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The Toronto-Dominion Bank (NYSE:TD) Q1 2024 Earnings Call Transcript

The Toronto-Dominion Bank (NYSE:TD) Q1 2024 Earnings Call Transcript February 29, 2024

The Toronto-Dominion Bank beats earnings expectations. Reported EPS is $2, expectations were $1.42. The Toronto-Dominion Bank isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, everyone, and welcome to the TD Bank Group Q1 2024 Earnings Conference Call. I would now like to turn the meeting over Ms. Brooke Hales, Head of Investor Relations. Please go ahead, Ms. Hales.

Brooke Hales: Thank you, operator. Good morning, and welcome to TD Bank Group's First Quarter 2024 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 Credit, the Anishinaabe, the Chippewa, the Haudenosaunee, and the Wendat Peoples, and is now home to many diverse nations, Métis and Inuit People. We also acknowledge that Toronto was covered by Treaty 13 signed with the Mississaugas of 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 Raymond Chun, Group Head, Canadian Personal Banking; Barbara Hooper, Group Head, Canadian Business Banking; Tim Wiggan, 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. With the move to the morning call, we will be ending promptly at 9.30 AM.

Accordingly, please limit yourself to one or two questions and then re-queue. Please turn to Slide 2. At this time, I would like to caution our listeners that this presentation contains forward-looking statements, and 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 and Kelvin will be referring to adjusted results in their 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 2024 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. Before we turn to our results, I'd like to welcome Tim Wiggan, Group Head, Wealth Management and Insurance, who is joining us for the first time. Ray Chun is also on the call, now in his capacity as Group Head, Canadian Personal Banking. At TD, we have depth of talent and a strong leadership bench. I'm confident both Tim and Ray will build on TD's many successes and deliver the next phase of growth in these important businesses. In addition, and speaking with many of you over the past quarter, I know there are questions relating to the Bank's investments in our risk and control infrastructure, including in our AML program. We are making comprehensive enhancements.

This is a priority for the Bank, and we take our responsibility seriously to live up to our high standards. We will continue to mobilize the required resources to strengthen our capabilities. This includes the appointment of proven senior leaders in anti-money laundering, external advisors with deep subject matter expertise and investments in technology, process redesign and training. We are accelerating investments in our risk and control environment, hiring hundreds of colleagues in these areas across the enterprise over the past two quarters. In short, we know what the AML issue is, and we are making progress in fixing it every day. I look forward to providing further updates as soon as I can. Q1 was a good quarter for TD. Earnings were $3.6 billion, and EPS was $2.

Revenue grew 5% year-over-year reflecting higher fee income and an improved macroeconomic environment for our markets-driven businesses, including the contribution from TD Cowen and higher volumes and deposit margins in Canadian Personal and Commercial Banking. PCLs were higher due to continued consumer credit normalization and commercial credit migration in line with our prior guidance. While expenses were up 12% year-over-year, reflecting the inclusion of TD Cowen, expense growth moderated on a quarter-over-quarter basis. We made progress on our restructuring initiatives, delivering efficiencies across the enterprise while continuing to prioritize investments in our risk and control infrastructure. The Bank's CET1 ratio was 13.9%, reflecting organic capital generation offset by an increase in RWA from strong volume growth and the impact of almost 21 million common shares bought back during the quarter.

In an uncertain market, TD remains well positioned from both a capital and funding perspective with the capacity to return capital to shareholders while supporting our customers and driving growth across our businesses. Last quarter, I highlighted TD Invent, the Bank's enterprise approach to innovation. We have reached a milestone. As of this quarter, TD has over 700 patents across Canada and the U.S. And for the third consecutive year, TD was recognized by the Business Intelligence Group in its Annual Innovation Awards, ranking highest in the organization and product categories for the TD Accessibility Adapter, a browser plug-in that helps make online experiences more inclusive. Let me now turn to each of our businesses and review some highlights from Q1.

In our Canadian personal and commercial banking segment, earnings were $1.8 billion, up 3% year-over-year, and PTPP was $2.9 billion, up 6% year-over-year. Expenses increased 6% year-over-year, reflecting higher employee-related spend and technology costs. We saw strong volume growth on both sides of the balance sheet, while delivering another quarter of segment NIM expansion of 6 basis points quarter-over-quarter. In real estate secured lending, TD recorded its eighth consecutive month of market share gains, and personal deposits grew 3% quarter-over-quarter. In everyday banking, we saw strong advisor productivity and record customer acquisition, with new accounts up 19% year-over-year and another strong quarter for new-to-Canada accounts.

