December 6, 2012 / 11:54 AM / in 5 years

TD Bank to buy Epoch, fourth quarter profit little changed

TORONTO (Reuters) - Toronto-Dominion Bank TD.TO is buying the owner of Epoch Investment Partners for $668 million in cash to expand its U.S. asset management business, Canada’s No. 2 bank said on Thursday as it reported little change in quarterly profit.

The acquisition will add $24 billion in assets under management to the $207 billion already overseen by TD Asset Management, and will fill a strategic gap for the bank, said TD Chief Financial Officer Colleen Johnston.

”It complements our existing capabilities by adding U.S. and global equities capability,“ she told Reuters. It’s also going to be very helpful in terms of growing our U.S. wealth management business.”

The bid is among several small acquisitions by TD since the 2008 financial crisis, the latest being an agreement last month to buy Target Corp’s TGT.N $5.9 billion credit card portfolio.

TD, which is also a sizeable player on the U.S. East Coast, said it had earned C$1.6 billion ($1.61 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 from superstorm Sandy and other one-time items, TD’s earnings came in at C$1.83 a share, slightly ahead of the C$1.81 that analysts expected, according to Thomson Reuters I/B/E/S.

The $28-a-share offer for Epoch Holding Corp EPHC.O represents a 28 percent premium over the company’s Nasdaq closing price of $21.91 on Wednesday.

The company’s stock was up 26.8 percent at $27.78 in early trading, while TD slipped 0.9 percent to C$81.85 on the Toronto Stock Exchange.

LOOKING AHEAD

Johnston said the bank would not rule out more deals, and said the bank was better positioned to think about larger acquisitions than it has been in the last 18 months, due to the strengthening U.S. economy and growing strength of TD’s 1,300 branch franchise.

“We’re probably better positioned now to think across the spectrum,” she said.

However, she would not comment on recent reports that TD had held discussions with Royal Bank of Scotland RBS.L about its Citizens U.S. bank unit.

For the Epoch transaction, TD received financial advice from Barclays and legal advice from Simpson, Thacher & Bartlett. Epoch was advised by Credit Suisse on the financial side and Skadden, Arps, Slate, Meagher & Flom, as well as Greenberg Traurig on the legal side.

LOAN LOSSES

TD’s profit 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.

The bank’s acquisitions of MBNA’s Canadian credit card portfolio last year helped drive loan growth, but also added about C$90 million to loan-loss provisions.

All told, provisions rose 66 percent to C$565 million, also fueled by certain “adjustments,” Johnston said, adding that she expected the overall level would likely come down in future quarters.

Barclays Capital analyst John Aiken said the rise in loan-loss provisions was bigger than expected.

“While we believe that this could be more of an exercise in catching up as opposed to an indication of structural deterioration, it is something that bears watching, particularly as some of TD’s peers have also shown some weakness in domestic retail credit,” he said in a note.

TD is the fourth of Canada’s “big five” banks to report results this quarter.

While stronger capital markets-related profits for the group have largely driven profit gains, the banks have suffered from narrowing loan margins due to low interest rates.

TD’s Canadian margins actually widened from the fourth quarter a year ago, but narrowed from the third quarter. At its U.S. bank, margins were weaker on the year and on the quarter.

While loan growth has been relatively steady, the banks are expecting it to slow in 2013 as Canada’s housing market cools and consumers try to reduce record levels of personal debt.

Reporting by Cameron French; Editing by Lisa Von Ahn and Chizu Nomiyama

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