The Toronto-Dominion Bank (NYSE:TD) Q4 2023 Earnings Call Transcript

The Toronto-Dominion Bank (NYSE:TD) Q4 2023 Earnings Call Transcript November 30, 2023

Operator: Good afternoon, everyone. Welcome to the TD Bank Group Q4 2023 Earnings Conference Call. I would 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 fourth 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 nations, Metis, 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 fourth 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; Barbara Hooper, 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 material 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’s 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 2023 Annual Report.

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

Bharat Masrani: Thank you, Brooke, and thank you, everyone, for joining us today. Before I begin, I want to say how saddened we are about recent events in the world and close to home. TD has contributed CAD1 million to support urgent humanitarian aid in Israel and Gaza, as well as to local organizations in North America that combat the rise of racism and hate. At TD, we stand against anti-Semitism and Islamophobia. Over the past several days, it has been encouraging to see the release of some hostages and pause in the fighting. As this situation evolves and with the war in Ukraine, now well into the second year, we hope and pray for peace. I also want to acknowledge our colleagues, customers, and neighbors impacted by the Lewiston shooting in Maine last month.

TD contributed CAD200,000 to help those affected. We are the largest bank in the state. We know that Mainers are resilient and the bank will continue to support the community to overcome those painful events. Let’s now turn to our fourth-quarter earnings. Q4 was a mixed quarter for TD. While expenses were elevated and we saw weaker results in our Wholesale Banking segment, fundamentals remained strong across our retail businesses. Earnings were CAD3.5 billion and EPS was CAD1.83. Revenue grew 8% year-over-year, reflecting margin expansion and loan volume growth. The contribution from TD Cowen and the strength of our diversified business model. PCLs were higher as credit continued to normalize as expected. This quarter expenses increased, driven by variable compensation and the inclusion of TD Cowen.

More generally, we recognize that the bank’s cost base is higher than it should be. We’re undertaking a broad-based restructuring program to deliver, efficiencies and drive profitability across the enterprise. As Kelvin will describe in more detail, the program includes real estate optimization, asset impairments as we accelerate transitions to new platforms, and a 3% reduction in FTE through attrition and targeted actions to create capacity to invest for future growth and limit the impact on our people. While we are focused on expenses, we are pursuing meaningful revenue opportunities across our businesses. We outlined our strategies to accelerate growth in our Canadian retail businesses at our recent Investor Day and the acquisition of TD Cowen provides additional capabilities for TD to grow its investment bank.

In U.S. Retail, our brand footprint and deep customer relationships provide a robust foundation for continued growth. As you’ll hear from my colleagues, we are already executing on those — on these opportunities across the bank. The bank’s CET1 ratio was 14.4%, reflecting organic capital generation and the impact of almost 38 million common shares bought back during the quarter. With heightened uncertainty in the economy and the markets, TD is in a position of strength. We have the capacity to return capital to shareholders, while continuing to invest to drive growth across our businesses. We remain confident in the earnings power of our franchise, and today declared a CAD0.06 dividend increase, bringing our dividend to CAD1.02 per share. And last month, we introduced TD Invent, the bank’s enterprise approach to innovation.

This will build on our track record of innovation, including the recently redesigned TD mobile app, which first launched in the U.S. and then in Canada this quarter. TD’s Digital Strength continues to receive recognition, with Global Finance recently naming the bank, the best consumer digital bank in North America for the third year in a row. We are also leveraging advanced technologies including AI, and have been granted 55 patents relating to AI inventions since 2018. This quarter, our in-house AI team Layer 6, won the Annual ACM RecSys Challenge for the third time. Let me now turn to each of our businesses and review some highlights from Q4. In our Canadian Personal and Commercial Banking segment, earnings were CAD1.7 billion, down 1% year-over-year, and PTPP was CAD2.7 billion, up 7% year-over-year.

In a challenging environment, we saw strong momentum across our businesses, with loans and deposits up 2% and 1% quarter-over-quarter, respectively, and NIM expansion of 4 basis points. In the Personal Bank, Everyday Banking delivered a record quarter for New to Canada accounts, as TD continued to make progress towards our medium-term target of 50% growth in New to Canada acquisition outlined at our recent Investor Day. In credit cards, we delivered strong volumes in Q4 and record spend for the year. And Rewards Canada Readers recognized TD with more rewards in 2023 than all other card issuers combined, with the bank taking first place in four of seven categories. In Real Estate Secured Lending, the bank continued to deliver market share gains and to help Canadians invest tax-free for a down payment on their first home.

This quarter, TD launched the First Home Savings Account. The Business Bank grew loans by 9% year-over-year. In small business banking, we are focused on helping clients refinance their CEBA loans in advance of the upcoming partial forgiveness deadline. And the bank continued to execute on its One TD strategy, more than doubling the number of senior private bankers co-located in our commercial banking centers over the last two quarters. Turning to the U.S. U.S. Retail Bank earnings were $800 million, down 17% year-over-year, and PTPP was $1.1 billion, down 13% year-over-year. Expenses increased 6% year-over-year, reflecting higher legal and regulatory cost and continued investments in our franchise and credit continued to normalize. However, we saw operating momentum with net interest income up 1% quarter-over-quarter, reflecting volume growth across loans and deposits excluding sweeps and a 7 basis point increase in NIM.

With the contribution from our investment in Schwab of $146 million, segment earnings were $946 million. TD Bank, America’s Most Convenient Bank is adding customers and deepening relationships, delivering peer-leading personal and business loan growth of 12% and 9% year-over-year respectively. In Commercial banking, middle market and specialty lending grew 22% and 12% year-over-year, respectively. In our us Bank Card business, new accounts were up 45% year-over-year, as our product suite continued to resonate with customers. And for the seventh year in a row, the bank ranked number one in Small Business Administration Lending in its Maine to Florida footprint, and ranked number two in SBA loans nationally. TD continued to demonstrate resilience in deposits in a competitive environment with balances excluding sweeps up 1% quarter-over-quarter.

The wealth management and insurance segment earned $501 million this quarter, down 3% year-over-year. Revenue growth of 9%, reflecting the strength of our diversified business model was offset by increased claims due to inflation, auto thefts, and more severe weather-related events. In Private Investment Advice, TD gained market share year-over-year and ranked number one among Canadian banks in net new asset growth, as the bank makes progress towards our investor day targets. In TD Direct Investing, we launched TD Active Trader this quarter, the Bank’s completely redesigned platform for sophisticated active traders, offering leading capabilities unmatched in the marketplace. And TD Direct Investing was recently named the best Canadian Brokerage by Benzinga, a leading financial media company.

