Q4 2023 The Toronto-Dominion Bank Earnings Call
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Good afternoon, everyone and welcome to the TD Bank Group Q4, 2023 earnings Conference call I would like to turn the meeting over to MS broke Hales. Please go ahead Michelle.
Thank you operator, good afternoon, and welcome to TD Bank group's fourth quarter 2023 investor presentation.
Joining today's meeting from lands across North America, North America is known as true islands by many indigenous communities.
I'm currently situated in Toronto.
I would like to begin today's meeting by acknowledging that I'm on the traditional territory of many nations, including the Mississauga doesn't have to credit.
The Chippewa hardness Shoney and the wind up people and is now home to many diverse nations may Tee and Inuit peoples. We also acknowledge that Toronto is covered by Treaty 13 signed with the Mississauga that the credit and the Williams treaties signed with multiple Mississauga and ship a y band.
We will begin today's presentation with remarks from Barrett Ms Ronni, the bank's CEO after which Calvin Tran the bank's CFO will present, our fourth quarter operating results.
Wally 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 micro roads group head Canadian personal banking, Barbara who bears group head Canadian business banking, Raymond Shine group head wealth management and insurance.
I'm, President and CEO TD Bank America's most convenient bank and react on that group had 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 performance. The bank believes that adjusted results provide readers with a better understanding of how management views. The bank's performance, Eric 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 Barry.
Thank you Bruce and thank you everyone for joining us today.
Before I begin I want to say, how saddened we heard about recent events in the world and close to <unk>.
He has contributed $1 million to support urgent humanitarian aid in Israel in Gaza as well as the local organizations in North America that combat the rise of racism and hate it T D. We stand against anti-semitism and Islamophobia.
For 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 did.
<unk> contributed 200000 U S dollars.
Those affected with the largest bank in the state we know that maintenance is a 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 $3 $5 billion and EPS was $1 83.
Revenue grew 8% year over year, reflecting margin expansion and loan volume growth the contribution from TD carbon and the strength of our diversified business model D. C. S were higher as credit continued to normalize as expected.
This quarter expenses increased driven by variable compensation and the inclusion of D. D Cohen.
More generally we recognize that the bank's cost base is higher than it should be we are undertaking a broad based restructuring program to deliver efficiencies and drive profitability across the enterprise.
As Ken as Kevin 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're pursuing meaningful revenue opportunities across our businesses, we outlined our strategy to accelerate growth in our Canadian retail businesses at our recent Investor day, and the acquisition of D. D. Gawain provides additional capabilities what do you do 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 base.
The banks do you one 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 D. D 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 6% dividend increase bringing our dividend to $1.02 per share.
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 big the best Consumer Digital Bank in North America for the third year in a row. We're also leveraging advanced technologies, including <unk> and have been granted 55 patents relating to AI inventions since two.
And 18.
This quarter our in house team layer six one of the annual ACM Rexes 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 $1 $7 billion down 1% year over year and P. T. P. P was $2 $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 four basis points.
In the personal bank everyday banking delivered a record quarter for new to candidate goes as <unk> continued to make progress towards our medium term target of 50% growth in new to get at 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 recognize D D with more awards in 'twenty to 'twenty three 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.
To help Canadians unless tax free for a down payment on their first home this quarter D. D launched first home savings accounts.
The businessman grew loans by 9% year over year and small business banking, we are focused on helping clients refinanced their ciba loans in advance of the upcoming partial forgiveness deadline.
And the bank continue to execute on its one TD strategies more than doubling the number of senior private bankers school located in OCA.
She'll banking centers or the last two quarters.
Turning to the U S. U S. Retail bank earnings were 800 million U S dollars down 17% year over year, and <unk> was 1.1 billion U S dollars down 13% year over year expenses increased 6% year over year, reflecting higher legal and.
Regulatory costs 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 seven basis point increase in NIM.
With the contribution from our investment in Schwab.
146 million U S dollars segment earnings were 946 U S dollars 946 million U S dollars.
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 U S Bank card business, new accounts were up 45% year over year as our product suite continue to resonate with customers.
And for the seventh year in a row. The bank ranked number one in small business administration lending it is Maine to Florida footprint and ranked number two in SBA loans nationally.
