The new TD: CEO Bharat Mas­rani’s quiet rev­o­lu­tion

The Globe and Mail (Prairie Edition) - - REPORT ON BUSINESS - TIM KILADZE JAMES BRAD­SHAW

In the sum­mer of 2014, shortly be­fore tak­ing over at Toronto-Do­min­ion Bank, Bharat Mas­rani was asked about his vi­sion for Canada’s se­cond-most prof­itable com­pany. For some­one about to be­come chief ex­ec­u­tive of­fi­cer, he had kept a low pro­file, and in­vestors and an­a­lysts were hun­gry for clues about his plans. How would he change the bank?

With­out a mo­ment’s hes­i­ta­tion, he an­swered by promis­ing no rev­o­lu­tion at all. “I feel like an equal part­ner of what this bank is to­day and hence, I don’t feel com­pelled to change.”

Mr. Mas­rani may have seemed bold in tak­ing credit for build­ing TD into a force, but he wasn’t ex­ag­ger­at­ing. He worked closely with Ed Clark, TD’s charis­matic CEO, for more than a decade and to­gether they made many ma­jor moves, in­clud­ing a de­ci­sion to spend heav­ily to ex­pand in the United States. With his fin­ger­prints all over the bank’s ex­ist­ing strat­egy, Mr. Mas­rani didn’t see a rea­son to sell the board on a new one.

But the sta­tus quo he promised lasted less than one quar­ter.

In De­cem­ber, 2014, a month into Mr. Mas­rani’s ten­ure, the new CEO laid out a new goal “to in­crease ef­fi­ciency and stream­line our cost base” – bank­ing lingo for slash­ing ex­penses and jobs where pos­si­ble.

The ra­tio­nale was a sud­den change in cir­cum­stances. Oil prices were crash­ing and Ot­tawa’s warn­ings about oner­ous con­sumer-debt loads were grow­ing louder. Ul­tralow in­ter­est rates had sparked a bor­row­ing binge by con­sumers, and from 2009 to 2014, TD’s to­tal mort­gage port­fo­lio al­most dou­bled in size to $199bil­lion. But hous­ing-driven pros­per­ity can only go so far (and, as U.S. banks learned a decade ago, it comes with its own risk). All of this played out against a back­drop of stub­bornly low eco­nomic growth and com­pet­i­tive threats from new star­tups.

Mr. Mas­rani’s quick fix was to en­dure $686-mil­lion in re­struc­tur­ing charges over 12 months, to strip out as many ex­penses as he could.

That was only the be­gin­ning. In the two years since, Mr. Mas­rani un­veiled a re­vamped wealth­man­age­ment strat­egy, com­plete with the launch of in-house, low­cost ex­change-traded funds; em­barked on a cap­i­tal-mar­kets ex­pan­sion, par­tic­u­larly in the United States; pulled the trig­ger on the $1.3-bil­lion (U.S.) ac­qui­si­tion of the bank op­er­a­tions of Scot­trade Fi­nan­cial Ser­vices Inc. and came close to buy­ing Richard­son GMP, a Cana­dian firm with $28-bil­lion in as­sets un­der man­age­ment.

Un­der Mr. Mas­rani’s watch, TD has in­vested heav­ily in dig­i­tal bank­ing tools, a strat­egy that seems a mod­est de­par­ture from its long-stand­ing fo­cus on in-per­son branch bank­ing and cus­tomer ser­vice.

Most re­cently, the bank an­nounced the re­tire­ments of long-time lead­ers in mul­ti­ple busi­ness units, in­clud­ing Mike Ped­er­sen, the head of the U.S. per­sonal and com­mer­cial bank – TD’s main ve­hi­cle for long-term growth.

So much for not feel­ing com­pelled to change.

“One of the hall­marks of TD is its abil­ity to adapt to the en­vi­ron­ment it finds it­self in, rather than hop­ing, pray­ing that the en­vi­ron­ment will go back to the good old days,” Mr. Mas­rani said in a re­cent in­ter­view at TD’s Toronto head­quar­ters.

Asked whether he re­versed course on his ini­tial prom­ise, the CEO prac­ti­cally scoffs. “I wouldn’t put it in your words, that there’s been some dra­matic shift here, be­cause there hasn’t,” he ar­gues.

Mr. Mas­rani said TD’s decade­long ex­pan­sion re­sulted in du­pli­ca­tion, which jus­ti­fied his early cost-cut­ting. Bay Street largely agrees with him. “They’d had a cou­ple of false starts on get­ting stricter on ex­penses,” said Robert Se­dran, an an­a­lyst at CIBC World Mar­kets. Then, just as the new CEO took over, the prospects for rev­enue growth be­gan to look more daunt­ing, partly be­cause of the weak­ness of the Cana­dian econ­omy. “In that en­vi­ron­ment, the cost con­trol be­came some­thing that was no longer op­tional.”