Finally, in Insurance, we continue to increase market share amongst Canadian personal lines insurers year-over-year. It was a challenging quarter for the Wholesale Banking segment. Net income was CAD178 million, down 35% year-over-year, as higher revenues from equity commissions and underwriting and advisory fees were more than offset by investments to grow TD Cowen and our U.S. Business. This quarter we expanded our credit trading team and financial institutions group in the U.S. We also achieved a significant milestone in the integration of TD Securities and TD Cowen with the combination of our U.S. institutional equities and convertible businesses to deliver even better outcomes for our clients and strengthen our brand in U.S. equity markets.

We are pleased with our integration to-date and continue to pursue strategies to ensure our combined businesses and cost structure, allows us to serve our clients optimally and drive profitability. For fiscal 2024, it will be challenging to meet our medium-term adjusted EPS growth and ROE objectives, as the bank navigates a complex macroeconomic environment, expected further normalization in PCLs, and elevated expenses, including investments to enhance the Bank’s risk and control infrastructure and accelerate growth. Despite these headwinds, the bank continues to deliver on its purpose to enrich the lives of our customers, communities, and colleagues. This quarter, we released the TD and Indigenous Communities in Canada 2023 Report, which highlights the Bank’s collaborations with First Nation, Metis, and Inuit Peoples and communities.

We also opened a new branch in the Province of Alberta, on the lands of the Tsuut’ina Nation, staffed entirely by indigenous peoples. In addition, the bank continued to focus on energy transition. Earlier this month, TD announced an agreement with 1PointFive to purchase carbon dioxide removal credits from the Direct Air Capture Plan, subject to it becoming operational. This transaction will help drive innovative, technology-based solutions to advance decarbonization goals for TD and our clients. I want to end by thanking all our TD bankers around the globe, who live our purpose every day. Thank you for your many contributions in 2023, and I look forward to what we will achieve together in 2024. With that, I’ll turn things over to Kelvin.

Kelvin Tran: Thank you, Bharat. Good afternoon, everyone. Please turn to slide 10. For 2023, the bank reported earnings of CAD10.8 billion and EPS of CAD5.60, down 38% and 41%, respectively. Adjusted earnings were CAD15.1 billion and adjusted EPS was CAD7.99, down 2% and 4%, respectively. Reported revenue increased 3%, reflecting the impact of the terminated First Horizon acquisition-related capital hedging strategy and gain in the prior period on sale of Schwab shares, and margin growth in the Personal and Commercial Banking businesses. Adjusted revenue increased 12%. Reported expenses increased 25%, reflecting higher employee-related expenses including TD Cowen, the Stanford litigation settlement, and higher acquisition in integration-related charges, including charges related to the terminated First Horizon acquisition.

Adjusted expenses increased 13%. Reported total bank PTPP was down 19.1% year-over-year. Consistent with prior quarters, slide 28 shows how we calculate adjusted total bank PTPP and operating leverage, removing the impact of the U.S. strategic card portfolio along with the impact of foreign currency translation and the insurance fair value charge. Adjusted total bank PTPP was up 7.2% after these modifications. Please turn to slide 11. TD’s restructuring program has been enabled by the bank’s consistent investments in technology and digital capabilities. This quarter, we undertook certain measures to reduce the bank’s cost base and achieve greater efficiency, resulting in a restructuring charge of CAD363 million pre-tax. We expect to incur additional restructuring charges of a similar magnitude in the first-half of calendar 2024.

The restructuring program is expected to generate approximately CAD400 million pre-tax in savings in fiscal 2024 and an annual run rate savings of approximately CAD600 million pre-tax. Cost savings will be driven by 3% FTE reduction, real estate optimization and asset impairments as we accelerate transitions to new platforms. Our goal of delivering positive operating leverage over the medium term remains unchanged. In the current environment, we expect one-run rate expenses, inclusive of the savings generated by the restructuring program and investments to accelerate future growth to increase by approximately 2% per year. For fiscal 2024, we expect higher expense growth, reflecting investments in our risk and control infrastructure and the impact of TD Cowen.

As a result, for fiscal 2024, we expect adjusted expense growth in the mid-single digits. Please turn to slide 12. For Q4, the bank reported earnings of CAD2.9 billion and EPS of CAD1.49, down 57% and 59%, respectively. Adjusted earnings were CAD3.5 billion and adjusted EPS was CAD1.83, down 14% and 16%, respectively. Reported revenue decreased 16%, reflecting the gain from the impact of the terminated First Horizon acquisition-related capital hedging strategy and the gain on sale of Schwab shares in the prior period, partially offset by margin growth in the Personal and Commercial Banking businesses. Adjusted revenue increased 8%. Reported expenses increased 20% and include restructuring charges and acquisition and integrated related charges, related to the Cowen acquisition.

Adjusted expenses increased 13%, reflecting higher employee-related expenses and variable compensation. Reported total bank PTPP was down 41.9% year-over-year. Adjusted total bank PTPP was up 1.8% after removing the impact of the U.S. strategic card portfolio along with the impact of foreign currency translation and the insurance fair value charge. Please turn to slide 13, Canadian Personal and Commercial Banking net income for the quarter was CAD1.7 billion, down 1% year-over-year. Revenue increased 7% year-over-year, reflecting volume growth and higher margins. Average loan volumes rose 6%, reflecting 6% growth in personal volumes and 9% growth in business volumes. Average deposits rose 2%, reflecting 5% growth in personal deposits, partially offset by a 3% decline in business deposits.

Net interest margin was 2.78%, up 4 basis point quarter-over-quarter. This quarter, we saw higher deposit margins, reflecting tractor maturities, partially offset by loan margin compression from a highly competitive market. As we look forward to Q1, while many factors can impact margins, including tractors, on and off rates, and balance sheet mix, we expect net interest margin to remain relatively stable. Non-interest expenses increased 6% year-over-year, reflecting higher technology spend supporting business growth. Please turn to slide 14. U.S. Retail segment reported an adjusted net income for the quarter was $946 million, down 19% and 21% year-over-year. U.S. Retail Bank reported an adjusted net income was $800 million, down 14% and 17% respectively, reflecting higher non-interest expenses, higher PCL and lower revenue.

