The Toronto-Dominion Bank (NYSE:TD) Q1 2023 Earnings Call Transcript

The Toronto-Dominion Bank (NYSE:TD) Q1 2023 Earnings Call Transcript March 2, 2023

Operator: Please standby, your meeting is about to begin. Good afternoon, everyone. Welcome to the TD Bank Group Q1 2023 Earnings Conference Call. I would like — now like to turn the meeting over to Ms. Brooke Hales. Please go ahead, Ms. Hales.

Brooke Hales: Thank you, Operator. Good afternoon. And welcome to TD Bank Group’s first quarter 2023 investor presentation. Many of us are joining today’s meeting from lands across North America. North America is known as Turtle Island by many indigenous communities. I am currently situated in Toronto. As such, I would like to begin today’s meeting by acknowledging that I am on the traditional territory of many nations, including the Mississaugas of the Credit, the Anishnabeg, the Chippewa, the Haudenosaunee, and the Wendat Peoples, and is now home to many diverse First Nations, Métis, and Inuit Peoples. We also acknowledge that Toronto is covered by Treaty 13 signed with the Mississaugas of the Credit and the Williams Treaties signed with multiple Mississaugas and Chippewa bands.

We will begin today’s presentation with remarks from Bharat Masrani, the Bank’s CEO. After which Kelvin Tran, the Bank’s CFO, will present our first quarter operating results. Ajai Bambawale, Chief Risk Officer, will then offer comments on credit quality. After which we will invite questions from pre-qualified analysts and investors on the phone. Also present today to answer your questions are Michael Rhodes, Group Head, Canadian Personal Banking; Paul Douglas, Group Head, Canadian Business Banking; Raymond Chun, Group Head, Wealth Management and Insurance; Leo Salom, President and CEO, TD Bank, America’s Most Convenient Bank; and Riaz Ahmed, Group Head, Wholesale Banking. Please turn to slide two. At this time, I would like to caution our listeners that this presentation contains forward-looking statements that there are risks that actual results could differ materially from what is discussed and that certain factors or assumptions were applied in making these forward-looking statements.

Any forward-looking statements contained in this presentation represent the views of management and are presented for the purpose of assisting the Bank’s shareholders and analysts in understanding the Bank’s financial position, objectives and priorities and anticipated financial performance. Forward-looking statements may not be appropriate for other purposes. I would also like to remind listeners that the Bank uses non-GAAP financial measures, such as adjusted results, to assess each of its businesses and to measure overall Bank performance. The Bank believes that adjusted results provide readers with a better understanding of how management views the Bank’s performance. Bharat will be referring to adjusted results in his remarks. Additional information on items of note, the Bank’s use of non-GAAP and other financial measures, the Bank’s reported results and factors and assumptions related to forward-looking information are all available in our Q1 2023 report to shareholders.

With that, let me turn the presentation over to Bharat.

Bharat Masrani: Thank you, Brooke, and thank you everyone for joining us today. To start I want to express that are thoughts are with all those impacted by the devastating earthquakes in Turkey and Syria, including our colleagues, customers and communities with deep ties to these two countries. TD has contributed directly to relief efforts and enable customers to do so as well through branches and online. Together, a collective effort can make a difference and provide some comfort during this terrible hardships. It’s been a busy week and before I review our strong quarter and start to the fiscal year, I would like to provide a few strategic updates. As you know on February 9th, we mutually agreed with First Horizon to extend the close day to May 27th as provisioned in our contract.

Since then we have come to believe that the deal is not expected to receive regulatory approval in time to close the transaction by that date. Regulatory approval is not within the Bank’s control. So we are doing what is prudent and appropriate. We have opened discussions with First Horizon about a potential additional extension. I cannot speculate on when we will receive approval. I can tell you that we are fully committed to the transaction. We have a robust community benefits plan in place with broad community support across our combined footprint and our teams have made progress on integration plans. This is a great transaction that offers scale and new capabilities to our U.S. franchise. We made another unrelated announcement earlier in the week regarding the Stanford matter.

