TD Bank Financial is announcing some radical action to address problems in its loan portfolio, which will force it to take a loss in the third quarter quarter.

TD Securities will significantly reduce the size of its corporate lending portfolio, particularly in the higher risk companies in the telecommunications sector, and reduce the capital associated with this portfolio by one-third, or $750 million, over three years. TD will also take a $600 million sectoral loan loss provision against potential problems in its performing corporate telecommunication loan portfolio. And, it will take a sectoral U.S. corporate provision of $250 million to address concerns in certain performing loans in its U.S. portfolio.

The bank also announced that it expects to take the full $1.3 billion of the loan loss provision guidance it provided in April 2002 and that it will take $400 million of these provisions in the third quarter of 2002. The $850 million new loan loss provisions announced today are in addition to this guidance and will bring the company’s expected loan loss total for 2002 to $2.15 billion.

At the end of the second quarter, TD’s telecom and cable portfolio stood at $4.9 billion. With the sectoral provision announced today, and reductions that have occurred in the portfolio since April 30th, the portfolio now stands at $3.8 billion, of which $1.5 billion is investment grade.

The additional provisions announced today will reduce third quarter earnings by 89¢ cents per share. As a result, TD expects a loss in the third quarter of between 46¢ and 51¢ on a fully diluted cash operating basis, or 70¢ to 75¢ on a GAAP basis.

“While no one can give guarantees on future developments, we have been thorough and realistic in establishing this strategic direction and related provisions. I am confident that by taking decisive action to deal with our credit challenges we have put the telecom issue behind us,” said Charles Baillie, chairman and CEO of TD in a news release.

“We intensively reviewed our non-performing loans again and believe our provisions are adequate, however, we have gone further and have identified any performing loans where we could see potential problems in light of developing market issues,” he added.

Baillie said that TD Canada Trust is expected to have growth in the quarter and TD Wealth Management to have flat or slightly lower earnings, but that slower capital markets will continue to depress the earnings of TD Waterhouse and TD Securities.

“TD Securities has been a good business for us, but they were being held back by the cloud that hung over our corporate lending book. It is important to remember that many parts of the telecom sector remain quite strong. TD Securities will play a significant role in TD’s future, providing us with a source of high margin growth,” Baillie concluded.

The bank held an extensive conference call with analysts later in the morning to explain its moves. Baillie admitted that a previous analyst call had not been as forthcoming as it could have been, and pledged to do better. The call included all of TD’s top brass, including Ed Clark and TD Securities chief Don Wright.

The team stressed their shift to focus TD Securities on its high-return businesses, and to concentrate on its Canadian business, with niche presence in the United States and worldwide.

Wright said that TD Securities had made some cuts to its business in recent weeks, citing weakness in the trading business, weak derivatives volume, weak new issue action. He noted that the merchant banking business has been flat, and that the bright spots have been in the money market and foreign exchange businesses.

Wright suggested that future cuts are possible, as conditions warrant. He said that they won’t run the business with the hope that markets will revive soon.

Clark said that the bank is not happy with its earnings performance, and is committed to improving it. He noted that the focus is on its operational efficiency, that it has now cleaned up its balance sheet, and that it has clearly, articulated strategies in all of its major businesses.

As a result of TD’s announcement, Standard & Poor’s revised its outlook on the bank to negative from stable. At the same time, the ratings outstanding on the bank remain unchanged, including the double–’A’-minus long-term counterparty credit rating and the ‘A-1 (High)’ Canadian national scale commercial paper rating.