Ex­pand­ing TD’s wealth-man­age­ment arm seemed equally nec­es­sary. Be­cause baby boomers are leav­ing the work force in droves – Canada has 250,000 new re­tirees ev­ery year, a fig­ure that could ap­proach 400,000 soon – de­mand for fi­nan­cial plan­ning is ris­ing fast. On this front, TD had to play catch-up.

The bank holds a 41-per-cent stake in TD Amer­i­trade Hold­ing Corp., the largest dis­count bro­ker­age in the United States, and also re­cently in­creased its wealth ex­po­sure by ac­quir­ing New York-based eq­uity-as­set man­ager Epoch Part­ners in 2012. But some­thing was still miss­ing. As the only large Cana­dian bank that hadn’t ac­quired an in­de­pen­dent dealer af­ter Ot­tawa re­laxed own­er­ship rules in the 1980s, TD didn’t have a ro­bust re­tail ad­vice plat­form – which is cru­cial to land­ing high-net­worth clients who seek tai­lored ser­vice.

TD’s money-man­age­ment arm also wasn’t well in­te­grated with its re­tail net­work. “Sell­ing wealth through the branches is an area where per­haps TD has not been as strong,” Mr. Se­dran said.

Un­der Mr. Mas­rani, TD has im­ple­mented new rules, such as shuf­fling wealth clients with un­der $100,000 in as­sets to its branches, where it of­fers more ba­sic prod­ucts such as low-cost ETFs. A closer con­nec­tion be­tween wealth and the branches is ex­pected to help the bank cross-sell prod­ucts, so a client who has only mu­tual funds can be of­fered a credit card as well, for ex­am­ple.

The bank also re­branded its re­tail wealth busi­ness to TD Wealth Pri­vate Wealth Man­age­ment, and pledged to add more than 130 in­vest­ment ad­vis­ers by 2020 – a rare move at a time when most ri­vals are trim­ming their ad­viser ranks. TD was work­ing to make up ground, which helps ex­plain why it was con­sid­er­ing buy­ing Richard­son GMP for $600-mil­lion last fall; the firm spe­cial­izes in high-net­worth clients. Be­cause the deal died, TD is left build­ing out its own net­work over the long haul.

What Mr. Mas­rani is do­ing with TD Canada Trust, the do­mes­tic re­tail bank that con­trib­utes 64 per cent of to­tal profit, has been harder to de­ci­pher. He in­stalled a new group head in 2015. The for­mer leader, Tim Hockey, left in a sur­prise move to run TD Amer­i­trade, and the cur­rent leader, Teri Cur­rie, is faced with trans­lat­ing TD’s cus­tomer-ser­vice strength to a dig­i­tal world. “We spend a lot of time and ef­fort on how we make sure this par­tic­u­lar [mo­bile] func­tion­al­ity you have is from TD, and on cre­at­ing that emo­tional con­nec­tion,” Mr. Mas­rani said.

There’s a lot to do. TD touts its “leg­endary” cus­tomer ser­vice, which in­cludes longer hours at bank branches than its com­peti­tors of­fered, but “tech­nol­ogy is work­ing to make that ad­van­tage less im­por­tant in a world where you have 24/7 bank­ing on your mo­bile phone,” said Cor­mark Se­cu­ri­ties an­a­lyst Meny Grau­man. Plus, all the banks are build­ing from scratch on a rel­a­tively level play­ing field. “You have a dy­namic where the leader is more vul­ner­a­ble than the lag­gards in this re­spect.”

Get­ting the dig­i­tal shift right is cru­cial. The re­tail divi­sion’s prof­its were flat last year, which was rare to see in the postcri­sis bull mar­ket for banks, and TD also lost its cov­eted J.D. Power award for over­all cus­tomer sat­is­fac­tion to ri­val Royal Bank of Canada.

Mr. Mas­rani ar­gues what tran­spired last year was a tem­po­rary hic­cup. Growth will re­turn, he says, partly thanks to ex­pan­sion plans that in­clude beef­ing up TD’s credit-card unit. The CEO also wants to build out the bank’s in­sur­ance busi­ness, de­spite that in­dus­try’s re­cent strug­gles, and to be­come a prom­i­nent com­mer­cial bank that lends to small and mid­sized com­pa­nies.

Of all his changes, the strat­egy that stands out is Mr. Mas­rani’s em­pha­sis on cap­i­tal mar­kets. This was a divi­sion that never got much at­ten­tion un­der the old regime, so when he started talk­ing more about it, some peo­ple won­dered whether TD would ex­pose it­self to greater risk.