Reported net income in the fourth quarter last year included acquisition and integration related charges for the terminated First Horizon transaction. Revenue decreased 3% year-over-year, reflecting lower deposit volume, loan margins, and overdraft fees, partially offset by higher deposit margins, loan volumes, and fee income from increased customer activity. Average loan volumes increased 10% year-over-year. Personal loans increased 12%, reflecting good originations and slower payment rates across portfolios. Business loans increased 9%, reflecting good originations from new customer growth, higher commercial line utilization and slower payment rates. Average deposit volumes excluding sweep deposits were down 4% year-over-year, personal deposits were down 4%, business deposits declined 5%, and sweep deposits decreased 25%.

Net interest margin was 3.07%, up 7 basis points this quarter — quarter-over-quarter, I mean, as higher investment returns from mature tractors and positive balance sheet mix with lower borrowings were partially offset by migration to term deposits and high yield savings, as well as modestly lower loan margins. As we look forward to Q1, while many factors can impact margins, including competitive deposit market dynamics in the U.S. Tractor on and off rates, and balance sheet mix, we expect net interest margin to be relatively stable in the near term, influenced by similar drivers as those we saw this quarter. Reported expenses increased 3%, reflecting higher legal expenses, regulatory expenses, and investments, employee-related expenses, and FDIC assessment fees, partially offset by acquisition and integration-related charges for the terminated First Horizon transaction in the fourth quarter last year, adjusted expenses increased 6%.

Please turn to slide 15. Wealth Management and Insurance net income for the quarter was CAD501 million, down 3% year-over-year, reflecting higher insurance claims and related expenses, partially offset by higher non-interest income. Revenue increased 9% year-over-year. Non-interest income increased 10%, reflecting higher insurance premiums, an increase in the fair value investments supporting claim liability, which resulted in a similar increase in insurance claims, and higher fee-based revenue, partially offset by lower transaction revenue in the Wealth Management Business. Net interest income decreased 4% year-over-year, primarily reflecting lower deposit volume. Insurance claims increased 39% year-over-year, reflecting increased claim severity, more severe weather-related events, and 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.

Non-interest expenses were down 1% year-over-year, reflecting continued efforts to drive productivity savings. Assets under management increased 2% year-over-year, reflecting market appreciation, partially offset by mutual fund redemptions and assets under administration increased 3% year-over-year, reflecting market appreciation and net asset growth. Please turn to slide 16. Wholesale Banking reported net income includes acquisition and integration-related charges for TD Cowen. Reported and adjusted net income for the quarter were CAD17 million CAD178 million, respectively, reflecting higher non-interest expenses, offset by higher revenues. Revenue including TD Cowen was CAD1.5 billion, up 28% year-over-year, primarily reflecting higher equity commissions, advisory and equity underwriting fees and loan underwriting commitment marked down in the prior year.

Reported expenses increased 80% and includes acquisition and integration-related charges for TD Cowen. Adjusted expenses increased 59%, reflecting investments to grow TD Cowen and our US business. Please turn to slide 17. The Corporate segment reported a net loss of CAD591 million in the quarter, compared with net income of CAD2.661 million in the fourth quarter last year, sorry CAD2,661 million in the fourth quarter last year. The year-over-year decrease primarily reflects gains in the prior year from the impact of the terminated First Horizon acquisition-related capital hedging strategy and the sale of Schwab shares and restructuring charges in the current quarter. Other items decreased CAD83 million, primarily reflecting the favorable tax impact of earnings mixed, and the recognition of unused tax losses in the prior year, partially offset by higher revenue from treasury and balance sheet management activities this quarter.

The adjusted net loss for the quarter was CAD133 million compared with an adjusted net loss of CAD10 million in the fourth quarter last year. We have said in the past that our run rate expectation for adjusted net losses in the corporate segment is approximately CAD100 million to CAD125 million per quarter. For fiscal 2024, although it may bounce around, we expect adjusted net losses to increase to CAD200 million to CAD250 million per quarter, driven by investments in our Risk and Control Infrastructure. These investments, which may extend beyond fiscal 2024, will be reflected in the corporate segment as they are expected to yield benefits enterprise wide, run rate expenses will be reflected in the business segments. Please turn to slide 18.

The Common Equity Tier 1 ratio ended the quarter at 14.4%, down 81 basis points sequentially. Internal capital generation added 27 basis points to CET1 this quarter. This was more than offset by an increase in RWA, excluding the impact of FX, which decreased CET1 by 33 basis points. We repurchased almost 38 million common shares under our previous 30 million share buyback program and current 90 million share back — buyback program combined this quarter, which reduced CET1 by 62 basis points, 57 basis points from the share buyback itself, and 5 basis points from the impact of lower capital base has on the portion of our Schwab investment that exceeds the regulatory threshold for non-significant investments. Our restructuring program decreased CET1 by 5 basis points this quarter.

The second phase of the Basel III reforms will become effective in Q1 ’24. We currently expect a negative impact of approximately 15 basis points to CET1, so that’s 15, driven by the implementation of the fundamental review of the trading book and the adoption of the standardized approach for market risk and counterparty credit risk. RWA including the impact of FX increased 4.8% quarter-over-quarter, reflecting higher credit risk due to volume growth in credit conditions, including some credit migration. The leverage ratio was 4.4% this quarter and the LCR ratio was 130%, both well above published regulatory minimums. And with that, Ajai, over to you.

Ajai Bambawale: Thank you, Kelvin, and good afternoon, everyone. Please turn to Slide 19. Gross impaired loan formations were 18 basis points, stable quarter-over-quarter as increases in the US Commercial and Canadian and US Consumer Lending portfolios were partially offset by reductions in Canadian Commercial and Wholesale Banking. Please turn to slide 20. Gross impaired loans increased CAD319 million quarter-over-quarter to CAD3.3 billion, or 36 basis points, driven by the impact of foreign exchange and the US Retail and Canadian Personal and Commercial Banking segments. Please turn to slide 21. Recall that our presentation reports PCL ratios, both gross and net of the partner share of the US 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 provision for credit losses increased 4 basis points quarter-over-quarter to 39 basis points. The increase is largely recorded in the Canadian and U.S. Consumer Lending portfolios and Wholesale Banking. For 2023, the Bank’s full-year PCL rate was 34 basis points, up 20 basis points from the prior year as credit performance continues to normalize. Please turn to slide 22. The Bank’s impaired PCL was CAD719 million, an increase of CAD56 million quarter-over-quarter, largely related to further normalization of credit performance in the Canadian and U.S. Consumer Lending portfolios. Performing PCL was CAD159 million, with a quarter-over-quarter increase of CAD56 million, driven by Wholesale Banking and the Canadian Commercial Lending portfolios.

