B5

Eoin Callan
Canwest News Service

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TORONTO - TD Bank Financial Group is winding down its overseas bond-trading business and making plans to boost capital after suffering unforeseen losses in credit markets.

Canada's second-largest bank said it would take a $350-million hit on a portfolio of troubled bonds, while its TD Securities unit slid into the red, and its corporate unit recorded a loss of $153 million.

The losses represent the first significant writedowns for the bank since the start of the credit crisis and underline how the unprecedented market turmoil of the past two months is taking its toll on Bay Street before the full impact of the economic slowdown is felt.

The financial damage would have been significantly worse had Ottawa and other governments not intervened, the bank said, noting it had avoided an extra $561-million charge because of an emergency move to relax accounting rules.

The $350-million loss was on a $2.5-billion portfolio of bonds and debt instruments, including credit-default swaps.

The bank ducked bigger losses by taking advantage of new looser rules to reclassify a portfolio of $7.4 billion in bonds that includes mortgage-backed securities so it would not have to record losses on their value.

"The size of this business was too large," said Ed Clark, chief executive, saying TD Securities would pull out of the non-North American credit business and that bonuses would be cut.

"Obviously there will be consequences in TD Securities and (for) the most senior people in the bank as a result of this performance," he said.

The executive also acknowledged the dire economic outlook meant the bank could face rising loan defaults among its U.S. customers.

But he said the negative impact of this on TD might be offset if the recent drop in the Canadian dollar was sustained, meaning that while U.S. profits might fall, they would be worth more when transferred to Canada.

This could determine the extent to which the bank is forced to seek fresh reserves to boost its minimum required capital, which has fallen to 8.3 per cent even after the bank raised $1.25 billion through so-called preferred shares, which are a hybrid of debt and equity.

Clark indicated the bank would raise more funds through preferred shares and said the bank's target for its capital cushion was eight per cent or higher, though reserves had previously stood closer to 10 per cent, before changes to international rules on counting reserves.

The executive pointed out that the bank's Canadian retail operations were on track to generate more than $4 billion in profit for the year, which would provide a future source of cash and lead to earnings of $1.22 a share when the bank reports full fourth-quarter earnings next week, following Thursday's unscheduled update.