In credit cards, we celebrated a 10-year milestone as the primary credit card issuer for Aeroplan, Canada's top airline loyalty program. Since TD Aeroplan credit cards were first issued in January 2014, we have delivered exceptional value to our customers, serving more than 1 million Canadians who together have earned over 300 billion points on their TD Aeroplan credit cards, enough to fly round-trip from Toronto to Los Angeles 3.5 million times. In business banking, we grew loans by 8% year-over-year. Small business banking helped over 165,000 clients conveniently repay their CEBA loans, providing over 70,000 pre-approved refinancing offers and almost $600 million in loans. And we saw growth in TD Auto Finance, reflecting strong performance in prime retail auto lending and accelerated acquisition of dealer relationships in our commercial business year-over-year.

Turning to the U.S. U.S. retail bank earnings were $752 million, down 26% year-over-year, and PTPP was $1.1 billion, down 17% year-over-year. Revenue declined 6% year-over-year, reflecting lower deposit volumes and margins partially offset by higher loan volumes and fee income. Expenses increased 3% year-over-year but declined 2% quarter-over-quarter as the bank's productivity initiatives helped offset higher employee-related costs and investments in business and control initiatives. PCLs were higher compared to last year, with the increase reflected in both the consumer and commercial lending portfolios. With the contribution from our investment in Schwab of $144 million [indiscernible] segment earnings were $896 million. The U.S. Retail bank saw continued loan growth while maintaining its through-the-cycle underwriting standards.

Loans were up 9% year-over-year, reflecting growth in mortgages, middle market, commercial lending and TD's proprietary bank card book. Quarter-over-quarter, deposit balances, excluding Schwab were flat and NIM compressed 4 basis points as the bank delivered balance sheet stability in a challenging market. TD Bank, America's most convenient bank is serving small business clients with innovative solutions. This quarter, we added tap to pay on iPhone, one of the first banks globally to launch with this feature integrated within our mobile app. We also enabled Zelle for small business, enhancing convenience and functionality through near real-time payment capabilities. And last month, TD Bank, America's most convenient bank announced a 3year community impact plan that will provide an estimated $20 billion supporting lending philanthropy, banking access and other activities for diverse and underserved communities across our U.S. footprint.

The Wealth Management and Insurance segment earned $555 million this quarter, flat year-over-year. The business earned through higher insurance service expenses with revenues up 8% year-over-year, reflecting insurance premium growth and higher fee-based revenue in the asset management and advice-based businesses. This month, TD Direct Investing was ranked as the number one direct investing brokerage in Canada by the Globe and Mailfor the second consecutive year. And we have now onboarded more than half of our eligible active trading clients on to TD active trader, the bank's completely redesigned platform for sophisticated active traders. We had a strong start to the year in TD Asset Management with several large institutional mandates across multiple geographies one and funded and we were proud that several TDAM managed funds were recognized with 2023 fund-grade A plus awards by fund data, reflecting strong risk-adjusted performance relative to industry peers.

Finally, in TD Insurance, we continue to build on our digital leadership with Canada's number one direct insurer with one in three customers now buying their insurance online from end to end. Wholesale Banking delivered record revenues driven by the segment's expanded capabilities coupled with improved market conditions. We are gaining share across U.S. M&A and equity capital markets as we leverage the power of TD Cowen. Expenses this quarter included a $102 million provision relating to the industry-wide U.S. record-keeping matter. Excluding this item, net income was $400 million, up 15% year-over-year. We are executing on one TD opportunities. This quarter, TD Securities and TD Wealth enabled fully paid lending to enhance returns for wealth clients.

And in partnership with TD Bank, America's most Convenient Bank, we began to issue equity linked certificates of deposit, broadening the suite of products available to clients in the U.S. TD Security has also continued to demonstrate its leadership in ESG acting as joint lead manager on TD's $500 million sustainable bond offering, International Finance Corporation's $1.5 billion social benchmark offering, supporting low-income communities in emerging markets and KFW AUD1.5 million green bond, the issuer's largest-ever transaction in the Australian market. Guided by our purpose TD is committed to creating value for all of our stakeholders. I'm proud that the bank was listed in the Dow Jones Sustainability Index North America Index for the 12th consecutive year.

A bank teller handling personal deposits with a smile at the counter.
A bank teller handling personal deposits with a smile at the counter.

