the core explanation.

Unidentified Analyst

Is there a way of trying to quantify that I mean how much it's like... it looks like sort of $15 million or $20 million higher this quarter than I would have guessed. So, how do you think we should think about this?

Bernard T. Dorval - Group Head Business Banking & Insurance and Co-Chair TD Canada Trust

That the growth... if you look at the growth for the year, I would say more than half's attributable to these new issues, these new codes before we have the time to change the scorecards or the models and that's where we are right now so.

Unidentified Analyst

So it's about a $100million specific here of about $200 million of loan losses from... so about half of that is getting a cohort and that probably wasn't scored right?

Bernard T. Dorval - Group Head Business Banking & Insurance and Co-Chair TD Canada Trust

That's those... yes.

Tim Thompson - Vice President of Investor Relations

Let's go to the phones first caller please.

Operator

First question comes from Jim Bantis of Credit Suisse. Please go ahead.

James Bantis - Credit Suisse

Hi good afternoon. Just falling back on the comments regarding the Canadian dollar and specifically looking at Ontario, I know that the prepared comments talked about low level of impairments and nothing really foreseeable. But I guess when you talk to the man on the street, and you read the headlines about auto losses, commercial real estate coming up empty. If you talk to your own commercial lenders they all realize some of the situations. And are we going to be surprised a little bit when this actually happens and we'll able to step up in terms of impairs?

Tim Thompson - Vice President of Investor Relations

You want to take that Mark?

Mark R. Chauvin - Credit Risk Management

Certainly, I think it's fair to say that the strength in the Canadian dollar will have an impact on the commercial portfolio and quite frankly, I would have thought would have had an impact by now. We're certainly seeing it to some extent in the portfolio with the promise we see, but we are not seeing a large increase, nor we see to the extent where its impacting our impairs. But I think that probably there is a certain sense of that in the portfolio and it wouldn't surprise me if that starts to show in the later half of '08.

Tim Thompson - Vice President of Investor Relations

Next caller please.

Operator

The next question comes from Brad Smith of Blackmont Capital. Please go ahead.

Brad Smith - Blackmont Capital

Yes, thanks very much. I just like to sort of take that question south of the border. With respect to the real estate exposure that you have in the pending exposure, you will have when you complete the Commerce Bank, I was wondering if you could may be just talk a little bit about the watch list and how it's been developing at Banknorth and to the best of your knowledge at the Commerce Bankcorp. I was wondering if your... either of those entities are actively trying to hedge any of the positions with respect to the real estate exposures which are quite high. And then lastly, I was just curious if I could get some sense for the Commerce Bankcorp., what the break up between a retail and commercial is in the CMOS Securities book? Thank you.

Bharat B. Masrani - President and Chief Executive Officer of TD Banknorth Inc.

On the first question on real estate, best explanation I can give you is that, what we have at Banknorth, Banknorth is not an outlier relative to its peer group within its own market. At our June 28 Investor Day, we broke out what exposures we had real estate and I am going through memory here but I think that is on our website you can look at it. But about 37% or 40% is what we've got into invest in real estate. Further more we broke out what our exposures are to certain sectors within that segment and what kind of underwriting we have in that. All that suggest that we were comfortable with our exposures. Having said that, being in the lending business, things can go wrong, real estate can be volatile. But based on our analysis today on the portfolio, we feel comfortable with the exposures. But if things were to unravel, various things that you guys know as much as I do, there is a risk that our PCOs would go up. With respect to Commerce, I am not sure what exact exposures Commerce has provided. But part of our due diligence we did extensive work on their whole book. And thought comfortable that this was in line with what we would expect for a bank of that profile in that market to have the kind of exposures it does, so and that view has not changed.

Tim Thompson - Vice President of Investor Relations

Thanks Bharat. Over to next caller please.

Operator

Next question comes from Mario Mendonca of Genuity Capital Markets. Please go ahead.