Please turn to slide 23. The allowance for credit losses increased by CAD415 million quarter-over-quarter to CAD8.2 billion or 89 basis points, due to a CAD214 million impact of foreign exchange. Current credit conditions, including some credit migration across the lending portfolios and volume growth. The Bank’s allowance coverage remains elevated to account for ongoing uncertainty relating to the economic trajectory and credit performance. Now, let me briefly summarize the year. Despite ongoing normalization of credit performance and heightened economic risks, including prolonged elevated interest rates, geopolitical tensions, and the potential for recession, the bank has exhibited strong credit performance throughout 2023. Looking forward, while results may vary by quarter, and are subject to changes to the economic trajectory, I expect PCLs in fiscal 2024 to be in a normalized range of 40 to 50 basis points.

To conclude, 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. [Operator Instructions] Thank you for your patience. And the first question is from Gabriel Dechaine from National Bank Financial. Please go ahead.

Gabriel Dechaine: Hi, good afternoon. Can I clarify some of these expense comments you’ve been making? I heard something about 2% increase and I didn’t quite follow what that was tied to, but what was clearer to me, and thank you for quantifying that, but the additional investments will be increasing your loss in corporate from, you know, previous guidance of CAD100 million to CAD125 million to CAD200 million to CAD250 million per quarter, I believe, and that could actually persist into 2025, correct?

Kelvin Tran: Yes. Hi, this is Kelvin. That’s correct. And when I said the 2%, that’s kind of — in terms of normal run rate that we expect after restructuring savings, and then — but the total bank expected expense growth would be in the mid-single-digits.

Gabriel Dechaine: Okay. So after restructuring, if nothing else is going on, you would expect 2% expense growth in ’24. But then these additional costs, you’re in the mid-single-digits?

Kelvin Tran: Correct? That and Cowen. Remember, we still have four months of TD Cowen.

Gabriel Dechaine: Yes, yes, yes. Okay, I understand. Quickly, you just have to explain slowly sometimes. The — one thing I want to ask about is the, you know, I asked one of your competitors today about NSF fees because the government is taking a look at these fees in Canada, and, you know, your bank has been through that experience in the U.S. Is the — my word, dependence or reliance on overdraft fees in your Canadian bank as material as it was in your U.S. Bank? Yes, there you go.

Michael Rhodes: Let me take this question. And this is Michael. The — with respect to the, you know, what the impact would be, you probably might be surprised. I’ll say lots we don’t know now. So it’ll be premature for us to comment about the potential impact at this time. And then in terms of relative dependence, I’m looking at Kelvin or Leo on that. I’m not sure I’ve got a point of view on the relative dependence.

Gabriel Dechaine: All right, my word, not yours, but in the U.S., there was around 5% or 6% of your other income or total revenues in the U.S. at some point? And I’m wondering if it’s anything close?

Michael Rhodes: It’ll be lower. It’ll be lower. But, you know, look, honestly at this point, I know you probably want to figure out a number to put in your forward view. It’s very hard for us to give you any guidance on that right now.

Gabriel Dechaine: Okay. Yes, I’ve got a blank in my note that I just wanted to fill out that note, but I’ll just reword it. And then on the AML issue, I know you don’t want to talk too much about or at all about the — what’s going on between you and the, you know, the regulator or whatever, and I understand that completely. But when I look at the disclosure on reasonable probable loss at Q3, it was — so for, particularly outstanding litigation or regulatory matters, last quarter was zero to CAD1.26 billion, and this quarter zero to CAD1.44 billion, bit of an increase. I’m wondering, is that at all reflected in that RPL figure? Is this issue for you?

Bharat Masrani: Gabe, this is Bharat. I don’t think we disclose specific cases. I don’t think that’d be reasonable. And if I’m mistaken, then we’ll clarify that after this call with you, but my understanding is we don’t disclose specific cases.

Gabriel Dechaine: Okay. And the last one, sorry, it’s a few questions. It’s my birthday, so I feel entitled.

Bharat Masrani: Go for it, Gabe. Go for it.

Gabriel Dechaine: Yes, the FDIC assessment that few of your peers have quantified, I don’t recall if you have?

Kelvin Tran: Gabriel, hi. First of all, did I hear that it’s your birthday?

Gabriel Dechaine: Yes. I’m so lucky to have three banks reporting, and I going out with my wife’s friend tonight, so it’s great.

Kelvin Tran: So a very happy birthday. I imagine you’d probably be in — you would like to be doing something else right now. But listen — let me just answer the question quickly. On the FDIC assessment we’re estimating that the impact will be approximately CAD300 million. Our intent is to reflect that in the first quarter of next year and take it as a lump sum item and that’s our approach at this point. That number you would have seen, the total FDIC cost of recovery that the FDIC announced was CAD16.3 billion, was up a little bit from their original estimate. So that’s how we get to our number of CAD300 million.

Gabriel Dechaine: Perfect. And that’s U.S. pre-tax?

Kelvin Tran: Yes, that is.

Gabriel Dechaine: Thank you and enjoy the rest of the week.

Kelvin Tran: Happy Birthday again.

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

Doug Young: Hi, good afternoon, and, Happy Birthday, Gabriel. Just on the CET1 ration, the reduction — part of the reduction, it looks like came from credit quality, and I assume that’s migration, but my rough calculation gives me about an 18 basis point reduction in the CET1 ratio. Can you talk a bit about that? And I guess that’s kind of embedded in the risk-weighted asset — credit risk-weighted asset growth impact, just hoping to get a little bit more color there?

Ajai Bambawale: Yes, it’s Ajai. So I’m happy to provide the color. So if you look at our total RWA, it increased CAD26 billion. And you’re right, there’s CAD7 billion of that CAD26 billion is from asset quality and that relates to migration. Some of it is coming from Canadian consumer in resale and in auto, and there’s some coming from U.S. Retail from commercial, auto and cards, and mostly the probability of defaults? What you should also know is that every quarter, when we look at the book and we do a lot of bottom-up analysis, sometimes we force migrate credit to Stage 2. So for example, in Canada, if there’s a client that has reached a trigger point, we would move — even though they’re paying, we would move them to Stage 2 and basically have a higher allowance rate for them.

Similarly, the trigger rate population that we believe that will reach trigger point in the next 12 months will be fairly conservative, move them to Stage 2 and build higher reserves. So some of that is driving the asset quality number of CAD7 billion.

Doug Young: And maybe just, like looking forward, as you kind of look at your PCL expectations in, you know, the evolution of the economic environment, any way to kind of get a sense of what we should be expecting, impact-wise on CET1 ratio from migration? I just see big this quarter, that’s what I’m just trying to understand how to think about this one?

