Q2 2022 Toronto-Dominion Bank Earnings Call
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Good afternoon, everyone and welcome to the TD Bank Group Q2, 2022 earnings conference call I would now like to turn the meeting over to MS. Brooke Shields. Please go ahead Ms Hills.
Thank you operator, good afternoon, and welcome to TD Bank group's second quarter 2020, Investor presentation. We will begin today's presentation with remarks from Mr. Han eat the bank's CEO after which Calvin Tran the bank's CFO will present, our second quarter operating results I J P. M. A wiley chief risk Officer will then offer comments.
On credit quality, after which we will invite questions from prequalified analysts and investors on the phone.
Also present today to answer your questions are Michael Roach Group head Canadian personal banking, Paul Douglas Group head Canadian business banking, Raymond Chen Group head wealth management, and insurance Leos, Geelong President and CEO TD Bank America's most convenient bank and react on that group had wholesale banking, please turn to slide two.
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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.
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.
Bank believes that adjusted results provide readers with a better understanding of how management views. The bank's performance merit 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 Q2 'twenty 'twenty report to shareholders with that let me turn the presentation over to Barrett.
Thank you Brook and thanks, everyone for joining us today.
Q2 was a good quarter for TD earnings were $3 7 billion and EPS was $2.02.
We had strong revenue performance up 8% year over year, reflecting increased customer activity and the benefits of our deposit rich franchise, we delivered approximately 200 basis points of operating leverage across the enterprise as we continue to see strong returns from our investments.
The bank's CET one ratio ended the quarter at 14, 7%, reflecting dd's consistent ability to generate capital organically.
Ken look as Kelvin will discuss in his remarks. This quarter, we are activating the drip discount as a prudent response to changes in the operating environment.
Our proven business model enables us to continue to deliver for our shareholders while building the better Bang for our customers colleagues and communities in the digital age let me now turn to each of our businesses and review some highlights from Q2.
Our Canadian retail segment earned $2.2 billion.
Revenue increased 9% driven by volume and fee income growth as customer activity continues to accelerate.
The personal bank had a strong quarter.
Out of our deposit franchise in this rising rate environment was amplified by significant growth this quarter with deposits up 7% year over year. Moreover, we are seeing strength in critical segments. For example, new to Canada going to acquisition is up more than 100% year over year.
In our real estate secured lending business, we are benefiting from our journey based approach and seeing progress in everything from advisor productivity to pipeline management, the account retention and in our branch network. We are seeing increased branch effectiveness and pull through and conversion rates.
<unk> business continued to perform very well God retail sales were up 22% year over year with a notable rebounded travel related spend.
Focus on creating deeper engagement and loyalty, we launched my T D rewards and new loyalty and rewards hub, where customers can easily access and redeem rewards and loyalty benefits online or on the go.
Through this platform customers will be able to take advantage of an integrated partnership with Starbucks, Canada, helping them unlock even more value on everyday purchases.
This partnership adds to our existing programs with Air Canada, Amazon Expedia, and Canada post as TD continues to collaborate with the biggest consumer brands in the world.
It was also a very strong quarter for the business bank with double digit growth in loans and TD auto finance ranked highest in dealer satisfaction among.
non-GAAP do lenders with retail credit by J D power for the fifth year in a row.
And our wealth business net asset growth and higher fee based revenue helped offset a moderation in direct investing trading volumes from the all time peak, we saw last year.
We've taken market share in both direct investing as measured by new accounts trades in revenue and private wealth management, demonstrating the strength of our offerings across investor segments.
And TD asset management led the banking industry mutual fund sales for the second consecutive quarter.
The competitive advantage of our insurance business were also added in the quarter as we strengthen our number one position in both the direct to consumer and affinity spaces. We also launched modernized cloud based contact center capabilities, including leveraging AI for intent based call routing.
We believe that this investment, which we plan to rollout more broadly across the bank over time will enhance customer experience and accelerate response times.
Turning to the U S retail U S retail bank earned $769 769 million U S dollars in Q2 <unk>.
Excluding PPP run a commercial loan volumes continued their momentum quarter over quarter with strong originations and increasing utilization rates credit card sales in auto loan originations were up 15% and 36% year over year, respectively, and we saw good retail deposit volume.
While benefiting from higher deposit margin in a rising rate environment.
To support commercial customers, we launched a pilot program with a leading fintech to automate cash management by embedding DD banking products and services directly into the enterprise resource planning and accounting software.
We added a general purpose mastercard to our offerings in targeted digital and store channels further growing our strategic card partnership belong beyond the store only red card.
We continue to innovate in the payments space This quarter TD Auto finance became the first indirect auto lender in the U S to offer real time payments throughout the day to a dealer clients nationwide rather than sending batch payments overnight a significant benefit for our clients.
And we launched <unk> home access mortgage new product designed to increase homeownership opportunities in black and Hispanic communities across several markets within our footprint. Didi also received an outstanding rating and has recently concluded community Reinvestment Act examination.
With the contribution from our investment in Schwab of 177 million U S dollars segment earnings were $946 million this quarter.
And we continue to make progress on our transaction with first horizon since the agreement was announced in late February our.
Teams in the U S have been hard at work.
Listening sessions and met with over a over 100 community groups across D. D and first horizon's footprints dd's commitment to local markets and our history of investment in the communities. We serve were well received and I am pleased by the broad support we've heard for the transaction, including letters of support.
<unk> by hundreds of community groups as part of the regulatory public common period process.
