TD Bank Financial Group (TSX:TD) reported a decline in third-quarter profits Thursday and warned of trouble ahead as difficult economic conditions weakened the performance of some of the bank's U.S.-based operations.

"It's unlikely that this level of earnings can be maintained," admitted TD chief executive Ed Clark in a conference call Thursday.

"But we do have an excellent business that continues to perform well and produce solid returns on capital with very tight risk management."

TD's financial performance was "great" in the quarter, given the ongoing economic weakness around the world, said Clark.

"There probably aren't many people on this call frankly, including me, who thought we'd be having this kind of performance in the midst of a recession," he said.

"At the beginning of 2009, I would have found it hard to believe that by the third quarter I'd be talking about year-over-year increase on our earnings per share, even after issuing shares last year, but it certainly looks like we're going to be there."

The Toronto-based bank reported a profit of $912 million or $1.01 per share for the quarter ended July 31, down from year-earlier profits of $997 million or $1.21 per share.

The bank said adjusted earnings rose 17 per cent to $1.3 billion or $1.47 per share from $1.1 billion or $1.35 per share reported a year ago. The adjusted results beat the estimates of analysts surveyed by Thomson Reuters, who predicted earnings would come in at $1.23 per share.

TD said total quarterly revenue rose to $4.66 billion from $4.32 billion, while provision for credit losses declined to $557 million from $656 million.

TD's Tier 1 capital ratio, a key metric measuring the amount of money held in reserve, stood at 11.2 per cent at quarter's end.

Clark gave credit to governments and central banks around the world for responding "both quickly and appropriately" to the global economic crisis, but said there are concerns about the extent of the recovery.

"We have never been tested by conditions this tough, but we were up to it," he said.

"It seems like we're through the bottom, but there's clearly a debate going on about the strength of the subsequent economic recovery."

Results got a boost from TD's wholesale banking operations, where profits soared nearly 90 per cent to $327 million. Net income also improved five per cent in the Canadian personal and commercial segment, which recorded profit of $677 million.

Earnings in wealth management were dragged down by weak market conditions, while loan losses drove profits in U.S. personal and commercial banking down to $172 million.

Clark said TD didn't anticipate the resilience of the Canadian resale housing market.

"The structure of Canadian housing and mortgage markets provides an enduring strength for the economy and for our business," he said.

The bank also announced Thursday that Clark had advised of his intention to exercise up to 390,000 options for TD common shares, which represents 13 per cent of his outstanding options.

Clark intends to donate approximately 10 per cent of the pre-tax net proceeds to charity, and to sell the remaining acquired shares.

TD shares were up just over $2 in late Thursday trading at $62.62.

Canada's annual inflation rate slid to the lowest level in 56 years last month, dropping more than expected for the second straight month to set overall prices 0.9 per cent lower than last year, Statistics Canada reported Wednesday.

The fall on a month-to-month basis was even more dramatic, as prices in July fell 0.3 per cent from the previous month, reversing the similar monthly increase registered in June.

Still, economists say there is little concern that deflation - a broadbased and persistent decline in prices that could inflict further damage on the economy - is setting in in Canada, as it did in Japan during the 1990s.

That's because only three of the major components tracked by Statistics Canada are experiencing deflation and most of that is based on falling gasoline prices.

In July, consumers paid 4.1 per cent less at the pump than they did the previous month, and 28.3 per cent less than they did last July.

"Regular unleaded gasoline prices at self-service stations averaged 97.4 cents per litre in July 2009 compared with a record high of just under $1.37 in July 2008," the agency noted.

But analysts expect the impact of gas prices on inflation is due to reverse next month, which could cause the current deflationary trend to reverse course. The influence of gas prices has mirrored the downward spiral in oil prices, which peaked at US$147 a barrel last July before plunging over the following year.

"We don't have a deflation or an inflation problem in Canada," said Meny Grauman, an economist with CIBC World Markets.

Statistics Canada also pointed out that excluding the energy component, inflation remains a healthy 1.8 per cent in Canada. Core inflation is also close to where the Bank of Canada would like it, at 1.8 per cent, only slightly below the desired two-per-cent target.

Scotiabank economist Adrienne Warren predicted the July number will be the low point of the cycle and that annual inflation will return to positive territory in October.

Although most consumers would welcome widespread price decreases, economists say a prolonged deflationary cycle could have the effect of further undermining activity if consumers and businesses decide to hold off spending in hopes of realizing bigger savings in the future.