The settlement we announced allows us to avoid the distraction and certainty and uncertainty of a long legal proceeding and is in the best interest of shareholders and the Bank. And of course, yesterday, we closed the Cowen transaction. TD Securities and Cowen are a powerful combination, accelerating our U.S. growth strategy and helping to create an integrated North American dealer with global reach. The acquisition of Cowen adds key capabilities to our growing global markets platform in U.S. equity sales and trading and in U.S. equity research. It also adds scale and industry expertise across U.S. capital markets and M&A advisory. Congratulations to everyone on this important milestone and a very warm welcome to our over 1,500 new colleagues.

I know I speak for Riaz and all of TD securities, when I say, we are very excited for what we will accomplish together. Let me now turn to our first quarter performance. TD delivered a strong Q1. Earnings increased 8% to $4.2 billion and EPS rose 7% to $2.23. Revenue grew 16% year-over-year, reflecting margin expansion, strong volume growth and our diversified business mix. We took advantage of this environment to continue to invest in our business to drive future growth, while delivering robust operating leverage. As expected, we saw some credit normalization this quarter, but credit performance remained strong overall, supported by consistent and disciplined underwriting practices. TD CET1 ratio ended the quarter at 15.5% or 15% pro forma for the closing of the Cowen acquisition.

With TD’s strong internal capital generation capabilities and the various capital levers available to the Bank, we continue to expect TD CET1 ratio to be comfortably above 11% post closing of the First Horizon transaction. These strong results are matched by a brand that is second to none. TD was recently named one of the 2023 Global Top 50 Most Valuable Brands by Brand Finance earning the highest ranking in Canada. Across our distribution channels, the Bank delivers personalized connected legendary experiences. For the ninth consecutive year, the TD mobile app had the highest number of monthly active mobile users among Canadian banks according to mobile analytics firm, data.ai. Let me now turn to each of our businesses and review some highlights from Q1.

Our Canadian Personal and Commercial Banking segment delivered record earnings of $1.7 billion, reflecting revenue growth of 17% and significant positive operating leverage. The Personal Bank continued to demonstrate momentum, with sales of our everyday banking products up over 20% year-over-year and industry-leading market share gains in non-term deposits again this quarter, driven by strength in branch banking. We saw a record Q1 acquisition in the New to Canada customer segment and announced an exclusive strategic relationship with CanadaVisa, one of the leading online sources of Canadian immigration information with over 2 million monthly visits. Through this relationship, TD will help support newcomers as they navigate financial services, while settling into their lives in Canada.

We also had record Q1 credit card spend, an organic loan growth driven by a rebound in travel and our compelling TD Aeroplan offering, coupled with our best ever quarter for digital acquisition for TD cards. In our real estate secured lending business, our teams delivered robust retention rates and enhancements in mobile mortgage specialist productivity despite a softening housing market. The Business Bank achieved double-digit loan growth for the sixth consecutive quarter and we were proud to collaborate with the Federation of African Canadian Economics to help black business owners in their entrepreneurial journeys, enabling them to access capital and scale their businesses. Turning to the U.S. Our U.S. Retail Bank delivered record earnings of US$1 billion, reflecting revenue growth of 27% and significant positive operating leverage.

With the contribution from our investment in Schwab of US$222 million segment earnings were US$1.2 billion. This quarter, enabled by our investments in event streaming technology, TD launched deposit balance thresholds alerts, the first of several self-service alerts that will further enhance customer convenience and experience. We delivered strong loan growth year-over-year, led by 18% growth in mortgages and 9% growth in cards, personal loans were up 11%. And TD demonstrated continued momentum in the middle market and C&I space, with business loans up 9%, excluding PPP loan forgiveness. Finally, this quarter, we were proud to announce a 20-year extension of our agreement with Delaware North, keeping Boston’s beloved landmark arena named as TD Garden to 2045.

Our Wealth Management and Insurance segment earned $550 million this quarter. Revenue was up 4% as higher insurance volumes and the benefit of higher interest rates helped offset a challenging market environment. In TD Direct Investing, we took the number one spot in the Globe and Mail’s annual ranking of digital brokers and increased market share of new account acquisition quarter-over-quarter. In TD Asset Management, TD regained its position as the number one money manager for Canadian pension assets and widened its lead versus competitors as the number one Canadian institutional asset manager. Highlighting the breadth of our capabilities, several TD Asset Management ETFs and mutual funds across equities, fixed income and balanced funds were recognized this quarter with funds Grade A+ awards.