Mario Mendonca - Genuity Capital Markets

Question for Colleen. I was little surprised by your characterization of what Basel could do, effectively being somewhat beneficial particularly in the context of everything we weren't but how Ameritrade or the investment in Ameritrade would be treated. In providing that guidance, were you contemplating the effect of Ameritrade as well?

Colleen M. Johnston - Executive Vice President and Chief Financial Officer

So my comments Mario were really more in respect to 2008. So the initial impact of the change in risk-weighted assets under the new methodology. If we move into 2009 then we are required to do the 50-50 on the TD Ameritrade investment and that will clearly be a negative impact of about 150 basis points currently.

Mario Mendonca - Genuity Capital Markets

Thanks very much.

Tim Thompson - Vice President of Investor Relations

Next caller please.

Operator

Your next question comes from Rob Sedran of National Bank Financial. Please go ahead.

Robert Sedran - National Bank Financial

Hi, thanks, good afternoon. I guess just following up on the issue of Basel II Colleen, you mentioned the possibility of capital relief in 2008 from the implementation. Are you able to give us a sense of what the rating agency is telling you right now about that capital relief? I guess the reason I ask is between the BNK privatization and the Commerce Bankcorp acquisition, the balance sheet seems a little stretched at least under the old regime. Was Basel II and the potential per capita relief are factoring your decision to take on TBH or at least perhaps in the way it was structured?

Colleen M. Johnston - Executive Vice President and Chief Financial Officer

You know Rob; it really wasn't a major factor in our decision. In fact, I would say going into this, there was even some uncertainty as to how all of Basel II might eventually get phased in. So when we do our capital modeling, I mean we look at a number of different data points in terms of all of the various rating agency models, Basel I, Basel II and under all of those scenarios, we were certainly comfortable proceeding with the Commerce acquisition.

Tim Thompson - Vice President of Investor Relations

Next caller please.

Operator

Next question comes from Shannon Cowherd of Citi. Please go ahead.

Shannon Cowherd - Citigroup

Hi. You mentioned that Commerce integration. Any update on the branding strategy? Initially, you were going to operate both brands simultaneously, is that still the strategy, and what sort of parameters are you using to help decide?

Bharat B. Masrani - President and Chief Executive Officer of TD Banknorth Inc.

We made the announcement when we announced the deal and this is a very important issue. It's a very important issue for our customers, it's very important for our employees and we also said that we will do extensive research to make sure that our brand positioning, which is more important than the visual as to what it would say, is gotten right before we move in any particular fashion. So that work is ongoing. The key point here is to make sure that our customer experience right through our footprint is consistent, and once we are able to do that I think the branding issue comes more in the forefront. So work is ongoing on that. We expect over the next few months to announce a specific approach on branding.

Tim Thompson - Vice President of Investor Relations

Next caller please.

Operator

Next question comes from Sumit Malhotra of Merrill Lynch. Please go ahead.

Sumit Malhotra - Merrill Lynch

Hi, good afternoon. This one is for Bharat as well. When we look at loans in the P&C segment, U.S. P&C segment, even if I adjust for currency it looks like we are seeing a continued decline in your average loans. The last time we saw Banknorth before the privatization real estate-related loans were about 45% of the book, obviously in the area of both residential and commercial that's a lot. Can you tell us where some of the best initiatives on the lending side right now are for the bank and is the scenario where you pulled back in the short term or is there still some pockets of growth that you see as observable?

Bharat B. Masrani - President and Chief Executive Officer of TD Banknorth Inc.

Sumit,on the commercial side, we are seeing growth. We are seeing good opportunities, and I think that is related it might be counter-intuitive to what you hear in the U.S. But I think the part of the country where we are, there are still pockets of strength and in fact I would say, our pipeline on the commercial side is healthy. I think where we are seeing some weakness is more on the personal side which is, to begin, is expected given the rate cycle, given some of the uncertainties that are going on.