In our wholesale banking business, we delivered solid performance this quarter in a challenging market and geopolitical environment with earnings of $359 million driven largely by higher trading revenues.
This quarter TD Securities was named the overall Canadian fixed income service quality leader in the coalition Greenwich study for the fourth consecutive year and the business continues to be recognized with the investments we've made.
To strengthen our global platform and enhance the capabilities, we offer our clients TD Securities was top three and the overall commodities dealers category.
Of the 2022 energy risk commodity rankings and was number two and number two it base and precious metals respectively.
Reflecting our leadership and sustainable Finance DD Securities was selected as schools structuring adviser and a joint lead manager on the government of Canada's inaugural 5 billion Green bond issuance the largest Canadian Green bond issued to date.
The bank also says interim financed emissions targets this quarter.
<unk> net zero goals, we're focused on do high emitting sectors energy and power generations, and TD Securities will work closely with clients to support and enable their transitions to a low carbon future.
Overall as I reflect on the quarter I am pleased with the way we've navigated the rapidly evolving environment credit performance remained strong and we saw growth in our businesses. However, we're also seeing elevated uncertainty high inflation and increased risk of a potential economic slowdown.
With our disciplined risk management approach and sustainable business model D. D is well positioned to face the challenges and seize the opportunities that lay that lie ahead.
To continue to exceed the rapidly changing expectations of our customers. We've launched an initiative we call. The next evolution of work or knew for sure.
Historically, the operating model of most banks, including TD has been designed to support a smaller number of large scale initiatives. It has served us well. However, it is not designed for the volume of change we're driving today and fought for what we will need to drive in the future.
With new we are building upon our strengths by modernizing our operating model and technology capabilities. This includes focusing on customer journey to foster continuous improvement.
<unk> certain functions of the organization to maximize cross functional effectiveness, enabling new tooling and platform capabilities, including the use of the cloud.
Adopting agile at scale processes.
Keep ourselves the organizations have shifted to the new models, so far and we are seeing positive results, including faster time to market and greater efficiencies in how we are building and deploying technology. This.
This is enabling us to move at the speed of the market and introduce new offerings and services to our customers in a matter of weeks.
Still early days, but we are confident that we are on the right path.
TD also continues to lead the industry in AI innovation for the second consecutive year, our Canadian banking was honored by the business Intelligence group for AI powered insights developed by layer six are in the house.
TD was also recognized by sealant, a global research and advisory firm focused on technology for financial institutions as the winner of the 'twenty to 'twenty two models Bank award for customer engagement for our AI powered digital experience is intended to improve financial outcomes.
For our customers.
We are a world leading AI capabilities at D D and their applications extend far beyond banking last month, we were proud to announce our investment in signal one signal one will apply AI to help improve health care delivery for everyone. A clear need that has been amplified.
Throughout the pandemic.
COVID-19 also heightened our focus on the healthy facilities. This quarter, we were proud that <unk> achieved the world Health safety rating certification across our entire North American retail and corporate real estate footprint, one of only a few organizations globally to assess.
Despite their entire portfolio.
And TD Bank America's most convenient bank was recognized by Diversityinc as a top company for diversity for the 10th consecutive year and by Forbes as one of the best employers for diversity for the fourth consecutive year.
These awards only motiva motivate us to work harder as we strive for a more diverse and inclusive future.
TD colleagues will contribute to that future and we continue to invest in them as they are our most valuable asset. This quarter I was pleased to announce 3% theories or onetime cash award for the majority of our workforce below the vice president level.
After two years of effort through challenging circumstances. It is the right thing to do to deliver for all of our stakeholders. It is a privilege to work alongside our over 90000 TD bankers around the globe and I. Thank them for all they do every day with that I'll turn things over to Kelvin.
Kelvin.
Thank you Barrett good afternoon, everyone. Please turn to slide 11.
This quarter, the bank reported earnings of $3 $8 billion and earnings per share of $2.07.
Up 3% and 4% respectively.
Net earnings include the litigation settlement recovery.
Adjusted earnings were $3 $7 billion, and adjusted EPS was $2 in Tucson down, 2% and 1% respectively.
Reported and.
Adjusted revenue increased 10% and 8% year over year, respectively, reflecting.
Reflecting volume and margin growth in our banking business says hi.
Higher fee based revenue in our banking and wealth businesses.
In prior year premium rebates for insurance customers.
Partially offset by lower transaction revenue in our wealth business.
Reported revenue also includes an insurance recovery related to litigation.
Provision for credit loss was $27 million.
Expenses increased 5% year over year, reflecting higher spend supporting business growth and higher employee related expenses.
Partially offset by prior year store optimization costs.
Adjusted expenses also increased 5%.
Absent the retailers partners not share of the profits from the U S strategic card portfolio adjusted expense growth was six 5% year over year or six 6% ex FX.
Consistent with prior quarters Slide 25 shows how we calculate total bank P. T P P 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 change.
Reported total bank P. T. P. P was up 16% year over year before these modifications and adjusted P. T. P. P was up 11% after these modification.
Mainly reflecting higher revenues in our personal and commercial banking businesses.
Please turn to slide 12.
Canadian retail net income for the quarter was $2 $2 billion up 2% year over year.
<unk> increased 9%.
<unk> volume growth prior year premium rebates for insurance customers.
Higher fee based revenue in our banking and wealth businesses.
Partially offset by lower transaction revenue in our wealth business.
Average loan volumes rose 9%.
