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Commodity prices too pumped, TD warns

Chief executive officer Ed Clark says the bank's lending standards in the West assume 'dramatically lower' prices

FINANCIAL SERVICES REPORTER

00:00 EDT Wednesday, May 14, 2008

Bankers should be wary of high commodity prices, Toronto-Dominion Bank chief executive officer Ed Clark warns.

Anyone lending money in Western Canada should do so under the assumption that commodity prices are too high, he told a financial services conference in New York yesterday, after being asked whether the prices are worrying him.

Mr. Clark, whose bank managed to avoid being whacked by the global liquidity crisis, said TD's lending standards in the West assume "dramatically lower" prices than now exist.

Banks should keep a close eye on oil service and gas service businesses, he said. And he suggested any downward adjustment in commodity prices could trickle through to individual borrowers in the West.

"What's interesting is, despite the fact that the West is booming, it's the only place in Canada starting to show housing price softness, because in fact it is the one place in Canada where housing prices went up too fast," he added.

"And so, yes ... a banker should assume that the world financial system is overinflating commodity prices."

Mr. Clark was far from throwing in the towel on the West, which he said "remains on fire." In fact, as he stands on the lookout for rising bad loans, it's Ontario he has his eye on.

But his comments are another cautionary message from a banker who hasn't been shy lately about sharing words of wisdom with his less-fortunate peers.

"Banking is a wonderful business to be in if you just don't blow yourself up every five to seven years," Mr. Clark told the conference yesterday. It was hosted by UBS, the Swiss bank that's reeling from more than $37-billion (U.S.) in writedowns, and those attending the conference included dozens of other executives whose banks have been casualties of the financial crisis.

Mr. Clark said TD has proven its strategy in Canada, and will prove it to people in the United States, as he talked about how the bank managed to avoid the complicated investment products at the heart of the current banking crisis by doing its homework.

"I don't want to hold myself up that I'm some genius ... ," he said. "I actually think that all the risks that brought the financial services [sector] down were well-known risks, much debated, and that anyone that sat down and studied these products could see it was pretty obvious."

National Bank Financial analyst Robert Sedran suggested that Mr. Clark has earned his stripes. "It's no accident that TD has avoided any separately disclosed writedowns," he said, adding that he suspects some other banks will decide to emulate Mr. Clark's strategy.

But John Kinsey, a portfolio manager at Caldwell Securities, said that while Mr. Clark has done a great job in Canadian consumer banking, "I'm not sure that we're ready to cast him in bronze yet."

Mr. Kinsey said he disagrees with Mr. Clark's stand on commodity prices. "We're in a new era that we haven't seen before," Mr. Kinsey said. "I really believe that the benchmark prices have been raised dramatically," he said, citing new demand from countries such as India and China. And he added that the jury is still out on Mr. Clark's recent $8.5-billion acquisition of New Jersey-based Commerce Bancorp.

Mr. Clark acknowledged as much yesterday. "Like every CEO in the world, I think my stock is undervalued, but in my particular case I'm being valued as if I had the blowouts that everyone else did, and I didn't," he said. "And I think that's because people are worried about the earnings, whether this Commerce thing is for real or not."

TD BANK (TD)

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