So overall, I am happy with where we are. There are some certain segments, the obvious segment you would see where we are more cautious than we might have been two or three years ago in showing that underwriting has kept up the standard that you'd expect of TD. So overall, I am happy with the portfolio and the growth potential in the portfolio given the tough market conditions.

Tim Thompson - Vice President of Investor Relations

And back in the room, any other questions here? Ian?

Unidentified Analyst

Question for Bob. The... I think Ed mentioned a couple of times our priority was of no special one-time items and structured credit, but I did notice the structured credit trading line is quite negative this quarter. So how do you, I mean, what happened there?

Robert J. Dorrance - Group Head Wholesale Banking Chairman, Chief Executive Officer and President, TD Securities and Vice Chair TD Bank Financial Group

Yes. Thanks Ian. So to clarify, it's the interest in credit, part of trading related to revenue that was negative in the quarter and the significant amount of that was in our vanilla credit trading business. That was impacted by what went on in the credit markets, specifically, we have a positional bias wherein over long assets, over long loans, over long bonds and we protect those with CDS. The spread between assets and CDS moved dramatically out during the quarter, and I think that was basically a liquidity issue in the marketplace.

So the difference between the value though it traditionally exists in a loan or a bond between the bond and the CDS, that basis, that delta in spread went against the market and against our positions in a fairly meaningful way. So on a mark-to-market basis, we lost money.

Unidentified Analyst

Because I would have thought your CDS book that you carry a fair amount of protection, I would have expected that that which I think somewhere else, I would have expected that to have blown out and you would have had quite large gains there, but I think Colleen said that was quite minimal this quarter.

Robert J. Dorrance - Group Head Wholesale Banking Chairman, Chief Executive Officer and President, TD Securities and Vice Chair TD Bank Financial Group

So what it did so there is two different, one, we used CDS to protect our loan book and that's what you see moving up and down through the quarterly adjustment to earnings. The other part of our business in our mark-to-market books and our trading books; we have positions wherein where long assets were protected with CDS. And we would mark the bond on the bid side of the market and we would mark the CDS to mid. In that delta in position we would earn typically we would earn money on that and what happened in the quarter was... and I think you would see this in a lot of banks' results, especially in the U.S. than the European banks, is those relationships change for a whole variety of reasons. So I think underlying what happened, Ian, is that funding assets became more difficult so bids on bond went down more rapidly than the countervailing trend on mids on CDS. So, and that is... that trend prevailed through a quarter. It rallied somewhat as credit rallied, but it still mean... it still is in an area in the marketplace that hasn't been seen before in terms of the difference between those two market classes. So, we also lost money in credit trading over and above that, but a good part of what you see in that line in the credit trading related revenue being negative was accounted for by that movement. Didn't really change in an accrual book, it wouldn't have moved, in trading book it moved.

Tim Thompson - Vice President of Investor Relations

Michael?

Unidentified Analyst

Yes. You mentioned that... I guess this is for Bharat or maybe for Colleen. You mentioned that the net interest margin in the U.S., there were some regular items that push it up to the 4%. Can you elaborate on what those were?

Bharat B. Masrani - President and Chief Executive Officer of TD Banknorth Inc.

There were various items, you know I think we had small recovery in one of the commercial loans so we sometimes, when we recover sometimes we get interest back and it is always a good thing. The other quarters you might see interest going out. So we see a non-recurring from my perspective, we should not be banking on those because they may not happen. So it's various items, small items like that in then we can go back and if there is more information you require, we can provide that. But I think the message there is that what we see in the previous quarter is the good run rate to look at and we've seen compression from that level.

Tim Thompson - Vice President of Investor Relations

Back to the phones please. Next caller?

Operator

The next question comes from Andre Hardy of RBC Capital Market. Please go ahead.