<unk> 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 tabs and more severe weather related events.
Private investment advice D D gained market share year over year and ranked number one among Canadian banks in net new asset growth is the big makes progress towards our Investor day targets.
And TD direct investing we launched D. D active trader this quarter the banks can click completely redesigned platform with sophisticated active traders offering leading capabilities unmatched in the marketplace and.
And TD direct investing was recently named the best Canadian brokerage, but then Zynga, a leading financial media company.
Finally at 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 $178 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 DDA 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 DD Securities a D. D Cohen with the combination of our U S institutional equities and convertible businesses to deliver even better outcomes for our clients and strengthen our brand and 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 to profitability.
Well fiscal 'twenty 'twenty four it will be challenging to meet our medium term adjusted EPS growth and our ROE objectives as the Bang navigate the complex macro and economic environment expect expected further normalization in BCS and elevated expenses, including investments to enhance the bank's risk and can.
Troll 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 T D and indigenous communities in Canada, 2023 report, which highlights the bank's collaborations with first nation may Tee in India.
Good people and communities.
We also opened a new branch in the province of Alberta on the lands of the suite in our nation stopped entirely by indigenous peoples.
In addition, the bank continued to focus on energy transition earlier. This month did he announced an agreement with 1.5 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 of 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 Kevin.
Thank you Barak and good afternoon, everyone. Please turn to slide 10.
For 2023, the bank reported earnings of $10 $8 billion, and EPS of $5.60 down, 38% and 41% respectively.
Adjusted earnings were $15 $1 billion, and adjusted EPS was $7.99 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 sell of Schwab shares and margin growth in the personal and commercial banking businesses.
<unk> revenue increased 12%.
Reported expenses increased 25%, reflecting higher employee related expenses, including TD Cowen.
The Stanford litigation settlement, and higher acquisition and integration related charges, including charges related to the terminated first horizon acquisition.
Adjusted expenses increased 13%.
Reported total bank P. T. P. P was down 19, 1% year over year.
Consistent with prior quarter Slide 28 shows how we calculate adjusted total bank PT pp and operating leverage removing the impact of the U S strategic park portfolio, along with the impact of foreign currency translation and the insurance fair value charge adjusted total bank P to P. P was up seven point too.
After the quantification.
Please turn to slide 11.
Td's restructuring program has been enabled by the banks consistent investments in technology and digital capabilities.
This quarter, we undertook certain measures to reduce the bank's cost base and achieve greater efficiency.
<unk> in a restructuring charge of $363 million pre tax.
We expect to.
To incur additional restructuring charges of a similar magnitude in the first half of calendar 2024.
The restructuring program is expected to generate approximately $400 million pre tax savings in fiscal 2024, and an annual run rate savings of approximately 600 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 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 $2 $9 billion, and EPS of $1.49 down, 57% and 15, 9% respectively.
Adjusted earnings were $3 $5 billion, and adjusted EPS was $1.83 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 swap chairs 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.
Adjusted total bank P to P. P was up one 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 $1 $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 volume.
Average deposits rose, 2%, reflecting 5% growth in personal deposits, partially offset by a 3% decline in business deposits.
Net interest margin was 278%.
Up four basis points 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 rate and balance sheet mix. We expect net interest margin to remain relatively stable.
Noninterest 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, it was $946 million down, 19% and 21% year over year.
U S retail bank reported an adjusted net income was $800 million U S down, 14% and 17%, respectively, reflecting higher non interest expenses.
PCL and lower revenue.
Reported net income in the fourth quarter of last year included acquisition and integration related charges for the terminated first horizon transaction.
Revenue decreased 3% year over year, reflecting lower deposit volume low 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 three point or 7%.
Up seven basis point 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.
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 dose we saw this quarter.
Reported expenses increased 3%, reflecting higher legal expenses regulatory expenses and investments.
<unk> 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.
Wealth management and insurance net income for the quarter, it was $501 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.
Noninterest income increased 10%, reflecting higher insurance premiums and 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 claims 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.
Noninterest 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 $17 million and and $178 million, respectively, reflecting higher noninterest expenses offset by higher revenues.
