TD to build U.S. business brick by brick, after First Horizon set back

By Nivedita Balu

TORONTO (Reuters) -Canada's no.2 lender TD Bank Group will push ahead with its U.S. expansion by focusing on organic growth, after its M&A-led strategy in the world's biggest banking market suffered a setback this month, a top official told Reuters on Thursday.

TD has made U.S. growth a key priority as it deals with a saturated market at home and had pinned its hopes on $13.4 billion bid for regional lender First Horizon, but that was scrapped after hitting regulatory hurdles.

With about $18 billion in excess capital, it now plans to focus on opening branches and building its wealth business in the U.S., Chief Financial Officer Kelvin Tran said in the first comments since the First Horizon deal was pulled.

"In the U.S., we are still a relatively young bank. We have a lot of white spaces there," Tran said.

"We continue to make referrals to our wealth business. That's still a new business in the U.S. ... So lots of opportunities still there in the U.S.," he added.

The bank has not ruled out other acquisitions.

"When we look at deployment of capital, it's about what we can invest to drive organic growth, we look at whether there are opportunities for M&A ... and then also opportunities to return capital to shareholders," Tran told Reuters.

TD announced plans to buy back 30 million shares along with its quarterly earnings that missed expectations.

The uncertainty of the First Horizon deal has weighed on TD shares, which are down more than 7% so far this year, compared with a 3.6% drop in TSX's banks sub-index.

Some shareholders are willing to be patient as TD seeks to grow its U.S. business.

Anthony Visano, a portfolio manager at Kingwest, a long-term TD investor, said the U.S. expansion strategy makes sense, but TD needs to shift towards wealth management.

"So, do they build or do they buy? I think they can do both in parallel. They can build locations and they can acquire the other pieces that are missing from the platform," Visano said.

OPENING NEW BRANCHES

Masrani told investors on Thursday the bank plans to open 150 new stores by 2027 and double wealth adviser hiring. That includes opening 18 stores in the U.S. this year, on top of the 1,100 it operates in 16 U.S. states and its 12% stake in Charles Schwab.

It has already opened five new branches, including in south Florida, Atlanta and North Carolina - areas considered to be First Horizon's turf - while also looking at the U.S. northeast.

"Think Boston, Philly, New York, where we think there are expanding communities, growing communities where we'll lean into ... But the Southeast is going to be a very important part of the overall equation," Leo Salom, the head of TD's U.S. Retail business said.

The bank earned about 40% of its second-quarter adjusted net income from its retail business in the United States, where TD is the eighth-biggest lender, as did its Canadian rival Bank of Montreal, which acquired San Francisco-based Bank of the West.

Some analysts said TD should rethink its U.S. M&A strategy.

"TD should revisit the idea of whether or not they should be pursuing aggressive growth in United States banking through acquisitions," Veritas analyst Nigel D'Souza said.

"My argument is that they should deploy excess capital to grow their wealth management and capital markets franchises."

(Reporting by Nivedita Balu Additional reporting by Maiya KeidanEditing by Denny Thomas and Sonali Paul)