Presentations & Events

1. general and sectoral loan loss allowance releases. As I indicated to you previously, every quarter for the next year we will run through a disciplined process to review the adequacy of our sectoral allowance and, to the extent we are overprotected, will release the reserves. We will also continue to be absolutely transparent in our reporting so you can adjust our results accordingly. Similarly at the start of the non-core bank I indicated the possibility of releasing some general reserves as the non-core bank wound-down. Again, we believe it is important to be transparent about these earnings so you can adjust them, as appropriate.
2. our reported results also include a charge to address a previously unhedged non-trading U.S. dollar exposure related to our US$ Visa product; and
3. a charge for technology, real estate and legal provisions associated with the wind-down of the non-core portfolio.

The charge for the non-core wind-down expenses is not unexpected as we withdraw from business activities that are no longer part of our strategy. However, I am disappointed we had an operational error leading to the foreign exchange loss. This is not the operational excellence we are targeting. We have reviewed our procedures and will be undertaking process changes to prevent recurrence of this in the future.

Since Dan will go over the quarter in detail, my remarks, although applicable to the quarter, will be more focused on the year on the whole and the outlook for 2004.

Before I turn to that, I'd like to comment on the report that was released on Monday by the Enron Bankruptcy Examiner.

There is no doubt that what happened at Enron is deplorable. A Fortune 100 company imploded under its corporate malfeasance and as a result, employees and investors lost a tremendous amount of personal savings. In addition, a great number of companies have had their reputations negatively impacted by what happened at Enron, and we have not been immune from that. Had we had the benefit of hindsight, we obviously would never have entered into any relationship with Enron.

But I want to be clear about the facts with regards to TD on this issue. As it was stated in the Examiner's report, we were not involved in putting together the structured deals. Enron put them together without our input and then presented them to us - which is where our involvement began. The deals were very similar to others that had been executed by other very reputable financial institutions. Second, when our employees were interviewed by the Examiner's counsel, they stated categorically that they did not know that Enron was managing earnings to mislead investors.

And finally, the Examiner, whose mandate was obviously to find fault, clearly stated, and I quote, "A fact-finder might draw alternative or contrary inferences from the same evidence." The Examiner's observation that the facts could also point to contrary inferences was not widely reported. I believe it is important to recognize that the Examiner has acknowledged that this, even in hindsight, is not a black and white case.

So what have we learned from this?

We've learned that it is not sufficient to rely on the assurances from the client that their intentions are legitimate. We've also learned that it is not sufficient to rely on the assurances of the client's internationally known auditors that reporting and accounting regulations are being adhered to. We are, quite understandably, now operating under an approach of what I would call "enhanced due diligence", as I am sure all other financial institutions are. Can I guarantee that this will never happen with another company? No, of course not. But I can commit to doing our part in asking questions and flagging potential issues. We now recognize it is not enough to take the word of just the company or its auditors. We recognize that in order to protect our reputation that our employees work so hard to build and maintain, we need to make sure that the intentions of our clients with which we are associating are above board. It's a lot to handle, but given the alternatives, it's worth it.

You are likely wondering whether or not we have adequate provisions to cover potential losses associated with Enron. The short answer is yes. Like all financial institutions, we continually assess our situation for potential expenses and exposures. In addition, Enron is a non-core asset, and the risks associated with it will be assessed before releasing any sectoral provisions.

I'd now like to move to discussing the financial results.

Fiscal 2003 Year End Overview

Fiscal 2003 was a great year for TD. Coming off a very tough year in 2002, we had lost a lot of credibility in the marketplace and had our work cut out for us. We knew that, in addition to turning the business around and demonstrating we could deliver high quality and sustainable earnings, it was also important for us to re-establish our credibility through greater transparency. This means telling it like it is, anticipating, as much as possible, issues and dealing directly with problems such as our losses in TD Waterhouse International and TD Securities' equity options business.

Overall, we accomplished more in a shorter space of time than I originally expected. The bank is now repositioned and we have made considerable headway towards our desired business mix of 80:20 retail to wholesale. This year, the mix, excluding restructuring, is 70% retail and 30% wholesale. If we include only core wholesale, our mix is 74% retail and 26% wholesale.

Excellent earnings and a focus on economic profit helped us grow our Tier 1 capital from 8.1% at the end of fiscal 2002 to 10.5% at fiscal 2003. We have reduced our risk-weighted assets in our core portfolio and wound-down our non-core book faster and with more value than we anticipated a year ago. This has allowed us to release both general and sectoral allowances.

We indicated at the start of the year that we hoped to grow our personal and commercial net income at an average compound rate of 10% per year in 2003, 2004 and 2005. In fact, the business grew this year by 14.6% despite a challenging revenue growth environment. This growth was accomplished by realizing the remaining integration synergies and maintaining a 3% gap between revenue growth and expense growth. As a result, our efficiency ratio dropped nearly 2 percentage points from 60.7% in 2002 to 58.8% in 2003. We were able to achieve this efficiency improvement while still investing in streamlining processes and re-engineering our infrastructure to permanently lower costs.

Within our North American wealth management operations, rising trade volumes allowed our discount brokerage business to demonstrate the benefits of the hard work they put into lowering their breakeven point and creating huge operating leverage. As we promised earlier in the year, our restructured operations outside North America are now breakeven.

TD Waterhouse continues to be well positioned in the U.S. market to take advantage of the renewed investor interest in direct investing. As I have said before, I like this space and intend to stay in it. In Canada, we are continuing our efforts to invest in the advice side. These efforts should pay off over the next two years.