Still, Canadians were seeing many bargains when they went shopping last month.

Besides lower pump prices, the cost of purchasing a car was 4.3 per cent lower than last year, shelter prices fell two per cent, mortgage interest costs were 0.1 per cent lower, and clothing and footwear cost 2.1 per cent less than last July.

The key contributor to inflationary pressure continued to be food prices, which were five per cent higher in July on an annual basis.

But Warren noted the year-long strong buildup of food prices also appears to be slowing and will likely result in inflationary pressures being kept in check even after the impact of gas prices has worn off.

Food prices had risen 5.5 per cent in June, and 6.4 per cent in May.

"There is some evidence now that there's a market share price competition among the major grocery store chains, and consumers are a little more price conscious," she said.

As well, car insurance rose 5.1 per cent last month, tempering the overall descent in the gas-price dominated transportation component.

Regionally, eight provinces experienced negative inflation last month, with British Columbia heading the pack with a minus 1.6-per cent reading.

Saskatchewan was the only province with positive inflation, at 0.9 per cent, while prices were flat in Manitoba.

Canadian housing starts fell unexpectedly in July, dropping 4.1 percent from June and breaking a two-month run of gains, largely because of a drop in construction of multifamily dwellings.

Canada Mortgage and Housing Corp said on Tuesday that starts fell to a seasonally adjusted annualized rate of 132,100 units in July from a downwardly revised 137,800 units in June.

Analysts had forecast a rise to 145,000 starts. June starts were previously reported at 140,700 units.

The fall in July was attributed to a 9 percent decrease, to 61,000 units, in starts on urban multiple dwellings such as condos and apartment buildings. Single family homes dipped 1.1 percent to 52,500 units.

The figures paled against the buoyancy of recent data for existing home sales and building permits, but economists were encouraged that the July number was still above the average for the second quarter.

"In the second quarter, starts averaged a 127,900 annualized pace so July's data shows a modest improvement from that level," said Dawn Desjardins, assistant chief economist at Royal Bank of Canada.

"Canada's housing market is showing signs of emerging from its slump with the July level of housing starts putting the economy on track to record a quarterly increase for the first time since early 2008."

Rona Inc , Canada's biggest home-improvement chain, said on Tuesday that soft housing starts in the second quarter were partly to blame for its weak quarterly profit. It also said it remained cautious about recovery in the housing sector.

Starts increased 16.6 percent in Quebec in July, but fell in other regions. Urban starts dropped 17 percent in the Prairies, 15 percent in Ontario, 10 percent in British Columbia, and 1.4 percent in Atlantic Canada.

Rural starts were estimated at a seasonally adjusted annual rate of 18,600 units in July.

Wells Fargo & Co., the fourth- biggest U.S. bank by assets, will no longer offer residential mortgages and home-equity loans in Canada.

Wells Fargo’s Canadian unit stopped accepting applications for the loans yesterday at its branches and through its HomePlan broker network, Wells Fargo Financial Corp. Canada President Rick Valade said in an e-mailed statement. The company also informed brokers in a statement on its Web site.

“Wells Fargo continuously reviews its operations and makes appropriate changes to its business model,” spokeswoman Erin Downs said in a statement. “In response to recent analysis of our operations and the current market environment, at this time, we made the decision to stop originating consumer real-estate loans products in Canada.”

“We’ve seen a pattern of a number of namely U.S.-based lenders that have exited the field as things have become difficult in the market,” said Jim Murphy, head of the Canadian Association of Accredited Mortgage Professionals. “It’ll mean less choice, less options for Canadians.”

Lenders that still offer so-called alternative mortgages to Canadians include Home Capital Group Inc. and Equitable Group Inc., as well as some Canadian banks, Murphy said.

Wells Fargo will honor existing mortgage commitments and will continue offering personal loans in Canada, the company said. The Canadian unit is a C$5.5 billion ($5.1 billion) business with 130 branches across the country, where it has operated for more than 60 years, according to the Web site.

Wells Fargo follows other mortgage providers including General Electric Co. that have stopped lending to Canadian homebuyers, including those who may not qualify for typical bank mortgages since the 2007 collapse of the U.S. subprime market.

Wells Fargo is the biggest U.S. mortgage originator, with more than 20 percent market share, according to Inside Mortgage Finance. Mortgage originations by San Francisco-based Wells Fargo surged to $129 billion in the second quarter, up 28 percent from the first quarter, according to company filings.