The short an­swer: Not on Mr. Mas­rani’s watch. Rather than ramp­ing up de­riv­a­tives trad­ing, TD aims to be­come a prom­i­nent cor­po­rate lender to big com­pa­nies in the United States and then build prod­ucts around that. The de­ci­sion fol­lows RBC’s strat­egy to ex­pand its U.S. cor­po­rate-lend­ing book in the wake of the fi­nan­cial cri­sis, just as global banks were pulling back.

Noth­ing is risk-free, as TD knows well. The bank had ma­jor prob­lems with its loans to tele­com com­pa­nies dur­ing the dot-com bub­ble, an era when it posted its first-ever quar­terly loss. But it was Mr. Mas­rani who was as­signed to clean up that port­fo­lio of bad loans. From there, he be­came chief risk of­fi­cer. “The bank’s risk ap­petite is non-ne­go­tiable,” Mr. Mas­rani ex­plains. “We will not risk the whole en­ter­prise with a strat­egy or a trade.”

“A lot of what we’re do­ing in the U.S. is ac­tu­ally the same as what we’ve done in Canada over the last 20 years … We have a fairly large per­sonal and com­mer­cial bank in the United States from Maine to Florida that has mil­lions of cus­tomers. A lot of them have what I would call in­vest­ment-bank­ing types of needs,” he said, such as man­ag­ing in­ter­est-rate risk, or vanilla de­riv­a­tives. “Why would we not build those ca­pa­bil­i­ties … to recre­ate what we did in Canada?”

To com­ple­ment the cap­i­tal­mar­kets strat­egy, he wants to el­e­vate the re­tail and com­mer- cial-bank divi­sion’s sta­tus south of the bor­der, mak­ing it more, well, Cana­dian. “What we are try­ing to cre­ate is more of a uni­ver­sal bank­ing model,” he says.

Now is the ideal time to do this, he says. The U.S. arm is now a top-10 bank ranked by as­sets in the United States, thanks to a decade spent lay­ing the ground­work by build­ing scale, a brand and a cul­ture. The mar­ket also has a much more pos­i­tive tone than it did when he ran the U.S. bank from 2007 to 2013. When Mr. Mas­rani took over as CEO, U.S. re­turns were still weak as the econ­omy made a slow re­cov­ery from the Great Re­ces­sion, and TD’s re­turn on eq­uity in the U.S. arm was just 8 per cent; in Canada, it was 43 per cent.

To­day, there’s more oxy­gen. Af­ter keeping in­ter­est rates near zero per cent for nearly seven years, the Fed­eral Re­serve hiked them for a se­cond time in 12 months in De­cem­ber, which boosts lend­ing mar­gins. “There is a sen­ti­ment change that is very pos­i­tive,” Mr. Mas­rani says.

To cap­i­tal­ize on that, he teamed up with TD Amer­i­trade on a pro­posal to buy dis­count bro­ker­age Scot­trade for $4-bil­lion in Oc­to­ber, ab­sorb­ing Scot­trade’s U.S. bank­ing as­sets. At a con­fer­ence this week, Mr. Mas­rani also re­it­er­ated his de­sire to ac­quire a smaller tra­di­tional bank in the south­east United States.

There’s also the Don­ald Trump fac­tor. Since he was elected to be the next U.S. pres­i­dent, big Amer­i­can bank stocks have jumped an av­er­age of 24 per cent on the as­sump­tion that he will loosen reg­u­la­tions. It is de­bat­able how much growth that will spur, but cou­pled with a plan to lower cor­po­rate taxes and boost in­fra­struc­ture spend­ing, the re­cov­ery could amp up as con­sumers bor­row more. “These three pil­lars are go­ing to mean more growth,” Mr. Mas­rani says.

For the first time, TD isn’t shy to pound its chest about its U.S. arm. A lot of in­sti­tu­tions – both Cana­dian and global – have had ex­pan­sion plans to the south, where a tan­ta­liz­ingly large mar­ket awaits, “but there have not been many in­stances of suc­cess,” Mr. Mas­rani said. “We’re very proud.”

And the new CEO is con­fi­dent he has time on his side. “The few banks that are big­ger than us had a 150-year head start.”

One of the hall­marks of TD is its abil­ity to adapt to the en­vi­ron­ment it finds it­self in, rather than hop­ing, pray­ing that the en­vi­ron­ment will go back to the good old days.

Bharat Mas­rani Pres­i­dent and CEO of Toronto-Do­min­ion Bank

CHRIS YOUNG/THE CANA­DIAN PRESS

CEO Bharat Mas­rani at­tends TD’s an­nual meet­ing in Toronto in March, 2015. Mr. Mas­rani has redi­rected the bank’s strat­egy in re­cent years to great ef­fect.

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