Reflecting 8% growth in the personal volumes, 16% growth in business volume.
Average deposits rose 8%.
<unk>, 7% growth in personal volumes.
10% growth in business volumes, and 10% growth in wealth deposit.
Wealth assets increased 4%.
Net interest margin was 262% up.
Up nine basis points compared to the prior quarter.
Primarily due to higher margin on deposits, reflecting the rising interest rate environment.
Total PCL of $16 million increased 727 million sequentially.
Total PCL as an annualized percentage of credit volume wise, 0.05%.
Two basis points sequentially.
Insurance claims increased 34% year over year, reflecting the normalization of claims partially offset by the favorable impact of a higher discount rate, which resulted in a similar decrease in fair value of investments supporting claims liability reported in non interest.
Income.
Noninterest expenses increased 9% year over year, reflecting higher spend supporting business growth, including technology and marketing costs.
Employee related expenses and variable compensation.
Please turn to slide 13.
U S retail segment reported net income for the quarter was $1 $1 billion.
Up 3% year over year.
Adjusted net income was $946 million down 10% year over year.
U S retail bank reported net income was $902 million up 6%.
Primarily reflecting higher revenue.
Partially offset by a lower recovery of P. C L.
U S retail bank adjusted net income was $769 million U S.
Down 10%, primarily due to a lower recovery of P. C. All partially offset by higher revenue.
Reported and adjusted revenue increased 12% and 3% year over year, respectively. As the business overcame lower income from PPP loan forgiveness.
Lower gains on the sale of mortgage loans.
With higher deposit volumes and margins and fee income growth from increased customer activity.
Reported revenue includes an insurance recovery related to litigation.
$177 million.
Average loan volumes decreased 4% year over year, reflecting a 4% increase in personal loans and an 11% decline in business loans are 3%, excluding PPP loans, primarily due to continued paydowns of commercial loans.
Average deposit volumes, excluding sweep deposits.
We're up 10% year over year.
Personal deposits were up 12% and.
And business deposits were up 7%.
Sweep deposits declined 7%.
Net interest margin was two point, 21% flat sequentially.
As higher deposit margins, reflecting the rising interest rate environment were offset by lower PPP loan forgiveness.
Lower loan margins and higher prepayment income in the prior quarter.
On slide 29, we've continued our disclosure on the impact of the PPP program.
This quarter Pvp revenue contributed approximately $28 million to NII and four basis points to name.
Most of the benefit of PPP revenue has now been realized.
Total PCL was a recovery of $15 million a decline of $32 million sequentially.
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 minus 0.04% lower by eight basis points sequentially.
Expenses increased 2% year over year, reflecting higher employee related expenses and business investments.
Actually offset by prior year store optimization costs.
Lower COVID-19 expenses and productivity savings in the current year.
The contribution from Td's investment and swap with $177 million.
One 9% from a year ago, Please turn to slide 14.
Wholesale net income for the quarter was $359 million, a decrease of 6% year over year.
<unk> higher noninterest expenses, and a lower PCL recovery, partially offset by higher revenues.
Revenue was $1 $3 billion up 8% year over year, primarily reflecting higher trading related revenue, partially offset by lower underwriting fees.
<unk> for the quarter was a recovery of $9 million compared with a recovery of $5 million in the prior quarter.
Expenses increased 10% year over year, primarily reflecting the continued investments in wholesale banking U S dollar strategy.
Clearly the hiring of banking.
Trading.
And technology professionals and the acquisition of TD Securities automated trading previously Heartlands Tech global market L. L C.
Please turn to slide 15.
The corporate segment reported a net loss of $151 million in the quarter compared with a reported net loss of $186 million in the second quarter of last year.
The year over year decrease reflects lower net corporate expenses and lower amortization of intangibles.
Corporate expenses decreased $25 million compared to the same quarter last year.
Adjusted net loss for the quarter was 70 $79 million compared with an adjusted net loss of $106 million in the second quarter of last year.
Please turn to slide 16.
The common equity tier one ratio ended the quarter at 14, 7% down 49 basis points sequentially.
We had strong organic capital generation this quarter, which added 45 basis points to CET one.
Capital.
This was more than offset by an increase in our W. E.
The impact of the repurchase of common shares prior to the first horizon acquisition announcement.
And the impact of a $494 million U S.
Men in first horizon convertible preferred stock, which accounted for eight basis points of CET one capital.
We are activating the drip discount for our upcoming dividend as a prudent response to a number of developments and uncertainties in the operating environment.
Inflationary pressures have led to greater volatility in interest rate markets and there is increased possibility of an economic slowdown.
Conversely should interest rates continue to rise, we would expect expanding margins for Td's Canadian and U S retail segment.
And higher fair value accounting adjustments upon closing of the first horizon transaction.
Which would result in a higher initial capital requirement and higher accretion of the fair value adjustments into earnings over time.
We also expect the Canada recovery dividend to have an adverse impact to see if you want.
All of these developments and uncertainties into account we believe it is appropriate to take steps to build our capital buffer to support continued business growth.
<unk> increased 4% quarter over quarter, mainly reflecting higher credit risk and market risk RW eh.
Credit risk <unk> increased $13 $9 billion, or 4%, mainly reflecting higher volumes in Canadian retail and wholesale.
Market risk <unk> increased $3 $6 billion or 18% reflecting market volatility.
The leverage ratio was four 3% this quarter.
And the LCR ratio was 119%, both well above regulatory minimums.