TD was also recently named a 2024 S&P Global Sustainability Yearbook member awarded to banks in the top 15% of S&P's Corporate Sustainability Assessment worldwide. Last month, the TD Charitable Foundation launched its 18th annual housing for everyone grand competition. The competition will focus on organizations in the U.S., providing services to support independent living for marginalized community members, including rapid rehousing and permanent supportive housing or transitional housing. And in a few weeks, TD will release its 2023 sustainability reporting suite, including our climate action plan. We are excited to share the progress enabled by dedicated colleagues across the bank who transform our aspirations into action. It is a privilege to work alongside our TD bankers every day.

I would like to thank them for all they do to deliver for our shareholders and to make TD the better bank. With that, I'll turn things over to Kelvin.

Kelvin Tran: Thank you, Bharat, and good morning, everyone. Please turn to Slide 10. This quarter, revenue increased year-over-year driven by higher fee income in our market-driven businesses and higher volumes in Canadian and personal Commercial Banking. Expenses reflecting the inclusion of TD Cowen also increased year-over-year reflecting higher employee-related expenses. We moderated expense growth on a quarter-over-quarter basis and made progress on our restructuring initiatives and reprioritize our investment. PCLs were higher due to continued consumer credit normalization and commercial credit migration. As a result, earnings were $3.6 billion and EPS was $2, down 12% and 10% year-over-year, respectively. This quarter, we had a $0.06 impact from a provision related to the industry-wide U.S. recordkeeping manner.

We also adopted IFRS 17 this quarter. On Slide 26, you will see that we have updated our presentation of PTPP to show revenues net of insurance service expenses. Please turn to Slide 11. As I said on our Q4 2023 earnings call, in fiscal 2024, we expect run rate expenses, inclusive of the savings generated by restructuring program and investments to accelerate future growth to increase by approximately 2% year-over-year. For fiscal 2024, we expect adjusted expense growth in the mid-single digits, reflecting investments in our risk and control infrastructure and the impact of TD Cowen. This quarter, we incurred a restructuring charge of $291 million pre-tax. We continue to expect to incur restructuring charges in the first half of calendar 2024 and that are of similar magnitude to the restructuring charges incurred in the fourth quarter of 2023.

As I noted last quarter, the restructuring program is expected to generate savings of approximately $400 million pre-tax in fiscal 2024 and annual run rate savings of approximately $600 million pre-tax. Cost savings will be driven by a 3% FTE reduction, real estate optimization and asset impairments as we accelerate transitions to new platform. This will create capacity to reinvest. We are on track to deliver our FTE reduction target and targeted fiscal 2024 and annualized savings. Please turn to Slide 12. The Canadian Personal and Commercial Banking delivered a strong quarter, reflecting volume growth and margin expansion. Average loan volumes rose 7% year-over-year with 7% growth in personal volumes driven by real estate secured lending up 6% and cards up 11% and 8% growth in business volumes.

Average deposits rose 3% year-over-year reflecting 6% growth in personal deposits, partially offset by a 2% decline in business deposits as small business banking customers drew down on balances to repay their CEBA loans. Net interest margin was 2.84%, up 6 basis points quarter-over-quarter, primarily due to higher deposit margin. As we look forward to Q2, while many factors can impact margins, including tractor on and off rates and balance sheet mix, we expect NIM to remain relatively stable. Expenses increased, reflecting higher spend supporting business growth, including employee-related expenses and technology costs. Please turn to Slide 13. The U.S. Retail Bank delivered strong loan growth and operating momentum in a challenging environment.

Average loan volumes increased 9% year-over-year. Personal loans increased, reflecting lower mortgage repayments in the higher rate environment strong auto originations and double-digit growth in TD's proprietary bank card book. Business loans increased, reflecting good originations from new customer growth and slower payment rate. Average deposit volumes, excluding sweep deposits, were down 2% year-over-year and flat quarter-over-quarter as the U.S. retail bank demonstrated deposit resilience in competitive market conditions. Net interest margin was 3.03%, down 4 basis points quarter-over-quarter due to lower deposit [indiscernible] the cost partially offset by the benefit of higher reinvestment rates. As we look forward to Q2, 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 NIM to be relatively stable in the near term, influenced by similar drivers as those we saw this quarter.

Expenses increased year-over-year, reflecting higher employee-related expenses. The decline quarter-over-quarter as productivity initiatives helped offset higher employee-related costs and investments in business and control initiatives. Please turn to Slide 14. As I mentioned, the bank adopted IFRS 17 this quarter. We appreciate that analysts and investors may have questions on the financials and presentation impacts of this change. We have added Slide 35 to this presentation to assist in this regard. Fiscal 2023 results have been restated to reflect this new standard. Wealth Management and Insurance delivered good performance this quarter, reflecting the strength of the segment's diversified businesses. Net income was flat year-over-year as higher revenue was offset by higher insurance service expenses and non-interest expenses, reflecting higher variable compensation commensurate with higher revenues.