Ajai Bambawale: Well, I am not — I can’t comment specifically on CET1, but you would have seen from my PCL guidance that we expect to see continued normalization of our credit portfolios. The 40 bps to 50 bps range, we’ve given you is a normalized range for TD Bank. So to the extent that that occurs as we expect, then I would expect RWAs also to rise.

Doug Young: Okay. And then in the US Bank, I mean, there was a decent drop in non-interest income. Can you talk a bit about what drove that? Is this kind of a normalized run rate in? And then Kelvin, I think you talked about various one-time items that flowed through expenses. I think these are the items of note that you back out at the top of house in terms of deriving cash EPS, just hoping to make sure that that’s the case?

Kelvin Tran: So, Doug, let me take the first part of that. With regards to the fee income, there were really two factors that played into the drop in the fee income. One is just the drop in value in certain investments, specifically our low-income housing tax credit portfolio. That tends to move around, you know, quite a bit, it’s not as predictable. And so we did see a bit of a write-down in value on that portfolio in the quarter. The second one is a drop in overdraft fees, but specific — it’s related to a remediation effort around a specific type of overdraft fee that’s referred to in the industry as authorized, positive, settle negative. And we took a reserve for client remediation in the quarter. It is a one-time charge. And so as you think about a normalized fee income number for us, I’d encourage you to look back to the second and third quarter of this year as a more indicative run rate fee income number.

Doug Young: Okay. And then those two items, I assume Kelvin, weren’t backed out?

Kelvin Tran: Correct. Those are part of the adjusted earnings. None of them are in item of note.

Doug Young: Not — those two items aren’t backed out. And then the other items that you mentioned Kelvin, like the restructuring charge and other investments that seem to flow through in the U.S., I can confirm this offline, but those are — those are in the cash EPS or backed out?

Kelvin Tran: Those are backed out. So the restructuring charges would be considered item of note and those are backed out of those.

Doug Young: Okay. And then if I could just squeeze one last one in maybe for Riaz, a big increase in capital market expenses adjusted. I think Kelvin talked a bit about some items here, can you maybe just shed some light on what’s going on through the expense line there?

Riaz Ahmed: Yes. Doug, I think, look, no doubt that we’d have to characterize this as a tough quarter for TD Securities for the bottom line, but I think it’s worth unpacking it a little bit for you. I think you’re zeroing on expenses, but I think you should start with the revenue growth story. And if you look at the growth in the global markets and the corporate investment banking revenue, from CAD2.9 billion last year in global markets to CAD3.3 billion this year, CAD1.8 billion in CIB last year to CAD2.8 billion this year. You know, the — we’ve had a 25% lift in our revenue power and to the point that we made at the time of the acquisition of TD Cowen, we’re getting more U.S. M&A revenue, we’re getting more U.S. CCM revenue, we’re getting more U.S. institutional equities revenue.

So our market share rankings in U.S. investment grade bond, in U.S. high yield bonds, in U.S. equity underwriting are all increasing smartly. And in an environment, which is still moderated by market challenges. And we’ve just started optimizing our client coverage and extending our capabilities in the — towards a wider set of verticals and to a wider set of clients. So I think that, you know, when you look at the expenses that have been added this year, you remember that we were growing organically in ’20 and — ’21 and ’22, and then added 1,600 colleagues from TD Cowen and a couple of hundreds of people, who were working on the various integrations. So as we just continue to build out our corporate coverage models, integrate — continue the integration, we announced that we had integrated the equity platform.

So that was a big milestone. You know, our efficiency ratio has risen from 62% last year to 74% this year. And if you look at the quarterly trends in the efficiency ratio, you’ll see that it bounces around. But look, I think that as we integrate over the three-year period that we said we would to get these synergies we were looking for, I think that we will normalize our way to about a 66% efficiency ratio and the potential that we’re building in this franchise and the capabilities we’re adding, I think we will be humming nicely.

Doug Young: Appreciate the color. Thank you.

Operator: Thank you. The next question is from Ebrahim Poonawala from Bank of America. Please go ahead.

Ebrahim Poonawala: Hey, good afternoon. Maybe just going back to Kelvin, comments around the risk and control expenses. So just based on what you said about the Corporate segment, that’s about CAD0.5 billion next year, potentially another CAD0.5 billion in 2025, that continues. Give us the sense of like, when we think about TD, Bharat and — like, you’ve talked about just the consistent management, et cetera. So where did the lapse occur, given just the amount of time and dollars that are required now to remediate that? Any perspective that you can share in terms of why it happened, what actions you’ve taken in terms of changing your approach towards risk management, tech spend on the risk side would be helpful?

Bharat Masrani: Nice to hear from you, Ebrahim. And hopefully it’s not your birthday as well today.

Ebrahim Poonawala: Gabe, would have nothing, but three bank supports, so everyone take note for next year as well, right?

Bharat Masrani: I know, I can imagine we look at opportunities, you know, to improve. That’s what we do. Sometimes we learn it ourselves, sometimes we learn from our regulators. We see that the level of innovation with respect to technology is moving at quite a speed. And when we recognize that we need to invest, we do. And we make investments to enhance our programs, you know, that fit our organization and manage our risk. And this includes investments, you know, to — and we’ve talked about it before in our U.S. AML program, and that will include people, training, you know, data, technology, et cetera, because, you know, there are sort of the evolving areas, and we got to make sure that we’re keeping up with what is expected of a very large bank in the domestic business in the United States and so we’re doing that.

And I expect that we will get there, and we will get there in a manner that you would expect out of TD. And so — that’s — I think that’s the best way I can describe it, Ebrahim.

Ebrahim Poonawala: And maybe the other side. Bharat, two other sort of follow-ups there. One — maybe for Leo, I think in the past, I think in the immediate aftermath of the deal termination with First Horizon, you talked about, like opening several stores across the Southeast, which sounded like a good plan in terms of when you think about household growth. Give us an update, is that still in the works or is that on a pause, till you solve for this over the next year or so?

Bharat Masrani: Well, Ebrahim, I’ll start by simply saying, this year we did focus on building out distribution, but broadly a distribution with a broader definition. So, in fact, this quarter, we upgraded our TD mobile application infrastructure to the next-generation solution, and it was successfully rolled out to 4.8 million clients. And we’re thrilled with the reception that we’ve gotten from our clients. Physical distribution will always be important. This year, to your point, we did open up 18 stores, I would say six of those in LMI communities. And so there’ll always be a view on both physical and sort of virtual. But I would just point — I know that the underlying question there is around organic growth momentum, and I would just ask you to look at the underlying stats that we posted in the fourth quarter.