On the insurance side, our expansion into small business insurance will launch in the coming months. As the number one direct-to-consumer insurer in Canada, this is a natural extension for us to leverage our expertise to deliver exceptional insurance experiences for small business owners. In our Wholesale Banking business, we delivered net income of $347 million, with revenues roughly flat year-over-year. The impact of lower underwriting and trading revenues was offset by higher global transaction banking and lending revenues as we continue to support our clients through market cycles. This quarter, TD Securities acted as financial adviser to GIC and Dream Industrial REIT on their acquisition of Summit Industrial Income REIT. Our wholesale banking team also acted a joint book runner on the Government of Canada’s $500 million Ukraine-sovereignty bond to assist the Government of Ukraine in providing essential service to Ukrainians and restoring energy infrastructure.

And as I mentioned earlier, Cowen is now part of TD Securities, with robust integration plans in place, work is already underway to tap the combined strengths of the business and extend our competitive advantage in the market. Guided by our purpose, TD is committed to creating value for all our stakeholders. I am proud that the Bank was listed in the DJSI World Index for the ninth consecutive year. TD is one of six banks listed in the DJSI North American Index and the only North American Bank included in the World Index. The Bank was also recently recognized with the top 10% S&P Global ESG score again, standing out from its peers as the only North American Bank to be listed in the top 10%. And TD Bank, America’s most convenient Bank was recognized as one of America’s best employers for veterans by Forbes for the third consecutive year.

This recognition is a reflection of our commitment to the communities we serve. Earlier this week, as part of the TD Ready Challenge, we were pleased to announce a total of $10 million in grants to 10 non-profit and charitable organizations that are working on solutions to help those may be disproportionately affected by climate change and the transition to a low carbon economy Later this month, TD will release its 2022 ESG reporting suite, including our climate action plan. We are excited to share the outcomes of a year of effort and accomplishments by thousands of dedicated TD colleagues who transformed our aspirations into action. Our TD bankers continue to deliver for all of our stakeholders and it is a privilege to work alongside them every day.

I would like to thank them for all they do to make TD the better Bank. I will end by noting that this Paul Douglas’ last earnings call as Group Head, Canadian Business Banking. Barbara Hooper will assume leadership of this segment. Barbara’s almost 47-year TD career is filled with remarkable achievements and success. He and his team have built one of Canada’s premier business banks known across market for the dedication to their customer. Paul has also build the best team of business bankers in the country and leave behind a tremendous bench of talent that will continue to drive growth. I have known Paul throughout my entire time at TD. I want to thank him for his partnerships, support and significant contributions to the bank’s success over many decades.

Paul will assume a newly created position as Chair, Canadian Business Banking will also serve as a special advisor to me. Congratulations to Paul and I look forward to continuing to benefit from his wise counsel as we build for the future. With that, I will turn things over to Kelvin.

Photo by emil kalibradov on Unsplash

Kelvin Tran: Thank you, Bharat. Good afternoon, everyone. Please turn to slide 11. For Q1, the Bank reported earnings of $1.6 billion and EPS of $0.82, down 58% and 59%, respectively. Reported earnings include the Stanford litigation settlement, a net loss from mitigation of impact from interest rate volatility to closing capital on the First Horizon acquisition and the recognition of a provision for income taxes in connection with the Canada Recovery Dividend and increase in the Canadian federal tax rate for fiscal 2022. Adjusted earnings were $4.2 billion and adjusted EPS was $2.23, up 8% and 7%, respectively. Reported revenue increased 8% and includes a net loss for mitigation of impact from interest rate volatility to closing capital on the First Horizon acquisition.

Adjusted revenue increased 16%, reflecting margin and volume growth in the Personal and Commercial Banking businesses and the impact of FX translation. Provision for credit losses was $690 million, compared with $72 million in the first quarter last year. Reported expenses increased 39%, primarily reflecting the Stanford litigation settlement and higher acquisition and integration-related charges. Adjusted expenses increased 11%, driven by higher employee-related expenses, the impact of FX translation and higher spend supporting business growth. On our Q4 call, I noted that we expected adjusted expense growth, excluding FX to moderate in fiscal 2023 on a quarter-over-quarter basis. We saw that this quarter with adjusted expense growth moderating sequentially as we continue to prioritize our investments.

