Debt-laden Canadians becoming more ‘fragile’ to economic shocks, warns TD CEO Ed Clark

By Doug Alexander, Bloomber News, January 28, 2014 - Toronto-Dominion Bank Chief Executive Officer Ed Clark said Canada’s economy is in danger of underperforming the U.S. as consumers become increasingly “fragile” amid rising household debt and home prices. “Canada could well undergrow the United States for the next three or four years, which means we’re going to have lower interest rates for longer,” Clark, 66, said this week in an interview at the bank’s Toronto headquarters. “There’s a risk that people are going to keep borrowing.”

Canada’s economy, once the envy of developed countries following the global recession, is struggling to gain momentum as households deal with record debts. Low interest rates pushed the nation’s ratio of debt to disposable income to a record 163.7% in the third quarter, according to Statistics Canada, surpassing levels in the U.S.

“We’ve learned around the world that when you make the consumer indebted like that, their ability to withstand shocks is dramatically less,” Clark said. “So the economy as a whole is more accident prone, more fragile.”

Clark, who has run Toronto-Dominion since December 2002, said the situation undermines Canada’s competitiveness, and the country may not be able to “ride up the U.S. growth” as much as in previous times.

“Over time, the consumer becomes more fragile and the Canadian economy becomes less competitive,” he said. “That’s worth worrying about.”

Clark, who led the Toronto-based bank in a $25 billion U.S. expansion, will retire in November after a dozen years in the post. He’ll be succeeded by Bharat Masrani, 57, the chief operating officer. Clark, a self-described “old-fashioned banker,” said he’s not going to spend the next few months trying to land another big transaction before departing.

“My job is to make sure there’s a smooth transition,” he said. “What you’re going to get is continuity, but with a new management team — and in the sense the same management team, but refreshed and elevated.”

Clark joined in 2000 after the lender acquired Canada Trust’s parent CT Financial Services Inc., where he was president and CEO. He led a U.S. consumer-lending expansion that began with a 2004 agreement to buy a 51% stake in Portland, Maine-based Banknorth Group Inc. Toronto-Dominion now has more branches in the U.S. than it does in Canada.

The bank probably won’t pursue more U.S. deals for the moment, though it “doesn’t mean we’re anti deals,” Clark said. The premium for buying branches in the U.S. is too high compared with building them, Clark said, adding the lender plans to open 15 more locations in New York City this year. “That’s a better deal than trying to buy those 15 branches.”

It’s also hard to buy U.S. bank assets and earn a worthwhile return for shareholders, Clark said. Still, he would consider another credit-card transaction similar to the firm’s March deal with Target Corp. for $5.7 billion in U.S. balances.

Toronto-Dominion has led Canada’s biggest banks in collectively buying $20 billion of credit-card assets since 2009. The lender, which bought about half of Canadian Imperial Bank of Commerce’s Aerogold Visa credit-card portfolio last year, introduced a rewards card this month with Aeroplan owner Aimia Inc.

“They’re blowing the lights out,” Clark said of the initial response to TD’s new Aeroplan card. “It’s really taken us aback.”

‘Direct Winner’

While Clark said he remains concerned that rising home prices in Canada are putting pressure on consumers, he doesn’t expect a downturn similar to the U.S. housing bust. Canada’s residential market has outpaced the rate of inflation and wage growth during the past 10 years.

“I’m not worried that there’s a housing bubble that’s going to collapse and bring the economy down, nor am I worried that if there’s a significant fall in prices that TD itself would be directly hurt,” Clark said.

Toronto-Dominion is benefiting from the weakening Canadian currency. The loonie fell to its lowest level in 4 1/2 years against the U.S. dollar on Jan. 22 after the Bank of Canada kept its benchmark interest rate unchanged.

“In a short-run sense we’re a direct winner because we have significant U.S. dollar earnings and they’re getting revalued in Canadian dollars,” Clark said.

The weakening Canadian dollar is “probably net a good thing for Canada” he said. “Some recalibration was clearly necessary.”

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