We had personal loan growth of 12% with good representation across all the major loan categories. As you and I spoke in one of our analyst discussions, growing our consumer lending portfolio was a distinct priority of ours. And I’m encouraged that we’ve been able to do that, while preserving quality, while increasing selective loan pricing. And likewise, on the commercial side, quite pleased that we were able to post a 9% growth in what is a much more challenged environment. And once again, I would say we were able to do that by increased focus and investment in our mid-market business, which is an area that we’ve said we have aspirations to continue to grow and leverage our existing specialty businesses as a foundation to do so. So I think we’ve got good fundamental momentum.

We’ll continue to leverage our core. And when I say our core, historically, we’ve been an exceptionally strong retail and small business deposit institution. And that was on display again this quarter. We actually grew on a quarter-on-quarter basis. And so that’ll be an area of focus and continuing to acquire clients and scaling our — you know, our operation is going to be a priority. As — I think we mentioned last quarter, we eclipsed the 10 million client mark, which is a big milestone for the franchise and speaks to our ability to not only deepen relationships, but also continue to acquire and grow our franchise organically. So, a bit of a long-winded way of saying, I feel quite comfortable with the franchise. But as Bharat said, we’re also committed in strengthening our core risk and control environment.

It’s a major priority. We are interested not only growth, but doing it in a sustainable and responsible manner, you know, certainly consistent with what TD has done historically.

Ebrahim Poonawala: Got it. So do you expect to open more stores this year or is that we are done for now?

Leo Salom: Well, we did open up six stores in the quarter.

Ebrahim Poonawala: Right? No, but looking into ’24, I’m just wondering your expense growth guide, how many store — new stores is it baking in?

Leo Salom: We haven’t released the number, but we do intend to make investments in both physical as well as virtual distribution.

Ebrahim Poonawala: Got it. Thank you.

Leo Salom: Thank you, Ebrahim.

Operator: Thank you. The next question is from Meny Grauman from Scotiabank. Please go ahead.

Meny Grauman: Hi, good afternoon. Just wanted to clarify going back to the restructuring program, CAD600 million pre-tax when fully realized annual cost savings, how much of that is actually going to be able to fall to the bottom line in ’24 and ’25, given the reinvestment requirements that you have? So I just wanted to clarify — make sure I’m thinking about that correctly.

Kelvin Tran: Yes, so we’ve given you the net amount and so the bulk of that would be into the business and mostly into risk and control.

Meny Grauman: Okay. So the bulk of that into risk and control in ’24 and ’25 — potentially ’25. The other question I had was just in terms of your EPS growth guidance, you’re guiding to below medium-term target. I’m just curious what — that forecast, what is it baking in in terms of buybacks? Is it assuming that the buyback activity continues at the current pace?

Kelvin Tran: Yes. First, just to — as a reminder, our medium-term target is EPS growth of 7% to 10%. And given the markets that continue to be challenging and also, as Ajai said, the normalization of PCL, that’s going to make it hard and challenging to meet that range. And that would include share buyback as well. But as you have noticed, we bought back a lot of shares to date and that would give us more flexibility on the pacing of the share buyback in the future, but always subject to market conditions.

Meny Grauman: I’m asking about the buyback just in the context of the decline in the CET1 ratio this quarter and just wondering if you’re viewing the buyback a little bit more cautiously going forward. Also there’s some headwinds that you highlight in terms of regulatory changes, the FDIC levy, you know, potentially maybe a legal charge in the US. I’m just wondering how you’re viewing the buyback going forward, you know, factoring all that in?

Bharat Masrani: Meny this is Bharat. As Kelvin said, we bought back a lot. You know, it gives us great flexibility how we pace our buyback. Buybacks, as you probably know and you know for sure, would depend on market conditions, you know, how we’re thinking about that, what kind of programs we put in place, and the bank, the level of capital we have, you know, we like our position and every quarter, you know, we add to that. So I feel very comfortable as to where the bank’s capital position is. And buybacks are largely influenced by market conditions. It’s hard to predict exactly, you know, what those markets would be and then we’d adjust, you know, that you would expect us to do based on those conditions.

Meny Grauman: Got it. Thank you very much.

Bharat Masrani: Thank you.

Operator: Thank you. The next question is from Paul Holden from CIBC. Please go ahead.

Paul Holden: Thanks. Good afternoon. Wondering if anyone on the call would like to provide guidance on Gabe’s age?

Bharat Masrani: What’s the consensus? [Technical Difficulty] with that Paul. What’s the consensus?

Paul Holden: Sorry, I just had to roll with the birthday joke. Okay, so first serious question is, just looking at the PCL trends across the book of business, I’m just trying to figure out why U.S. Retail is increasing faster than Canadian Retail. Because I just look at the economic trajectories of those two economies and it looks like Canada is weaker than U.S. I’m just wondering if this is simply a matter of loan mix and maybe that is the simple answer. And then also maybe you can give me a sort of expectation going into 2024, again, given the different trajectories of the two economies?

Ajai Bambawale: So, I think you got to look at those over a longer period of time. So if I have the numbers in front of me, if I look at the full year, if PCLs are up both in Canadian P&C and in U.S. P&C. And if you look at impaired and performing, actually impaired and performing are both up, okay. But performing is greater in Canada and it’s for the full year. So what you may be seeing is maybe fluctuation between quarters and the reason for that is the Canadian consumer is more vulnerable in our view than the U.S. consumer, both from a leverage standpoint and also an exposure to interest rates. This quarter, I think there were some puts and takes and there was some divergence between impairs and performing between the two — the two segments. But I do feel the quality in both segments is good and we are adequately reserved in both segments. So I would just tell you to look at it over a long period of time.

Paul Holden: Okay, that vulnerability comment makes sense, thank you for that. And then a question, I guess for Riaz on the Wholesale Banking business. When I look at the current quarter, I understand that’s not the standard you’re operating to, but I see an ROE of 5%. You know, I guess last quarter was somewhere around 10% or 11%. What do you think is required to get this business to be ROE-neutral at the all-bank level or maybe perhaps ROE accretive over time and is that the fair way to think about it? Is this always going to be an ROE dilutive business?

