Interesting Strategy in Retail Banking.........

Retail banking in America

A new dominion

Cracking the American market has proved beyond many 

foreign banks. Is Canada's TD different?

Jun 17th 2010 | CHERRY HILL, NEW JERSEY

Hands up if you find this all a bit ridiculous

AT MOST banks, tellers who have been particularly helpful to a customer are content with a pat on the back from their manager. Star workers in the American branches of TD (for Toronto-Dominion) can expect a lot more. The bank's WOW! Department (yes, really), a jazzed-up version of internal communications, sends costume-clad teams from Alpha WOW! Omega, its "fraternity", to "surprise and delight" high performers in front of colleagues and (presumably bemused) customers, dishing out tokens that can be redeemed for TD-branded goodies.

Cringeworthy, perhaps. But TD, which touts itself as "America's Most Convenient Bank", takes service seriously. Its branches are open 50% longer than a typical rival's, including Sundays. It provides water bowls for clients' dogs, colouring books for their kids. Its ATMs offer stamps as well as cash. It eschews ropes for customer queues. "We don't want them to feel like sheep," says Mike Carbone, head of TD's branches in Philadelphia, whose staff, like everyone at the bank, are trained at its "university" in New Jersey. TD calls 800 customers a night to gauge their experience. All of this seems to work. JD Power, a research firm, ranks it top for customer service among large banks in America's mid-Atlantic region.

Toronto-based TD's big leap into the United States came two years ago. Seeking growth outside its mature, oligopolistic home market, it bought Commerce Bank, which had shaken up high-street banking in New York. It has continued to expand, using its strength—Canadian banks weathered the credit crisis relatively well—to buy several troubled banks in the south-east this year. This has brought its total investment in America to $18 billion and its east-coast network to nearly 1,300 outlets, 200 more than it has across Canada. Its latest deal made it a top-ten bank in Florida.

TD's speciality is sucking up deposits, a cheap and stable form of funding. Banks with more than 10% of the branches in a given local market typically garner a disproportionately large share of deposits. TD can do the same with only 5-6% of total branches because of its reputation for convenience, says Sherief Meleis of Novantas, a consultancy. It works hard to find the best locations, favouring former fast-food outlets, which tend to be in busy places and already have drive-throughs (for ATMs). In the densest parts of the network, TD has 50% more deposits than its share of branches would imply, claims Bharat Masrani, head of its American operations.

TD has various ruses for bringing in deposits. It has attracted thousands of new customers by placing penny arcades, which count change, in branches. Users get a slip which they must redeem for cash at the counter, giving tellers a chance to persuade them to open an account. TD has curried favour with savers by offering a scheme that pays $10 to children for every ten books they read and by supporting local sports teams. It recently launched a mascot, the imaginatively named "TD": a bit naff, maybe, but $128 billion of deposits is nothing to smirk at for a firm that was barely on America's retail-banking radar a few years ago.

Still, there are grounds for scepticism. Chief among them is the poor record of foreign banks, including some of TD's Canadian peers, on America's high street. TD's overall return on invested capital in America was 4.5% last year, half its target. Brad Smith, an analyst at Stonecap Securities, wonders whether the bank will return its cost of capital. "They say it is a once-in-a-generation opportunity," he says, "but we've seen this video many times."

TD points out that its operating returns (excluding goodwill and the like) are close to 20%. Ed Clark, its boss, argues that profitability will grow as loan losses fall. He also thinks TD can sell more products to each customer: its franchise is "thin" compared with cross-selling leaders such as Wells Fargo, he says. The bank's 45% stake in TD Ameritrade, a brokerage, could help.

TD's profits should also get a lift as it shifts from holding low-yielding securities to making (admittedly riskier) loans as the economy recovers. Currently it has 65 cents of loans for every dollar of deposits, compared with 90 cents or more for many peers. It has begun to close the gap: it was one of very few large banks to expand lending last year.

Like other retail banks, TD faces regulatory headwinds. Restrictions on overdraft and other fees will take $15 billion-19 billion of non-interest income out of the industry, reckons Mr Meleis. But deposit spreads should widen as rates rise, because banks can delay passing on some of the extra interest to savers. To make up for the lost revenue, banks will need to improve their deposit margins by only 0.3 percentage points, Mr Meleis calculates. The improvement needs to be even smaller at deposit-rich institutions such as TD.

And if rates stay lower than expected? Mr Clark admits it is a worry. So, too, is lending indiscipline, though TD has a thick conservative streak. It faces intensifying competition as the economy picks up. Its high-touch service model, though impressive, is not impossible to replicate (British bank customers will get something similar with the opening next month of Metro Bank, one of whose founders was the force behind Commerce Bank).

But TD is not about to turn tail. America has become hugely important to the bank, which Mr Clark describes these days as "a North American institution that just happens to have its headquarters in Canada." For better or worse, TD's future increasingly lies not in Ontario or Quebec, but somewhere between Maine and Florida.