I will now turn the call over to RJ.
Thank you Kelvin and good afternoon, everyone. Please turn to slide 17.
Gross impaired loan formations decreased four basis points quarter over quarter to 12 basis points, reflecting higher prior quarter formations in U S commercial.
Largely related to government guaranteed paycheck protection program loans.
Please turn to slide 18.
Gross impaired loans decreased three basis points quarter over quarter to a new cyclical low of 30 basis points largely reflecting.
Further resolution of Paycheck protection program loans in the U S commercial portfolio.
Please turn to slide 19.
Recall that our presentation reports PCL ratios, both gross and net of the partner's share of the U S strategic Codpiece Hills.
We remind you that <unk> recorded in the corporate segment.
Fully absorbed by our partners and do not impact the bank's net income.
The bank recorded provisions of $27 million or one basis point this quarter <expletive>.
Decreasing by $45 million quarter over quarter, reflecting.
Lower impaired PCL loss and a larger performing allowance release.
Please turn to slide 20.
The bank's impaired PCL was 314 million decreasing by $15 million quarter over quarter and remaining at cyclically low levels.
Performing PCL was a recovery of $287 million compared to a recovery of 257 million last quarter.
The current quarter recovery reflects additional allowance releases across all segments.
Please turn to slide 21.
The allowance for credit losses decreased 231 million quarter over quarter to $6 9 billion or 87 basis points, reflecting improved credit conditions.
However, the release was tempered due to the increased economic uncertainty largely related to geopolitical risks and inflation.
The banks allowance coverage remains elevated to account for this ongoing uncertainty that could affect the economic trajectory and credit performance.
In summary, the bank continued to exhibit strong credit performance this quarter as evidenced by lower gross impaired loan formations gross impaired loans and <unk>.
While these key credit metrics remain at or near a cyclical low levels economic uncertainty continues to be elevated.
However, it 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're now ready to begin the Q&A session.
Thank you we will now take questions from the telephone lines do you have a question and you're using a speaker phone. Please lift your handset before making your selection.
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The first question is from Ebrahim <unk> from Bank of America. Please go ahead.
Good afternoon.
I guess Oh.
Just wanted to follow up on capital and better understand.
One maybe for Calvin just give us a sense of what the.
CET, one would be if rates stay where they are and where you want to close the deal today. If you could help us quantify that I'm just trying to.
Understand the game and whether what the initiation of the dip is just out of abundance of caution or.
Is there a meaningful hit so would appreciate if you could quantify what the impact would be.
The movement in interest rates and then a follow up tied to capital and just how you're managing the results.
Before Calvin picks it up Ebrahim. This is Barrett nice to hear you.
Just I know there's been lots of questions on this tailwind told me on the earlier calls as well just to give you a sense here you know historically in the bank. This particular issue you know, we don't go out and hedge because if you look at the underlying offsets we have in the bag.
<unk> itself. The net interest sensitivity is what happens to earnings when rates go up in this case, even earnings at first horizon, what happens to them when rates are rising and then finally as Kelvin said in his comment on this one this particular.
The transaction you know whatever.
Whenever there's additional fair value adjustment will be and it will be offset with the accretion that we would earn you know after we close the transaction. So just wanted to provide you with that sense as to how we think about this and this has been a framework for many many years and all the acquisitions, we've done well there maybe Calvin can help you with some of the numbers you were asking us.
Yes, hi, Thanks, Barrett I think in other words, we do have a natural hedge when interest rate rise because we see margin expansion in both our Canadian and U S businesses, including underlying earnings our first horizon.
But maybe I can just give you a more of a sensitivity measure because this number would move around.
It's about 50 basis points for every 50 basis point increase it's about a $350 million on an after tax basis.
That's extremely helpful and I totally get it in terms of its just.
A timing issue with.
It should come to the warning so over a period of time.
And.
Just on first horizon and one more question me they think the U S regulatory process has become a little more prolonged over the last year one of the.
Concerns at our U S D D uniquely that G SIB relative to the other bank M&A that's been announced.
Would love to hear your thoughts around one conviction level in terms of getting the deal through the regulatory sort of finish line and is.
Different than the other five transactions doesn't all dead because of being a G SIB.
Well I don't want to comment on what the other transactions out there might be but we feel very comfortable process continues and you know.
We did this transaction on the basis that regulate it meets all the requirements of all the regulators. So we continue to be comfortable and working hard to get it to closing.
And so I don't think it'd be appropriate for me to comment on you know how this compares to other deals out there because each one has its own unique feature.
That's fine and just one last for.
A J on reserves like you still have loan loss allowance, which is about $1 $3 billion more than pre COVID-19 levels, while $1 4 billion and we've seen some of your peers.
That was down to call it or below it is this entirely excess itself just because of the.
Uncertain macro backdrop and could destroy the warnings or is there something else going on with regards to make so how you perceive the portfolio.
Yeah no. Thanks for the questions in question and let me, let me respond to what I would say is.
Prudent from US there is uncertainty out there.
Horses as I said, even on the last call you don't aren't aren't changing.
Our allowance really account for this uncertainty that's out there having said that if the macro conditions improve and the uncertainty reduces then yes, we would be looking to release more reserves, but as you're aware the situation is quite fluid right now and you know what the future holds.
But to the extent.
We are in a recessionary scenario, where even in a stagflation kind of scenario you know.
It is possible we may have to build reserves I think at this point because we are seeing all this uncertainty, we're just being very prudent very careful thoughtful and deliberate in how we are releasing our results. So hopefully that helps.