Riaz Ahmed: No, I don’t think so, Paul. Like, you know, global trends for wholesale banks would say that ROEs tend to be in the 11% to 12% range through a cycle and, you know, full-year ’22, that’s kind of exactly where we were in the mid-11% range for ROE. I do think that as we gain the revenue synergies that we were talking about and get a more normalized expense ratio, that basically solves the issue. If you just do some normalizing math and just say, you know, if we think CAD1.5 billion, CAD1.6 billion of revenue per quarter, which is sort of the run rate of the full TD Cowen quarters in Q3 and Q4, and, you know, we’re going to get lift in that revenue as the markets become more favorable, as they have been in the last few weeks, we’re seeing nice momentum, a little bit of opening again, and we get our coverage models and our integration correct.

I feel very confident that we’re well on our way. So I think if we focus on what we said we would, which is expand our client base, deepen it, we’ve got a whole bunch of work to do with Leo on the middle market investment banking side to drive revenue growth. You know, I feel very optimistic about the potential for this — for the wholesale franchise.

Paul Holden: Okay. Last one from me, since expenses is very topical and you provided some guidance around expense growth, just and maybe it’s for Kelvin, how do you think about the efficiency ratio for this bank over time? Like, what do you think is the appropriate level? Because clearly in the short-term, you’re going to be somewhere above that target efficiency ratio and remind us of what your targets are? Your medium-term targets? And maybe based on your growth trajectory for this year and then 2% going forward, how long it may take to get to sort of the efficiency target?

Kelvin Tran: Yes. So the efficiency target is really dependent on the mix of business that we have, depending on which year, which business is growing faster than the other. Our focus is on delivering positive operating leverage in the medium-term. And we know that if we do that, our efficiency ratio will just continue to improve over time. So that’s the measure that we focus on.

Paul Holden: Understand. I’m sorry, did you include this in early commentary? The efficiency — sorry, the operating leverage for 2024, is that expected to be positive?

Kelvin Tran: No, our operating leverage target is medium-term. We don’t do that for — from year-to-year.

Paul Holden: Okay. Had to try. Okay, thank you.

Operator: Thank you. The next question is from Mike Rizvanovic from KBW Research. Please go ahead.

Mike Rizvanovic: Hey, good afternoon. I want to go back to Kelvin on the expenses. And, what I’m wondering is that second restructuring that you’re expecting next year, does that have a similar dynamic in a sense, that all of those savings will basically be offset by additional investments, or are you going to see that latter part fall to the bottom line?

Kelvin Tran: No, they have the same dynamics, because when we look at the expense savings, we look at the full program would generate about CAD600 million pre-tax, and for 2024 would be 400 pre-tax. And as you know, that would be lower than the amount of increase in expenses that we expect in risk and control in the corporate segment.

Mike Rizvanovic: Okay. So then, at some point down the line, maybe not until 2026, you would see your corporate loss come down to more normal levels. Is that how we should think about it? I know it’s far out, but is that a rough proxy?

Kelvin Tran: It is far out, but that’s what we’re targeting.

Mike Rizvanovic: Okay, perfect. And then just to follow up on that, so, I guess what I’m sort of wondering about is, you have all this excess capital, and I would have imagined that any sort of additional costs that you have to bear now, would be — you’d be able to sort of offset with some of that excess capital. So I’m wondering, why can’t some of these costs be capitalized? It seems like they’re all just going to be related to people and hiring new people to get you through whatever process you’re working on, is that — is that the case?

Kelvin Tran: No, the accounting would not allow you to do that. The capital and expense on the P&L are just two different concepts. So you cannot reserve expenses and offset that to capital. So when you add people, for example, it would just be going through your P&L line as an expense item.

Mike Rizvanovic: Okay. Okay. That’s helpful. Thanks for the color.

Operator: Thank you. The next question is from Nigel D’Souza from Veritas Investment Research. Please go ahead.

Nigel D’Souza: Hi, good afternoon. Thank you for taking my questions. Just a couple of follow-ups for you on your mortgage portfolio. First, to clarify a point that was made earlier, I think I heard that there was some credit migration related to mortgages that have hit the trigger rate that may be vulnerable or may be expected to hit the trigger point. And just want to clarify that’s referring to your negatively amortizing portfolio and those balances potentially, your customers hitting a trigger point, where the effective loan to value hits an 80% threshold for the uninsured, is that what you were referring to?

Ajai Bambawale: Yes, that is exactly what I was referring to.

Nigel D’Souza: So does that include an expectation of home prices to decline? I know your economics team has put out a forecast, I believe, for home price declines. Just wondering how that’s factoring in the outlook for the credit?

Ajai Bambawale: I think we are assuming if the rates remain the same, you know, and clients will reach an 80% threshold over the next 12 months, we’ll book them at a higher rate of reserve. It is a conservative calculation.

Nigel D’Souza: Right. So I guess what the question I’m asking is that 80% being hit by the balances increasing through negative amortization or a decline in home prices, or a combination of both occurring?

Ajai Bambawale: It could be a combination.

Nigel D’Souza: And then last question on your — on that portfolio, I noticed that the percentage of your book that’s negatively amortizing declined from 18% to 14%. And correct me if those numbers are inaccurate, but if that’s correct, could you provide some color on what drove that decline in negatively amortizing balances?

Ajai Bambawale: Yes. I think the way I would describe it is we are seeing positive payment actions by clients that are reaching trigger rates. And we reach out to those clients well in advance of them reaching trigger rate. And they’re responding positively by either making lump sum payments or moving to a fixed rate or increasing the P&I. So, again, from a credit perspective, I would — I would attribute it to positive payment behavior.

Nigel D’Souza: Okay, that’s it for me. Thank you.

Operator: Thank you. The next question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.

Sohrab Movahedi: Okay, thank you. I appreciate you taking the call. I know, you’ve gone over time here. Just a couple of quickies. Kelvin, what was the average price for the shares you bought back in the quarter?

Kelvin Tran: Well, we’ll get back to you. We have those disclosed. Yes.

Sohrab Movahedi: Okay. And then presumably, Bharat, you said it’s dependent on market conditions as to the pace I assume, if the share price ends up drifting lower than that average share price then you would pick up the pace, is that the right way to think about it?

Bharat Masrani: Well, I don’t want to, you know, create a formula for you, Sohrab. You know, we look at, you know, how the market is behaving, look at what those conditions are, look at the flexibility we have. A lot of factors go into how we think about this, but, you know, we’ve been buying back. Kelvin, you know, gave you the numbers and our intent — our current intent is to continue doing that, but as to the pace and how we do it, would depend on market conditions.