Revenue, including TD Cowen was $1 5 billion up 28% year over year, primarily reflecting higher equity commissions advisory and equity underwriting fees and loan underwriting commitment markdown in the prior year.
Reported expenses increased 80% and include acquisition and integration related charges for TD Cowen.
Adjusted expenses increased 59%, reflecting investments to grow TD Cowen and our U S business. Please.
Please turn to slide 17.
The corporate segment reported a net loss of.
$591 million in the quarter compared with net income of 2.6 hundred $61 million in the fourth quarter last year.
I'm, sorry, 2000, and $661 million in the fourth quarter of 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 south of Schwab shares.
And restructuring charges in the current quarter.
Other items decreased $83 million, primarily reflecting the favorable tax impact of earnings mix 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.
Adjusted net loss for the quarter was $133 million compared with an adjusted net loss of $10 million in the fourth quarter last year.
We have sat in the past that our run rate expectation for adjusted net losses in the corporate segment is approximately $100 million to $125 million per quarter.
For fiscal 2024.
Although it may bounce around we expect adjusted net losses to increase to $202 million to $250 million per quarter, driven by investments in our risk and control infrastructure.
These investments, which may expand 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 one ratio ended the quarter at 14, 4% down 81 basis points sequentially.
Internal capital generation added 27 basis points to CET, one this quarter.
This was more than offset by an increase in <unk>, excluding the impact of FX, which decreased CET, one by 33 basis points.
We repurchased almost <unk>.
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 <unk> by 62 basis points.
57 basis points from the share buyback itself and five basis points from the impact of lower capital base has on the portion of our swap investment that exceeds our regulatory thresholds for non significant investments.
Our restructuring program decreased to 81 by five 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 CET. One so that's one 5% 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.
<unk>, including the impact of FX increased four 8% quarter over quarter, reflecting higher credit risk due to volume growth in credit conditions, including some credit migration.
The leverage ratio was four 4% this quarter and the LCR ratio was 130% both well above publish regulatory minimums.
And with that RJ over to you.
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 U S commercial and Canadian and U S consumer lending portfolios.
Were partially offset by reductions in Canadian commercial and.
Wholesale banking.
Please turn to slide 20.
Gross impaired loans increased $319 million quarter over quarter to $3 3 billion or 36 basis points.
Driven by the impact of foreign exchange and the U S 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's share of the U S strategic card Bcl's.
We remind you that U S card PCL 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 four 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 banks 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 $719 million, an increase of $56 million quarter over quarter.
Largely related to further normalization of credit performance in the Canadian and U S consumer lending portfolios.
Performing PCL was 159 million.
With a quarter over quarter increase of $56 million driven.
Driven by wholesale banking and the Canadian commercial lending portfolios.
Please turn to slide 23.
The allowance for credit losses increased by $415 million quarter over quarter.
Two $8 2 billion or 89 basis points due to a 214 million impact of foreign exchange.
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 a 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 PCL as in fiscal 2024 to be in a normalized range.
40 to 50 basis points.
To conclude.
D D remains well positioned given.
We are adequately provisioned.
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.
Thank you we will now take questions from the telephone lines. If you have a question on using a speaker phone. Please just your handset before making your selection. If you have a question. Please press star one on your devices keypad canceled a question. Please press star two please press star one at this time, if you have a question Daryl.
Be a brief pause all participants register thank you for your patience.
And the first question is from Gabriel Mcshane from National Bank Financial. Please go ahead.
Alright.
Good afternoon can I clarify some of these are expense comments.
You've been making a I heard something about 2% increase and I didn't quite follow what that was tied to but what will clearer to me and thank you for quantifying that but the no additional investments will be increasing your loss in corporate from previous guidance of 100 to 125 to.
200 and 250.
Per quarter, I believe and I could actually persistent with 2025.
Ryan.
Correct, yes.
That's correct.
When I said, the 2% that kind of in terms of a normal run rate that we expect after our restructuring savings and then but the total bank expect that.
Expense growth would be in the mid single digits.
Okay. So after restructuring you if if nothing else is going on and you would expect a 2% expense growth of 24, but then these additional costs you are in the mid single digits.
Yeah, Okay. Okay.
Okay I understand quickly you just have to explain slowly sometimes.
The.