That's helpful. Thanks for taking my questions.
Thank you next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Hi, good afternoon.
Personalized and you talked about like a lot of town halls, with senior executives and I'm back maybe at a high level have you learned anything on Neal Hot Springs.
Now cement that you could possibly share maybe in terms of people, our culture or anything like that and pass it onto LIFO in the second I attended some meetings with with the various groups.
And it was terrific to engage in TD <unk> TD Bank America's most convenient Megan DD generally.
As we have always been well received in the communities and our purpose is to enrich the lives are.
Not only of our customers and I got a little broader communities as well.
That has played well in all of these meetings was that but maybe Leo I can give you more color because leo was in various meetings himself and his whole team as well and can give you a bit of a color on on the meetings we've had.
Sure Scott. Thank you very much for the question.
We've we had the opportunity to essentially do a 15 town halls across 13 cities over over the course of the last four weeks and it's been it's been a terrific opportunity to get to know the.
The entire organization, we met with over 6000 employees I'd say, a couple things that stood out and I think more of it falls in the category of reaffirming our beliefs going in one. It's there's no question first horizon has a very strong commercial bank with very strong and deep ties in the local communities and that that came across in the talent in that spa.
We view is going to be very additive as we continue to build our commercial banking as we continue to try to grow the middle market space I think the distribution that they've built across the south east is very compelling they've got 412 branches, we got a chance to to to actually visit in many of those cities that are experiencing.
Orient seeing above average population growth and above average banking formation and I think we're quite excited about how we can bring our retail model to bear a model that served us very well in the east coast bring bring that to be able to grow the retail franchise and so I think that's.
That was quite a quite encouraging but I think probably the the thing that I would harp on the most is just the culture.
It's a it's an organization that's sorta humble is at its core but very ambitious in terms of what they want to achieve and very committed to serving you know.
Their clients and their local communities and I think that certainly resonates with us.
It's how we built our franchise in the U S and we look forward to bringing these two organizations together and really the time. That's been spent most recently is working very closely in our in our work streams to start to stitch together, what the combined organization is going to look like and I and I look forward to sharing some of our progress on that and.
On future calls.
Okay. Thank you.
Okay.
Thank you.
Next question is from many Grumman from Scotiabank. Please go ahead.
Hi, good afternoon, Steve.
Sticking to first horizon.
The community meeting is coming up for August and I'm wondering if any concessions are likely in that through that process.
The remainder is just make sure we understand what do you mean by concessions specifically I'm wondering specifically about overdraft could there be a scenario, where you have to do something more on overdraft fees overall for U S business is there a risk there for them.
Well I'll, let you answer, but I think there's always a community.
<unk> remains a pretty consistent installed at work and we would expect to follow a similar lane Leo do you have any further color on that so maybe I can just give you maybe just to go back to what I shared last quarter.
We are executing the overdraft a strategy that we shared with you before in fact on April eight we implemented the new minimum threshold for overdraft fees, increasing it to $50 and that was a that was a big part of the changes that we had proposed we've got a series of other changes planned for the fourth quarter.
The impact of those is tracking very much to what we shared in terms of the guidance that we provided provided last quarter. The only additional change that we've made in the interim and its unrelated to the first horizon quite frankly is the fact that we are going to go to zero on our NSF fees. So that was the one incremental change.
From last quarter's overall impact I cant quantify that for you it will be less than $40 million a year. So it's not it's not material on its own.
But those changes we believe that collectively those that we've announced last quarter plus the NSF fee puts us in a very competitive space and I think it provides our clients.
With choice and value. So we're quite comfortable with with the changes we've made from an overdraft standpoint, we are working just to your point on on the commute to discussions we have met with community leaders over 100 community leaders in five listening tours that was organized.
By the NCIC and those have been quite useful in and that'll be the that that input will be the the ground work for the actual community benefit agreements that will strike overtime, that's unrelated to the public hearing itself.
Got it and then just as a follow up in the U S business.
You highlight are the lower fee income from overdraft and overdraft changes in and then lower gains on the sale of mortgage loans and I'm wondering if you could break out the impact of both of those in and.
How we should think about that going forward as well.
I would say from an from an overdraft standpoint, we implemented April eight so it was a relatively small time series and.
The overall impact, which I shared with you last quarter was at the aggregate impact of all the changes was $250 million and to that you should add the $40 million number and that'll give you a sense of what the impact is going to be related to overdrafts with regards to some of the other changes prepayment and some of the gain on sale of mortgages really depends on market conditions. So I wouldn't.
I wouldn't necessarily read too much into it to the extent that market conditions change, we would certainly look to seeing those numbers and overtime I would say I do want to just.
Comment that as we continue to grow our wealth franchise as we continue to lean into growing our core checking account base and continue to accelerate the growth in our cards business, we would expect us to be able to generate fee income from those activities to be able to help compensate some of the some of the declines in the overdraft space.
Got it thanks, so much.
Thank you.
Thank you next question is from Sohrab <unk> from BMO capital markets. Please go ahead.
Yeah. Thank you just two quick ones here Neil you, obviously have spent a lot of time.
Since announcing the first horizon or U S.
April to also talk about where some of the quantify some revenue synergies that may be coming.
So thanks again for the question as I shared last time, we were together.
We didn't in our model, we Didnt put revenue synergies in the model now that said I do believe there's some really compelling opportunities as we bring our two organizations together, which will and that'll be generate no revenue synergies I think that I think top of that list is bringing our two commercial banks together.
