Kristine Owram, THE CANADIAN PRESS

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TORONTO - TD Bank (TSX:TD) will book a $350-million loss on its wholesale banking operations in its fourth quarter, but will still have an overall profit thanks in large part to its successful retail banking operations.

"We're clearly disappointed with this outcome, but we are also realistic enough to know you can't totally outrun the most extraordinary financial markets since the Great Depression," TD president and CEO Ed Clark said Thursday in a conference call.

"Even though we tried, it was just not possible to build a wholesale bank that could withstand a world with no buyers, only sellers."

Wholesale banking involves lending between merchant banks and other financial institutions, as opposed to retail banking, which involves lending between banks and individual customers.

Bank-to-bank lending has virtually dried up in the wake of the Wall Street financial crisis, global economic slowdown, stock market collapse and uncertainty about how bad the situation can get if the major U.S. auto companies, who are asking for a bailout, go bankrupt.

All the major Canadian bank stocks fell sharply Thursday, with TD's dropping 12.7 per cent or $6.36 to $43.57 on the Toronto Stock Exchange.

In a preview of an earnings report expected on Dec. 4, TD said that it will earn $1.22 per diluted share before one-time charges, or 79 cents per share on an adjusted basis.

It's also on track to deliver a promised $4 billion in earnings from its retail banking business for all of 2008, including $1.05 billion in the fourth quarter.

"The very reason we avoided the problems facing so many other banks is that we've been repositioning TD Securities over the last five years, aggressively working to lower their risk profile," Clark said.

"We made tough choices that cost us money at the time, but these decisions have proven to be the right ones for TD Bank."

Clark said the bank has been careful to protect itself against credit risk, holds quality assets, runs a conservative treasury operation and has been working to exit complex financial products. He also said it avoided many of the assets - including those tied to subprime mortgages - that got its U.S. peers in trouble.

But he admitted TD made a mistake by failing to anticipate the current financial crisis, which has been worsened by the selloff of stocks and other assets around the world as investors reduce debt and get out of risky sectors.

"We did not perceive an extended liquidity crisis in the banking industry, which would lead to a massive deleveraging of all financial institutions, causing asset prices to fall dramatically," Clark said.

A large chunk of TD's wholesale banking losses were attributable to the bond market, where many assets declined dramatically in value beginning in August 2007 when U.S. mortgage defaults began to soar.

Clark said TD will wind down a "significant portion" of its credit trading book - which includes many of its riskier assets, including bonds - in the next 12 to 18 months in response to the crisis.

Bob Dorrance, group head of wholesale banking at TD, added that the bank should eventually be able to recover the losses it saw in the fourth quarter. He added that much of this loss is the result of mark-to-market accounting rules, which force a company to assign the current market value to its assets, even if it plans to hold onto them until the market value improves.

"We believe we can recapture the mark-to-market losses over time as the market stabilizes and as this book winds down," Dorrance said.

Clark said he believes most of the losses related to TD's credit trading activities are behind it, although it's impossible to say for sure given the uncertainty of the current financial environment.

Dundee Capital Markets analyst John Aiken said the success of TD's retail banking operations makes it "the safest bet of the Canadian banks heading into the upcoming credit storm."

Dundee maintained its neutral rating and $59 target for TD, and said it expects TD's fourth-quarter core cash earnings to be slightly above $1.30 per share

Credit rating agency DBRS maintained its rating of TD at AA.