Sohrab Movahedi: Okay, thank you. And I appreciate the investments that are getting done in risk and control and I think the quantification of the expenses and the duration over which probably that has to happen. Is there going to be — do you have an estimate as to what sort of an impact that may have on your operational risk RWAs, and over how quickly we’ll see that sort of any impact, if any, you’re anticipating?

Kelvin Tran: The increase in spending for risk and control does not have an impact on operational risk.

Sohrab Movahedi: So you’re not anticipating any increase in your operational risk RWA outside of the spending?

Kelvin Tran: The operational risk capital would depend — could be impacted by other items like fines and stuff like that, but the increase in spending does not have an impact on operational risk capital.

Sohrab Movahedi: Thank you for squeezing me in.

Operator: Thank you. The next question is from Lemar Persaud from Cormark Securities. Please go ahead.

Lemar Persaud: Thanks. Most of my questions have been asked and answered, but I got a couple of quick ones here. Just wondering if you guys know the size of the restructuring charges that are to come in 2024, why not just put them through today?

Kelvin Tran: So, I’ll give you some examples. So when you look at real estate optimization, there are specific accounting rules on what conditions you need to meet in order to be able to take those charges and those would come over time. And so we expect some of that would be in Q1 or Q2, for example.

Lemar Persaud: Okay. So it’s not related to the impact that it would have on capital today, for example, it’s strictly due to accounting rules?

Kelvin Tran: That and you know, the pace of the program that we’re initiating.

Lemar Persaud: Okay. And then could you guys talk about or help me understand, which business lines are going to be most impacted by the 3% reduction in FTE?

Kelvin Tran: It’s pretty broad based.

Lemar Persaud: Okay. So just assuming it goes across all business lines would be a fair characterization of it.

Kelvin Tran: Correct.

Lemar Persaud: Okay. And then, just last one here in terms of the rapid-fire questions, I think last quarter you guys were guiding to flat margins in the U.S., but you had 7 basis points this quarter and then you guys are sticking with flat margin guidance again moving forward. What drove the surprise on U.S. margins this quarter? And why not offer a little bit more of a constructive outlook?

Leo Salom: Lemar, thanks for the question, and I’ll try to be constructive. Just — I wouldn’t say, it was a surprise, a couple of factors actually materialized in the quarter. First and probably foremost is that we had larger maturities and the tractor on rates, you know, generated a significant positive lift for us. That was one significant factor. The other is that, while we had made borrowing reductions last quarter, and you would have seen that in the spot reductions, the average value actually came through this quarter. So the combination of higher tractor on maturities and the impact associated with that and lower borrowings in the quarter actually gave us a bigger lift than what we had anticipated. And then to a lesser extent, and I want to be careful on this one, deposit migration, which was a factor in some of the pressure we saw last quarter, eased just a bit, and I would expect that to continue over the subsequent quarter.

So I think it was really the combination of those factors that yielded a slightly better margin profile. I would still say, that given market conditions in the U.S., given the uncertainty that still exists in terms of overall funding and liquidity positions, we feel quite comfortable with the guidance that margins are going to be relatively stable over the next quarter.

Lemar Persaud: I appreciate the time, guys.

Operator: Thank you. And we do have one last question, Darko Mihelic from RBC Capital Markets. Please go ahead.

Darko Mihelic: Hey, thank you for squeezing me in. I appreciate that. Just a couple of quickies. First, maybe this is for Kelvin. The U.S. business, I’m looking at it in U.S. dollars, what’s a reasonable tax rate, do you think for 2024 to think about with respect to our business?

Kelvin Tran: I’ll take that. So on an average basis right now, it’s sitting just under 20%, but at the margin, I would expect that number to be slightly higher.

Darko Mihelic: Slightly higher. Okay. Second question, Leo sticking with you, I may be looking at this incorrectly, but was there a benefit to your NII from the Schwab payment or was that put into corporate?

Leo Salom: No, it’s a very good question, Darko. There was a — there was a benefit in the cost. So let me just break those two out. We did — there was a breakage — one-time breakage fee that was paid by Schwab as they bought down flexibility in terms of the fixed rate obligations, which was a condition that we put into the agreement with them, and they exercised that in the quarter. So that would have given us a slight benefit in the quarter. It was more than offset by the decline in overall sweep balances and lower investment earnings and management fee earnings from the actual agreement itself. So net Schwab in the quarter for us from an NII perspective was a drag.

Darko Mihelic: It was a drag and essentially moving forward now, unless there’s other charges or something we should really assume that. I mean, what was that, is there anything you can provide to us in terms of — I mean, I think I can calculate the fee that they paid to you, but I can’t calculate all the negatives. Can you — is there a number you can put around the NII hit?

Leo Salom: Darko, we’ve traditionally not provided that number, but if you’re — but if you’re trying to get at, would we expect potentially balances to decline and there could be some revenue headwinds? Yes, and that’s something that we factored into our long-term plans.

Darko Mihelic: Okay. Okay, thank you. And last question for me, and I promise I’ll stop here. But again, a question on net interest margin. And maybe this is for Kelvin, but anyone can pipe in, I guess. When I stare at the sensitivity that you guys provide, and now I’m looking at it through the lens of falling rates, because I think that’s where we’re all heading. And it looks like your sensitivity has declined over the last six, seven quarters now with respect overall at the all-bank level, with respect to the sensitivity to falling rates, is this something intentional that TD is doing? Is there some sort of balance sheet changes occurring at the bank to reduce NII sensitivity? Or is this just simply normal course and the balance sheet structurally has just moved in such a way that you have less sensitivity to falling rates going forward?

Kelvin Tran: Yes. So I’d say it’s Kelvin here. Largely speaking, it’s a combination of a bunch of factors, like, as deposit composition mix changes from lower beta to higher beta deposit, then you actually see less sensitivity. And then also, as we look at tractoring maturities, we may find at the margin in locking forward tractors, and that may have an impact as well.

Darko Mihelic: Okay, thank you. So to confirm, nothing’s really changed, it’s just sort of a structural change with respect to the balance sheet. That’s helpful. Thank you, Kelvin.

Operator: Thank you. There are no further questions registered at this time. I’d like to turn the call back over to you, Mr. Masrani.

Bharat Masrani: Thanks very much, operator, and thanks everyone, for joining us today. I would like to take this opportunity to thank my colleagues around the world for the wonderful work they do for all of our stakeholders, including our shareholders. And given the time of the year, I’d like to wish them happy holidays and to you all on the phone as well, happy holidays and all the best, and see you next year. Thank you.

Operator: Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.