TD Bank Faces Uphill Battle to Conquer New York

TD Bank is two years into its New York invasion, and the hard work has only begun.

The Canadian bank's new emerald-green branches, supply of dog treats for customers' best friends and (gasp! in the Big Apple?) friendly customer service have made a splash. And the moves have shown signs of early success.

But its primary — and ambitious — goal is to be No. 3 in market share in New York by 2016. It has added $1 billion of deposits since mid-2012 yet remains stuck at No. 6, according to federal data.

TD's strategy rests heavily on the opening of brick-and-mortar branches with urban appeal, but the bank will need some very creative products and perhaps an acquisition to take major share, experts say.

"It's a lot of growth they're shooting for, and I don't think branches alone will make it happen," says Mary Beth Sullivan, a managing partner at Capital Performance Group.

TD's branch plan is in full swing at a time when many banks are shuttering or selling branches.

It's well on its way to fulfilling a pledge to increase its branch count by 50% by 2016. TD plans to have between 150 and 160 branches in the five boroughs and crack the top 3 by then.

But that deadline is only two years away. JPMorgan Chase (JPM) and Bank of New York Mellon(BK) are secure in the top two spots, and TD would need more than $56 billion of local deposits to pass No. 3 Citigroup (NYSE: C).

That is a tall order. TD had New York deposits of $13.3 billion as of June 30, according to the latest Federal Deposit Insurance Corp. data. It had $12.2 billion in mid-2012, but its No. 6 ranking was unchanged.

Chris Giamo, TD's metropolitan New York president, remains bullish. He points to growth in capped deposits, which are accounts of $500 million or less and exclude large corporate holdings. TD has climbed from No. 8 to No. 5 by that measure, he says.

"We've gotten so much market share quicker than we thought we would," says Giamo, a native of northern New Jersey who has been in his current job since 2002. "We're not arrogant, but confident."

The $232 billion-asset lender has opened 25 new metropolitan branches since launching its "Take New York" initiative in 2012, including two plum Midtown locations that opened last weekend.

TD's strategy of snapping up city real estate makes good business sense, according to Ken Thomas, a Miami-based bank consultant.

"Counter to banks closing branches, the really smart bankers are doing the opposite," Thomas says, citing JPMorgan, BB&T (BBT) and TD as examples of financial institutions that are expanding their retail offices. In cities like New York, Boston, Houston and Philadelphia, Thomas says, branches still wield plenty of power.

"Convenience is the No. 1 factor" for bank clients, according to Thomas. "When customers see JPMorgan, TD or BankUnited on every corner — that's the bank they want to deal with.... They're like 24-hour billboards."

But it will take more than abundant branches and convenient store hours to lure primary checking account customers and small-business owners away from big banks, Sullivan says.

"I would think that they'll have to combine [convenience] with some degree of price competition or interesting product features in order to get people to switch," Sullivan says. "I question if [stores are] enough, or a sustainable point of differentiation, as the branch becomes less relevant to people."

What goes on inside of those branches counts most, Giamo says.

TD has wooed New Yorkers with branch features that appeal to big-city demographics. Its public restrooms — a rare commodity in the city — are "actually clean and nice," Giamo says. Dishes full of dog treats welcome urbanites who arrive to deposit a check with pups in tow. Harried parents on their way back from day care can plop children in front of an interactive cartoon that teaches them about savings; penny-pinchers can lug in bags of change for TD's free coin-counting service.

"The bar is set so low for banks, from a consumer perspective, that we overwhelm them with the positive," Giamo says. Hardened New Yorkers are frequently wowed by gestures that seem like common courtesy, according to Giamo, from saying "'hello'" to knowing their names to asking questions that ensure customers are matched with the right banking products.

Commercial lending is also key to increasing TD's market share, according to Giamo. Its commercial loan portfolio in the area has grown by an average 10% over the last several years, he says, bolstered by the lending expertise of local staff. The bank has carved out several New York-specific niches, financing taxi medallions and signing up area clients like Signature Bank. And it's developed a robust nonprofit and specialty lending business that extends credit to municipalities, universities and health institutions.

But, to break into the top three rankings, "TD will probably have to do an acquisition of some scale," according to Dan Werner, an equity analyst at Morningstar.

Werner declined to speculate on likely targets but predicted TD would be most interested in "a retail bank with a decent commercial business. It's always easier to integrate someone who looks more like yourself."

Rumors have persisted that TD could make a play to buy the Royal Bank of Scotland's Citizens Financial Group.

"That's not on the table at this time," but TD is open to other kinds of deals, Giamo says.

"There could be a continued focus on niche businesses like Epoch and other asset generators," Giamo says, referring to the asset manager that TD bought last year.

TD's acquisition of Target's consumer credit card portfolio nearly a year ago provides another example of the kind of purchase that could appeal to TD going forward, according to Giamo.

"We'll look at acquisitions when they make sense," he says. "But we're also leveraging our expertise in organic growth."