Andre Hardy - RBC Capital Markets

Good afternoon. On slide 29, which deals with the disclosures on hot topics, I am just trying to understand better what you are trying to say on the LBO side. You tell us you have nominal LBO exposure, you tell us there were no mark-to-market related to LBO exposure. But you have at least one fairly large commitment that I wouldn't describe as nominal. So may be explain to me why you described as nominal, are there hedges that you can tell us about that we're not aware of and that may be wider in mark-to-market or is it something else?

Mark R. Chauvin - Credit Risk Management

It's Mark Chauvin I'll handle that question when we are saying nominal LBO exposure, we are talking to is our whole position in that portion of the book that we retained on a credit which we've determined to be highly leveraged, the highly leveraged transaction. So late in the market we started identifying these as we were doing them to make sure we had a handle on our total exposure to that amount. So when we say nominal, if you were to add those across its well diversified relatively small holes on each particular item and in total, it would be less than 1% of our total book. So that's why we reached conclusion that it's nominal.

Tim Thompson - Vice President of Investor Relations

Okay, next caller please.

Operator

Next question comes from Darko Mihelic of CIBC World Markets. Please go ahead.

Darko Mihelic - CIBC World Markets

Hi I actually... regarding the same slide, just one point of clarification just to make sure I am not looking at this incorrectly. But you see we have no exposure to TD sponsored SIVs. Do you have exposure to other bank sponsored SIVs?

Mark R. Chauvin - Credit Risk Management

It's Mark Chauvin again. As you... I mean throughout the loan portfolio, we do have some small exposures to other banks, to two other bank sponsored not TD sponsored, but other SIV structured investments, vehicles. In each case, the amounts are their credit, their back up liquidity line. They are again structures that have not had downgrades. They are relatively small amounts, I'd characterize as nominal as just that we have a better derivative but it's very small again. So if you add those together in terms of our credit exposure to SIVs, it's not material in my view.

Tim Thompson - Vice President of Investor Relations

Next caller please.

Operator

Next question is a follow-up question from Jim Bantis of Credit Suisse. Please go ahead.

James Bantis - Credit Suisse

Hi. It looks like to be a little bit of a soft quarter in personal banking from the perspective of retail market shares. Just tumbling a little bit relative to the May 2007 I am specifically looking at personal loan. You had highlighted that the credit card market share actually, it ramped up quite nicely up 35 bps, may be you can tell us where you are actually loosing share in it what are we doing to turn it around?

Unidentified Company Representative

On the personal side on the loan side, I would say it's under real estate secured business, where we've seen some slippage. We are quite attached to the one growth is quite nice, if you look at our real estate secured loan growth. But we haven't grown as quite as fast as the market. So we are doing a number of things with regards to this including increasing significantly our mortgage sales force. We have added 50 mortgage sales force people this year. We are going to add another 50 next year. We are improving the skill set the sales skills set of our people in the branches right now. And we believe that our strategy to be open longer hours etcetera would be also conducive to having more customers come to us for their mortgage products. So we are addressing this, we have slipped a little bit lately, but we are hopeful that we're going to be able to get this back.

Tim Thompson - Vice President of Investor Relations

And one last question before we go back to Ed to finalize the call. So to the callers please, next caller.

Operator

The next question comes from Mario Mendonca of Genuity Capital Markets. Please go ahead.

Mario Mendonca - Genuity Capital Markets

Actually I just wondered if you could address what Andre Hardy was actually getting at there and the belt in it?

W. Edmund Clark - President and Chief Executive Officer

So if we are done, as I said at the start, great fourth quarter, the track we are here, with all our franchise business delivered the goods. I think you can see that the benefits of our transparent and our approach to risk reward in wholesale bank clearly paid off. So I think we are credibly well positioned now in the U.S. in terms of building the retail franchise and we look forward to trying to achieve goal for close to $4 billion of retail earnings next year alone, so it's a great position to be in. Thanks very much.

Tim Thompson - Vice President of Investor Relations

Thanks. That will end the meeting. Have a good day.

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