Our goal of delivering positive operating leverage over the medium-term remains unchanged. Absent the retailer partners net share of the profits from the U.S. strategic card portfolio, adjusted expenses increased 10.4% ex-FX. Reported total Bank PTPP was down 26% year-over-year, primarily reflecting the Stanford litigation settlement. Consistent with prior quarters, slide 26 shows how we calculate adjusted total Bank PTPP and operating leverage, removing the impact of the U.S. strategic portfolio along with the impact of foreign currency translation and the insurance fair value charge. Adjusted total Bank PTPP was up 14% after these modifications. Please turn to slide 12. Canadian Personal and Commercial Banking net income for the quarter was $1.7 billion, up 7% year-over-year.

Revenue increased 17%, reflecting higher margins and volume growth. Average loan volumes rose 8%, reflecting 6% growth in Personal volumes and 14% growth in Business volume. Average deposits rose 3%, reflecting 8% growth in Personal deposits and a 5% decrease in Business deposits. Net interest margin was 2.80 — 2.8%, up 10 basis points compared to the prior quarter, primarily due to higher deposit margins, reflecting rising interest rates, partially offset by lower margin — lower loan margins. While many factors can impact margins including the path of short-term rates, tractors on and off rates, customer activity and competitive market dynamics, and margins may bounce around quarter-to-quarter, we currently expect net interest margin expansion to moderate for the remainder of fiscal 2023.

Total PCL of $327 million increased $98 million sequentially. Total PCL as an annualized percentage of credit volume was 0.25%, up 8 basis points sequentially. Non-interest expenses increased 10% year-over-year reflecting higher spend supporting business growth, including technology and employee-related expenses. Please turn to slide 13. U.S. Retail segment reported net income for the quarter was US$1.2 billion, up 17% year-over-year. Adjusted net income was US$1.2 billion, up 23% year-over-year. U.S. Retail Bank reported net income was US$955 million, up 18%, primarily reflecting higher revenue partially offset by higher noninterest expenses, including acquisition and integration-related charges for the First Horizon acquisition and higher PCL.

U.S. Retail Bank adjusted net income was $1 billion up 26%, US$1 billion. Revenue increased 27% year-over-year, reflecting higher deposit margins and loan volumes, partially offset by lower loan margins and deposit volumes, lower overdraft fees and lower income from PPP loan forgiveness. Average loan volumes increased 9% year-over-year. Personal loans increased 11% reflecting strong originations, lower prepayments and higher credit card sales volumes. Business loans increased 6%, reflecting strong originations, new customer growth, higher commercial line utilization and increased customer activity, partially offset by PPP loan forgiveness. Excluding PPP loans, business loans increased 9%. Average deposit volumes, excluding sweep deposits, were down 2% year-over-year.

Personal deposits were flat. Business deposits declined 4% and sweep deposits decreased 15%. Net interest margin was 3.29%, up 16 basis points sequentially as higher deposit margins, reflecting the rising interest rate environment were partially offset by lower loan margins and negative balance sheet mix. While many factors can impact margins, including the path of short-term rates, tractors on and off rates, customer activity and competitive market dynamics, margins may bounce around quarter-to-quarter. We currently expect net interest margin expansion to moderate for the remainder of fiscal 2023. Total PCL was US$149 million, a decrease of US$20 million sequentially. The U.S. Retail net PCL ratio, including only the Bank’s share of PCL for the U.S. strategic cards portfolio, as an annualized percentage of credit volume was 0.34%, lower by 6 basis points sequentially.

Reported expenses increased 22% and include acquisition and integration-related charges for the First Horizon acquisition. Adjusted expenses were up 16%, reflecting higher employee-related expenses, credit card growth-related expenses and other business investments. The contribution from TD’s investment in Schwab was US$222 million, up 11% from a year ago, reflecting higher net interest income, partially offset by higher expenses, lower asset management fees and lower trading revenue. Please turn to slide 14. Wealth Management and Insurance net income for the quarter was $550 million, down 14% year-over-year. Revenue increased 4%, reflecting higher margins and increase in fair value of investments supporting claims liabilities and higher insurance volumes, partially offset by lower volumes and lower transaction and fee-based revenue in Wealth.