Like peers across the industry, we have seen deposit flow into GIC and other products in the high-rate environment. That trend has begun to moderate. We are also executing upon initiatives to help ensure TD retains that flow in-house and captures flows from other institutions. Assets under management increase year-over-year, reflecting market appreciation and assets under administration increased year-over-year, reflecting market appreciation and net asset growth. Please turn to Slide 15. Wholesale Banking delivered record revenue. Net income for the quarter was $298 million, down 14% year-over-year. Excluding the impact of the $102 million provision related to the industry-wide U.S. record-keeping matter, net income was $400 million, up 15% year-over-year.

Revenue, including TD Cowen was $1.8 billion, up 32% year-over-year, primarily reflecting higher equity commissions, lending revenue, primarily from syndicated and leveraged finance underwriting fees and trading-related revenue. Expenses increased 60% year-over-year, reflecting the provision I mentioned as well as higher repo compensation commensurate with higher revenues. Excluding this provision, expenses increased 49% year-over-year, reflecting the inclusion of TD Cowen, which closed March 1st last year. Please turn to Slide 16. The corporate net loss for the quarter was $218 million compared with a net loss of $140 million in the first quarter last year. Net corporate expenses increased $63 million compared to the prior year mainly reflecting investments in our risk and control infrastructure.

Please turn to Slide 17. The Common Equity Tier 1 ratio ended the quarter at 13.9%, down 49 basis points sequentially. Internal capital generation was offset by an increase in RWA excluding the impact of FX, primarily reflecting volume growth. We continued our NCIB this quarter and have now completed almost 50% of our $90 million share buyback program. Regulatory changes, which included the fundamental review of the trading book and negatively amortizing mortgages decreased CET1 by 17 basis points this quarter primarily reflecting an increase in market rates. With that, Ajai, over to you.

Ajai Bambawale: Okay. Thank you, Kelvin, and good morning, everyone. Please turn to Slide 18. Gross Impaired Loan Formations increased by 4 basis points quarter-over-quarter to 22 basis points, driven by the Canadian commercial lending portfolio largely related to one file in the automotive industry and continued normalization of credit performance in the consumer lending portfolios, including some impact of seasonal trends in the U.S. cards and auto portfolios. Please turn to Slide 19. Gross impaired loans increased 4 basis points quarter-over-quarter to 40 basis points driven by the commercial and consumer lending portfolios, partially offset by a reduction in wholesale banking. 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 provision for credit losses increased 5 basis points quarter-over-quarter to 44 basis points. The increase is largely recorded in the U.S. retail, corporate and Canadian personal and commercial banking segments. Please turn to Slide 21. The bank's impaired PCL was $934 million, an increase of $215 million quarter-over-quarter, largely related to continued credit normalization in the consumer lending portfolios, including some seasonal impact in the U.S. cards and order portfolios. And credit migration in the commercial lending portfolios across various industries. Performing PCL decreased 92 million quarter-over-quarter to 67 million. Current quarter performing provisions were largely recorded in the Canadian Personal and Commercial Banking segment.

Please turn to Slide 22. The allowance for credit losses increased by 79 million quarter-over-quarter to 8.3 billion due to current credit conditions, including some credit migration across the lending portfolio and volume growth, partially offset by a 122 million impact from foreign exchange. The bank's allowance coverage remains elevated to account for ongoing uncertainty relating to the economic trajectory and credit performance. Before I conclude, I will make a few additional comments about the loan portfolio. Key credit metrics in our consumer lending portfolios are now broadly at pre-pandemic levels as rising unemployment and elevated interest rates have presented challenging conditions for consumers. Notwithstanding current conditions, performance of our Canadian result portfolio reflects its strong underlying credit quality as impaired PCLs remain at less than 1 basis point.

And we see continued reductions in the negatively amortizing population. Moving to non-retail. The wholesale segment continued to perform well with no new impairments over the past two quarters. Canadian and U.S. commercial gross impaired loans and PCLs have risen over the past year from cyclically low levels. Consistent with the economic trajectory. Pressure on the commercial real estate office segment is expected to persist, and we continue to bolster our reserves as appropriate. The bank's exposure to the office segment remains small. To conclude, the bank exhibited good credit performance this quarter with PCLs in line with our prior guidance. Looking forward, I continue to expect PCLs for fiscal 2024 to be in a range of 40 to 50 basis points, although results may vary by quarter and are subject to changes in economic conditions.

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

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