Playing a much bigger role in the mid market space. When you combine some of their capabilities, our balance sheet and the TD Securities product based there's no question in my mind that that that would be that that would be a platform for us to be able to grow and grow at an accelerated pace over time I mentioned on the previous to the previous question the opportunity there.
Retail space I'm I'm I'm excited about what we might be able to do if you simply take the penetration rates that we enjoy today on some of our product sets and bring that to the first horizon basis that'd be another source of significant synergy that we can we can build so.
We'll work through those and certainly will try to prioritize that as part of our overall integration efforts. Obviously, we provided a $610 million expense guidance in terms of synergies, but we're equally going to be leaning in on these revenue synergies because I think it's it's exciting it will help us accelerate the growth of the French.
[noise] size overall.
Okay exciting, but not quantifiable yet is that the right way to think about it.
We're working through those but suffice to say that we're very optimistic.
Okay, and Calvin just for clarification the sensitivity.
I think the capital sensitivity you provided about $350 million.
Or at least 50 basis points I think in a.
<unk> was that in Canadian dollars or was that in U S dollars.
That would be in U S dollars.
So U S. III safety for every 50 basis points and fed rate hikes is that the right way to think about it.
Yeah.
Thank you.
Okay.
Thank you.
Next question is from Gabriel <unk> National Bank financial Please go ahead.
Just to clarify that one.
The $3 50, that's not a it's not an increase in goodwill or increasing C. P run consumption.
It would be an increase in goodwill, okay and when.
When you talk about the timing, where you make that up with our asset accretion overtime what.
What kind of timeframe is that on a three year time frame and five year time frame that you expect.
I'm trying to think maybe along the lines of about the duration.
Along the line the last situation typically four to five years got it.
Uh huh.
Expenses are you along with other banks, you've announced some wage hikes for most of your employees.
Wondering how the.
It plays out in terms of your near term and near term outlook in the near term outlook for.
Positive operating leverage and yeah, and our efficiency ratio improvement is it.
In all likelihood we could view of zero or you can leverage this in the second half or what.
Yeah. So when we look at operating leverage like we don't manage expenses on a quarter to quarter, it's more on a medium term basis.
And so we continue to work.
Work towards building positive operating leverage over that timeframe and to help you quantify the expense impact of the 3%, it's about $290 million on than our run rate annualized basis. Okay.
Sure.
Okay. Thanks for the answers.
Thank you.
Next question is from Nigel D'souza from Dara just investment. Please go ahead.
Thank you good afternoon I just had a quick question for you first just to clarify some of your information on slide 35, what's your onto value disclosure.
The HELOC ltvs on that slide just wanted to clarify that is inclusive of the mortgage balances.
Associated with those properties as well.
Yeah.
It should be yes.
Okay. So when I'm looking at those Ltvs, the HELOC ltvs actually below.
The LTV on your mortgage book, which is.
I Wonder if you could probably just following up because I would think borrowers with mortgages plus hillocks without higher ltvs and borrowers with just mortgages.
Okay.
We'll have to take that away.
But I have to look at the data and come back to you on that.
Oh, Okay sure. So if I could switch gears to.
Yoga allowances I can understand how a deterioration in forward looking indicators can lead to.
That's reversals or more built in provisions, but when I look at your stage two loans.
You have about 7% of your total.
Total loan portfolio sitting in stage two before the pandemic that was closer to 3%. So you're running at about two to three times your stage two pre pandemic stage two loan levels just wondering why.
Those loans still have been migrated to stage, one and what's preventing that migration.
Yeah. So.
We saw a lot of migration to stage two through the pandemic.
And I'd say over the last few quarters, we've seen a lot of migration back.
Not all the loans that migrated back because of the uncertainty out there and because of the macroeconomic scenarios. We're using would you got to keep in mind is the stage two loans don't district reflect delinquency numbers, but to the extent the macroeconomic scenarios drive different bdcs you at a different stage.
And all of your loans. So you know overtime as I said that the macro conditions improve we should see more migration and if the uncertainty reduces however that things could go the other way as well as I said you know, it's a it's pretty fluid right now the whole situation.
Okay, but fair to say that the stage two loans.
Higher PD then your stage one.
One loans.
Right.
Okay and looking at your forward looking indicator disclosure this quarter and when I look at the downside scenario you now have a scenario where we're.
This could move higher in the short term and a real GDP declines is that representative of your.
Stagflation scenario and how does that how does that impact your expected credit loss modeling this quarter.
Yes, our downside case is it almost stagflation.
Sure so higher inflation.
Lower GDP whats the second part of your question.
Does it impact your expected credit loss modeling in provisions for performing loans this quarter by introducing that scenario.
Yeah. So we didn't change the weight on the downside and if you look over all like the uncertain macro situation and the downside and the weight on the downside is a factor you know led us to actually temper the release, which is what we called out so overall macro between the base and the downside actually led to it.
Temporary relief.
Got it and then last question for me when I look at that downside scenario.
The assumption you have the home prices is about the same as your base case scenario despite rates moving higher in the downside scenario. So should we take that away as an expectation.
Our expectation that home prices are going to remain where they are not declining rates move up and that's a good that's a great question and thank you for calling it out and let me talk about housing just for a minute. So I think the starting point for housing is really two years ago and the big.
Increase that we've seen in house prices over the last two years I believe that number is 45% is actually a material risk mitigating for our book.