Insurance claims increased 29% year-over-year, reflecting the impact of changes in the discount rate, which resulted in a similar increase in the fair value of investments supporting claims liabilities reported in non-interest income, increased driving activity and inflationary costs, partially offset by fewer severe weather-related events. Non-interest expenses were flat year-over-year, reflecting higher spend supporting business growth, including higher employee-related expenses and technology costs, partially offset by lower variable compensation. Assets under management decreased 3% year-over-year, reflecting market depreciation. Assets under administration decreased 3% year-over-year, reflecting market depreciation, partially offset by net asset growth.

Please turn to slide 15. Wholesale Banking reported net income for the quarter was $331 million, a decrease of 24% year-over-year, reflecting higher noninterest expenses and PCL. Adjusted net income was $347 million, down 20% year-over-year. Revenue was $1.3 billion, largely unchanged year-over-year, reflecting lower trading-related revenue and underwriting fees, offset by higher global transaction banking and lending revenue. PCL for the quarter was $32 million, an increase of $6 million from the prior quarter. Reported expenses increased 16% and included acquisition and integration-related charges, primarily for the Cowen acquisition. Adjusted expenses increased 13%, reflecting continued investments in Wholesale Banking’s U.S. dollar strategy, including the hiring of banking, sales and trading and profession — and technology professionals, higher severance and the impact of foreign exchange translation.

Please turn to slide 16. The Corporate segment reported net loss of $2.6 billion in the quarter, compared with a reported net loss of $227 million in the first quarter last year. The year-over-year increase primarily reflects the Stanford litigation settlement, a net loss from mitigation of impact from interest rate volatility to closing capital on the First Horizon acquisition, the recognition of a provision for income taxes in connection with the Canada Recovery Dividend and increase in the Canadian federal tax rate for fiscal 2022 and higher net corporate expenses. Adjusted net loss for the quarter was $140 million, compared with an adjusted net loss of $127 million in the first quarter last year. Please turn to slide 17. The common equity Tier 1 ratio ended the quarter at 15.5%, down 69 basis points sequentially.

We had strong internal capital generation this quarter, which added 42 basis points to CET1. This was more than offset by an increase in RWA net of FX, which decreased CET1 by 62 basis points. We saw a 14 basis point increase in CET1 related to the issuance of common shares under our dividend reinvestment plan. Relating to the First Horizon acquisition, a net loss from the mitigation of impact from interest rate volatility to closing capital decreased CET1 by 13 basis points and an FX hedge decreased CET1 by 6 basis points. Previously announced regulatory changes also impacted our CET1 this quarter. We saw a 16-basis-point decrease in CET1 related to the Canada Recovery Dividend and an 8-basis-point decrease related to the elimination of the transitional arrangements for expected credit losses.

Finally, the previously announced Stanford litigation settlement decreased CET1 by 23 basis points this quarter. RWA, including FX, increased 2.8% quarter-over-quarter, reflecting higher credit risk RWA. Credit risk RWA increased $16.8 billion or 4%, mainly reflecting higher volumes, asset quality reflecting further credit normalization and parameter updates, and methodology changes in preparation for Basel III reforms. Market risk RWA decreased $3.4 billion or 15%, reflecting lower exposures and tightening credit spreads. The leverage ratio was 4.8% this quarter and the LCR ratio was 141%, both well above published regulatory minimums. I will now turn the call over to Ajai.

Ajai Bambawale: Thank you, Kelvin, and good afternoon, everyone. Please turn to slide 18. Gross impaired loan formations increased by 2 basis points to 16 basis points quarter-over-quarter, driven by Canadian Commercial Banking, primarily related to a new formation in the health and social services sector and some further normalization of credit performance, largely reflected in the Canadian and U.S. consumer lending portfolios. Please turn to slide 19. Gross impaired loans were stable quarter-over-quarter and remained at cyclically low levels. Please turn to slide 20. Recall that our presentation reports PCL ratios, both gross and net of the partner share of the U.S. strategic card PCLs, we remind you that U.S. card PCLs recorded in the Corporate segment are fully absorbed by our partners and do not impact the Bank’s net income.