I am quite pleased with our success on the wholesale side. And I am particularly pleased to announce the promotion of Bob Dorrance to the position of Vice Chair, TD Bank Financial Group, effective immediately. Bob retains his title as Chairman and CEO of TD Securities and will now be responsible for leading the overall wholesale banking operations. I know that Bob and his team will continue to drive forward in the two areas of growth - as a leading full-service domestic franchise and a strong niche player in global capital markets. I have full confidence that Bob will be successful in leading the wholesale banking team and I look forward to continuing to work with him.

When we started to reposition that business, there was some skepticism we would stay the course. I believe the market is now convinced we are determined to follow our strategy. There was also concern that the fallout from repositioning our lending business outside Canada would impact businesses that we continue to want to grow - our domestic wholesale franchise and our global capital markets group.

Our domestic franchise has done extremely well. We have a strengthened business, one we intend to aggressively grow. We will do so within our risk framework, which involves reducing our single name and industry concentrations, but we expect this business to successfully take market share in Canada.

Our global capital markets group has had to adapt to the reality of a reduced lending franchise abroad. It has also adjusted its strategy to the risk parameters we have imposed on the business. Again, their response has been excellent and despite the challenges of these adjustments, they continue to be leading global players.

The net result has been that the core business demonstrated a capacity to earn in the $500 million range with a greatly reduced risk profile. Fiscal 2003 earnings were $549 million, including $15 million in credit protection expense and zero PCLs. Importantly, return on invested capital was 18.8%.

We have made great progress in reducing the size of our non-core portfolio, ending this year at $4.2 billion in assets versus $11.2 billion a year ago. The overall improvement in the credit environment helped to facilitate our speedy wind-down of the non-core portfolio, but the group managing this portfolio has done an outstanding job.

What's In Store For 2004

So, what's in store for next year? As I've said before, we're not in the business of forecasting. We work at executing our strategies and growing our economic profit.

Our two challenges, now that we have repositioned the bank, are to: (i) strategically grow income and economic profit in each of our businesses; and (ii) re-deploy our excess capital in ways that maximize shareholder value over the long-run.

Let me talk about the near and longer term hurdles I see us facing as we set out to accomplish these two challenges.

In our personal and commercial bank, I believe I first expressed concern for margin compression almost six quarters ago. As we head into 2004, we continue to see environmental factors that may continue to put pressure on margins. However, we see signs the trend may be changing and the rate of compression decelerating. We expect to see some margin decline next year but perhaps less than this year.

I continue to worry about loan losses, and we've been reiterating quarter after quarter throughout the year that our loan losses have been abnormally low. Well, commercial PCLs did increase this quarter but it is not an indication of any major negative trends. Personal PCLs also experienced an increase this quarter, not because delinquencies are increasing but rather from a combination of an uptick in bankruptcies and fewer collections in the quarter, in part attributable to seasonal factors. So in looking at the fourth quarter run rate, I would say that while the fourth quarter may be slightly high, the second and third quarters were unsustainably low. Consequently, we do not see lower PCLs contributing to earnings growth in 2004.

Despite the low revenue growth environment, we are still targeting average annual compounded earnings growth of 10% in P&C. To achieve this goal, we will look for modest revenue increases as enhanced sales systems contribute to volume growth and we once again focus on holding costs in line. In fact, we would expect relatively flat expenses if it were not for the addition of the Laurentian branches.

With regards to wealth management in Canada outside of discount brokerage, 2004 will be another year of reinvestment. We see a huge opportunity for growth in the long-term for wealth management, and are methodically investing to have all the components in place for the future. We are not looking for major benefits in the coming year but will continue to enhance and build this business.

Overall, for wealth management in total, we have started this year with excellent trading numbers, which, if sustained, will enable this business to see modest earnings growth despite next year's reinvestment program.

The focus for our core wholesale business will continue to be economic profit. In terms of next year's profit, it should be noted that our current run rate expense for credit protection is $28MM per year and we do not expect PCLs to continue to be zero. However, while PCL may be higher next year, we did absorb a number of expenses in 2003 associated with refocusing the businesses that will not be repeated in 2004, and should partially offset higher PCLs. Our objective is to earn a return on invested capital in the range of 18% to 20%.

The non-core portfolio will continue to be wound-down as quickly and in as shareholder friendly a way as possible. We remain very aware of this portfolio's leverage to the credit environment.

As for our growing capital position, our objective is to find the optimum balance between (i) making investments that truly add shareholder value; (ii) giving capital back to shareholders to reallocate where appropriate; and (iii) continuing to grow the Bank so we do not become strategically vulnerable.

There are no simple answers to what is the right balance here. I do not intend to be rushed into making major capital decisions until I have fully explored our strategic options. Our acquisition of 57 Laurentian Bank branches is a good example of an investment that truly adds value for our shareholders and also contributes to the strength of our franchise. This acquisition represents a boost of 30 basis points in market share and helps cement our leadership position as the #1 personal retail bank in Canada.

So to wrap things up, from my point of view I'm very pleased with where we are today, and I'm extremely appreciative of all the hard work and efforts that have gone into repositioning the bank. We're ahead of where I thought we'd be. We have three businesses, each with strategies I am fundamentally comfortable with and that are generating solid results. The leaders of those businesses know those strategies and know their challenge is to execute them and grow economic profit. As an enterprise, our major task is to take a look at the kind of capital we're going to be accumulating over the next year, which is likely to be quite significant, and decide what's the best use of that capital in terms of creating shareholder value.