When we did our allowance scenarios.
And this is this is partly because of timing we did view that there would be some price growth both in the base and the downside case and the reason for that is there are many supporting factors.
<unk> unemployment income levels supply constraints.
And of course the.
Population growth.
Our house view however, there's been recent data in our house view has adapted and I'd say now we are expecting some correction in the housing market and some of that 45% gain that I talked about is going to recalibrate. So we would see some unwinding.
That in the coming quarters, and we did actually take that into consideration in our allowance process and put in an overlay, but what I drive comfort from is a few things one is our customer base and their risk profile is strong second underwriting standards haven't really changed and they've been through the cycle.
You know Todd is we are using a qualifying rate.
Okay stress red two to approve these loans and lastly, and this is an important point the job market is still very strong.
So we'll really look at it next quarter, but it's not like we completely ignore it in.
Those numbers did you call out it was a point in time, yes, and youre right in calling it out.
Okay, that's really.
Helpful. Appreciate the color that's it for me thanks.
Yeah.
Thank you Nick.
Next question is from Nomura Prasad from <unk> Securities. Please go ahead.
Yeah. Thanks for taking my call and hopefully just a quick modeling question to start off with here I think I heard in the opening remarks, there is either a 3% pay your age pay raise bore.
A onetime cash award I Wonder if you could split out how big the onetime cash award was in non interest expenses since presumably it would be non recurring in nature.
Yeah, Hi, it's Kelvin that's right.
Onetime cash award is only $10 million and it is one time.
Oh, Okay and causes a bunch of line. Okay. That's my real question here I, just want to come back to the discussion on capital, particularly as it relates to our first horizon I understand that you can get the benefits of additional accretion from higher rates or that national had you're referring to when the deal closes, but there's often take that into consideration.
Or would answer yet.
Can you one ratio, even if temporarily kind of touch the 10, 5%.
Hard to comment this is Barry.
Great question hard to comment on exactly how the regulators look at this but this has been our.
Traditional way of doing it and we've been prudent capital managers are real comfortable that not only will we close the transaction. The way we intended but we will have capital levels that will meet all regulatory requirements.
Yeah, maybe I can just clarify the AR so that.
The accretion.
Post day, one that would be and ought to capital post day one.
And then but what we talk about is the natural hedge is not just a post day, one as well rate increases during this period first horizon, we'd earn more revenue and so does the bank in terms of the Cam retail in the U S business and so all of that acts as a natural hedge as well.
Okay. Thank you.
Thank you next question is from Paul Holden from CIBC. Please go ahead.
Hi, good afternoon.
Sorry to belabor this point, but I'm going to ask a follow up question on this.
First horizon first time for value.
Adjustment so what happens if there is a possible scenario where.
Rates increase significantly between now and then.
And then.
Possibility that rates decrease thereafter would that therefore suggest you would take a goodwill impairment charge later on down the road and then thereby decrease your capital associated with the transactions that.
How to think about the natural hedge in that type of scenario.
It's Kelvin here.
The goodwill write down is a significant event and it's not just based on rates alone.
Like do you have to look at the entire business and the value that it generates so.
I wouldn't draw that conclusion between those two.
Okay, and so how do we think about you, earning that box and that type of scenario again rates rates move higher significantly in the next you know six nine months, but then you know if there is a recession, they're gonna they're gonna come back down yeah. So the way that this is really the accounting of the business acquisition. So on I'm going to get a little bit technical here, So bear with me.
So on closing what you do is you write down to fair value of the of the let's say the loans is at par and you write it down to $30 and over time that $70 would accrete to par 100. So all of that would get back to you as you collect that cash and would come into earnings.
I understand okay. Thank you for that.
So the other question I wanted to ask was just.
On your underwriting appetite today, you've been very clear in terms of how you're managing.
Your credit allowances and taking a conservative view you also made some comments about expecting housing prices, perhaps to decline here.
Does that mean, you decrease your underwriting appetite or really I guess tighten up your credit parameters today.
Yes, it's Jason so the simple answer is no we're not going to change our credit parameters I think you've heard from US many times we're.
Through the cycle underwriters and we'd like to keep our underwriting standards consistent and that's the intent. So we would not change our underwriting standards unless we thought there was going to be unexpected loss, so consistent underwriting standards should be expected.
From us the other sort of comment I'd make is that actually.
Seeing very good quality on our original book with its HELOC.
Residential mortgages, where like it if you look at delinquencies charge offs formations and gross impaired loans.
They are at historical lows and you look at our you look at our origination metrics you look at our customer quality just to scores.
There is very good shape.
Customers in very good shape. So I know things are changing and we need to monitor how things will change and how customer attributes may change and to the extent they change, we'll certainly factor it into our allowance process, but as of now we feel pretty good about the quality of our book.
Okay, that's great I'll I'll leave it there for now thank you.
Thank you next question is from Joe Ho Kim from RBC. Please go ahead.
Hi, Good afternoon, just a quick question on U S retail.
And wondering what you're seeing in terms of client demand and utilization for commercial loans.
But the rate of decline seemed to have slowed down and I think a part of that is the PPP impact diminishing I'm. Just wondering you know when we could start seeing that commercial loan growth pick up ahead. Thank you.
Thank you very much for the question.
You're right we did see.
Really an acceleration in terms of commercial lending in the quarter just to give you a sense gross originations increased 47% year on year and probably more probably more relevant is that we saw a slowdown in some of the pay down activities and line utilization, which is the number we do do pre.