The bank’s provisions for credit losses increased 3 basis points quarter-over-quarter to 32 basis points. The increase was largely recorded in the Canadian Personal and Commercial Banking segment. Please turn to slide 21. The Bank’s impaired PCL was $553 million, an increase of $99 million quarter-over-quarter and primarily related to some further normalization of credit performance largely reflected in the consumer lending portfolios. The Bank’s current quarter impaired PCL rate remained well below 2019 levels. Performing PCL of $137 million this quarter was largely recorded in the Canadian Personal and Commercial Banking and Wholesale Banking segment. Please turn to slide 22. The allowance for credit losses increased by $113 million quarter-over-quarter, reflecting volume growth and credit conditions, including some deterioration in the economic outlook, partially offset by the impact of foreign exchange.

The Bank’s allowance coverage remains elevated to account for ongoing uncertainty relating to the economic trajectory and credit performance. In summary, the Bank’s credit performance was strong again this quarter. However, as anticipated, key credit metrics continue to rise from cyclically low levels experienced last year with this trend, most evident in the consumer lending portfolios. Looking forward, while results may vary by quarter, I continue to expect total PCLs to be in the range of 35 basis points to 45 basis points in 2023 as credit performance continues to normalize and we progress along the economic path. TD remains well positioned given we are adequately provisioned, we have a strong capital position and we have a business that is broadly diversified across products and geographies.

With that, Operator, we are now ready to begin the Q&A session.

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Q&A Session

Operator: Thank you. And the first question is from Meny Grauman from Scotiabank. Please go ahead.

Meny Grauman: Hi. Good afternoon. A few questions on First Horizon, Bharat, you addressed it in your opening comments in terms of renegotiating of the contract and I am just wondering what extension data are you looking for, for that new contract?

Bharat Masrani: Meny, we have just started those conversations. I think it’s premature for me to give you any specific dates. We are thinking through as to what might be appropriate and when the timing is right, we will certainly let you know.

Meny Grauman: And just as a follow-up to that, as a result of these negotiations, could the purchase price change, is that something that is a potential?

Bharat Masrani: Well, we have just initiated the negotiations, and once the negotiations are finalized, we will be sure to give you further details.

Meny Grauman: Okay. And then just a final one on the same topic, just wondering about the nature of the delay, given that the fact that the commentary that we are hearing comes so soon after the contract was extended to the end of May. So I am wondering, is the issue a procedural issue or is it something more substantive? How would you sort of describe the delay as you see it?

Bharat Masrani: Well, first, let me, as we have discussed previously, we are really excited about this transaction. We worked very hard to-date and continue to work very, very hard and our planning for integration continues. We have set up an integration management office. I was thrilled that we announced our community benefit plan very recently, which was very important for the communities in which we operate. So really excited about what this transaction does for our U.S. franchise. As far as timing goes, unfortunately, I can’t tell you any more than what I have said in my remarks. We — yes, we did extend the deal till May 27th since then. We believe that we will not be able to close this transaction by that date, and therefore, I started, as you would expect us to start to talk about an extension with First Horizon.

Meny Grauman: Okay. Thank you very much, Bharat.

Operator: Thank you. The next question is from Doug Young from Desjardins Bank Capital Markets. Please go ahead.

Doug Young: Hi. Good afternoon. Just a few on related questions. I mean, TD had negative organic capital generation this quarter about negative 20 basis points. So just a few items I just want to get some clarity on and hoping you can dig into the asset quality drag of 21 basis points. Is that just normal migration or can you kind of elaborate?

Ajai Bambawale: Yeah. It’s Ajai. So let me take asset quality. You would have noticed the increase there is $6.8 billion and there are really two drivers of that. One is normal cost non-retail parameter updates that were made and we make these annually. So we actually put it through in Q1. And then the second driver is credit normalization, and as I said in my prepared remarks, that credit normalization is occurring largely in the consumer portfolios, both Canada and the U.S. Hopefully, that…

Doug Young: Thank you. It is. Can you kind of split the two in terms of which one was more impactful?

Ajai Bambawale: Yeah. I would say, well, it’s — I would say, about 40% is the parameter updates. The balance is credit migration.

Doug Young: Okay. Okay. And then, second, I mean, the CET1 impact from the Basel III changes coming in Q2, it looks like you had parameter updates because of Basel III that came through in Q1. Can you talk about is there additional hit or benefit that you are going to have in Q2 from the upcoming Basel III changes?

Kelvin Tran: Hi. It’s Kelvin. I will take that one. Correct. So in Q2 we expect the impact of Basel III to be small either way.