<unk>.
Increased by 250 basis points. So you put those three factors together and have resulted in this strong in quarter spot growth of about 3%. So we're pleased with that and then if I can give you a little bit more color as to where because I think it's important we're.
We're seeing that growth in the in the middle market space and in our specialty lending businesses. So health care municipal nonprofit education some of the more established.
Verticals that we have but we're still not seeing it quite as much demand loan demand in the in the small business and sort of lower end of our community banking space.
And those I think those businesses are still trying to find their way post pandemic and so I think it's going to take a little longer to see some some of the growth that we'd like from those sectors, but I'm really pleased with what we saw in the quarter certainly from our established mid market in and specialty businesses and and I'm certainly encourage.
Now, there's you know to the point that to the point that Ajay raised there's plenty of uncertainty in the marketplace right now so I'm encouraged by it but we remain cautious with regards to the outlook.
Thank you and just a quick follow up on capital I'm, just I know there was a lot of discussion on that thought just a quick one given the discount on the drip M D.
The constructive I guess growth outlook ahead.
If you could speak to whether there was any change in where you see the CET one.
Ratio landing after the first horizon acquisition closes and if there's any change thank you.
Yes, hi, its Kelvin no we don't see any changes.
Okay perfect. Thank you.
Thank you.
Last question is from Darko <unk> from RBC capital markets. Please go ahead.
Thank you two questions.
One.
One is for for reacts I guess the other one that's maybe for Calvin maybe for Barrett.
And just going back to the scaffolding for for a moment when you announced the first horizon deal. You're you mentioned you know you terminated the NCI b, which makes sense.
But you didn't announce the drip then so what has changed from then until now.
Just sort of make you guys think about.
And employing the drip I mean.
I can think of one thing, which is maybe the federal budget, but.
I would've thought that the environment look pretty gruesome back then and rate increases were already factored into your thought process or just want to make sure that there isn't anything that I missed it like what has actually changed since February to now that that says you have to use the drip.
You see a lot of uncertainty out there Darko youll see the volatility in the markets. The volatility as you know this is a.
Quite intense.
And you know.
I think you know us we've been prudent here and we want to make sure then recovering up all the basis and we'd rather have this than other than to say all right. We will just get buys it. So for US. This is the prudent approach and it's the right thing to do given the uncertain environment, We live in and February since February things have changed.
The war is a reality in Europe , you see energy prices in all over the place. So there is a lot of volatility and as is usual from TD to address volatility and uncertainty at this stage, we wouldn't be prudent.
Is it too late to hedge now Barrett.
Yeah, no. It has not been our approach the natural way we look at it is that served us well and I'm sure. It will service well here as well. So we are quite comfortable with the approach we've taken.
Kelvin has explained to you the accounting and I know before this deal and each one of you are going to become experts in and purchase accounting and know exactly what the what are the puts and takes on this but we feel very comfortable to look at Tds net interest rates sensitivity. If that is what you're worried about looking first horizon's net interest sensitivity.
And then of course, the accretion that comes after closing so I think overall feel very comfortable but you know we own them and maintained in a particular level of capitalization given the volatility that we all of us are experiencing.
Okay, and a real quick question on TD Securities.
I I've seen now with all of them.
Sale businesses that we saw a pretty big increase in loans average loans on the balance sheet, but one thing that I always found odd with TD Securities. Though is is you've got a very low margin.
On that loan book once I take out the trading.
<unk> to your NII and it really fell quarter over quarter am I looking at that wrong or is there some sort of explanation as to why a little bit of loan growth causes such a big drop in the ER and the margin on those on those assets at TD Securities.
Yeah. Thanks for that Darko I look I think our I mean, our aggregate loan book.
$4 million has components of corporate lending prime brokerage securitizations.
Other semi.
Similar.
Product. So the margin that you would be looking at would be in <unk>.
The aggregate of those and and.
And then as we as cost of funds increase you can see.
That margin comes down a little bit in some areas, we're able to adjust our margins fairly quickly and in our corporate lending book as you know is probably maybe the last product that tends to adjust to margin. So.
So we're basically are just continuing to make sure that we're managing that book prudently and pricing it to make sure that we are.
Supporting the clients that we want to support them and earning the returns that we need to earn.
Okay. Thank you for that and I may follow up with you. Afterwards, just there may be a mechanism of my math behind why your margin is so much lower versus peers. So I'd love to have a follow up with a good. Thank you.
Your point on I guess, you know this is a good way to say never say never you know when I say you know, we're very comfortable with our position now, but I don't want to you know me yesterday in the clear window, where the wood markets might do so I'll never say never but very comfortable with the approach we've taken historically and where we are in the cycle based on what we.
See if we continue to feel very comfortable.
Okay, great. Thank you very much for that jurisdiction.
Thank you.
There are no further questions registered at this time I would like to turn the call over to direct Ms funny for closing remarks. Thank.
Thank you operator, and thank you all for joining us I know, it's been a busy day I appreciate everybody, taking the time and like I said before the end of this.
This year all of you are going to become experts on purchase accounting, which is great for everybody's benefit.
Once again, you know we have a very good numbers from TD I'd like to take this opportunity to thank our 90000 bankers around the world. They continue to deliver for all of our stakeholders, including our shareholders really appreciate everything they do and we will see you folks in the next 90 days. Thank you very much.
Thank you. Your conference has now ended please disconnect your lines at this time and thank you for your participation.
Okay.