One thing I wanted to ask about is the you know as one of your competitors today about the NSF fees because there. The government is taking a look at these the fees in Canada and you know.
Your bank has been through that experience in the U S.
Is the I'll call. It my word dependence or reliance on overdraft fees and your Canadian Bank.
As material as it was in your U S Bank.
Yeah, There you go.
Let me take this.
Question and this.
This is Michael.
The.
With respect to the Oh, you know what the impact would be it price might be surprised to say lots, we don't know now Oh there'll.
It will be premature for us to comment about the potential impact at this time.
And then in terms of relative dependent some of them killed.
Kelvin or really on that and I'm not sure I've got a point of view on the relative dependents.
And my my word not yours.
Errors, but are in the U S. There was around five 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 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 in.
In your forward view it it's very hard for us to give you any guidance on that right now okay. Yeah, I've got a boddington mine, but I just wanted to follow.
Just reword it.
And then Oh on the AML issue I know you don't want to talk too much about her at all about the AR, but the what's going on between you and the you know the.
A regulator or whatever.
And I understand that completely but when I look at the disclosure on reasonable probable walls are Q3. It was so for outstanding litigation or regulatory matters.
Last quarter was zero to 1.26 billion in this quarter zero to one four for a bit of an increase I'm wondering is that at all reflected in the in the therapy all figure.
As this issue for.
I gave you gave this is better I don't think we disclose specific cases, I don't think that would be reasonable.
If I'm mistaken then we'll clarify that even after this call with you, but my understanding is we don't disclose specific cases okay.
And the last one I'm sorry, it's a few questions my birthday, so I'll be able to tell us what it gave us.
The FDIC assessments of your peers are kind of hard I don't recall, if you have.
Gabriel Hi.
First of all did I hear that it's your birthday.
Yeah Yeah.
So lucky to have three bank reported in your mind going over what my Boyfriend's Tonight. So that's great.
Happy birthday, I imagine you'd probably be in a you.
I would like to be doing something else right now, but let's see.
Let me just answer the question quickly.
On the FDIC assessment, we're estimating that the impact will be approximately $300 million. Our intent is to reflect that in the in the first quarter of next year and take it as a lump sum item yeah.
And and that's our approach at this point.
That number you would have seen the total F T I C cost of recovery at the FDIC announced with $16 $3 billion.
A little bit from the original estimate so that's how we get to our number of 309.
Up U S pretax.
Yes. It is.
Thank you and enjoy the rest of the week.
If he birthday again.
Yeah.
Thank you. The next question is from Doug Young from Deutsche Bank Capital markets. Please go ahead.
Yeah.
Good afternoon, and happy birthday Gabriel.
Just on the just on the.
The set one ratio the reduction part of the reduction it looks like it came from credit quality and and I assume that migration, but my rough calculation gives me about an 18 basis point reduction.
And in the set one 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.
Yeah, it's it's RJ, so I'm happy to provide that color. So if you look at our total our W. Eight increased $26 billion and you're right.
7 billion off that two.
<unk> six is from asset quality.
And that relates to migration.
Some of it is coming from Canadian consumer.
In Brazil, and in and in auto and there's some coming from U S retail from commercial auto in Cogs and mostly the problem.
Probability of default.
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 credits to stage two so for example in Canada. If there's a client that has reached trigger point, we would move even though they are paying we would move them to stage, two and and basically.
A higher allowance rate for them.
Similarly, the trigger rate population.
We believe that will reach trigger point in the next 12 months will be fairly conservative move them to stage, two and build higher reserves. So.
Some of that is driving the asset quality number of $7 billion.
And maybe just like looking forward.
As you can look at your PCL expectations in the evolution of the economic environment any way to kind of get a sense of what we should be expecting impact wise on set one ratio from from migration.
This quarter, that's what I'm just trying to understand.
I can't comment specifically on the set one but you would have seen from my PCL guidance that we expect to see continued normalization of our credit portfolios. The 40 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 our W is also to raise.
Okay.
And then in the U S Bank I mean, it was a decent drop in noninterest income and can you talk a bit about what drove that and is this kind of a normalized run rate in <unk>.
And then Kevin I think you've talked about various one time items that flow through expenses.
I think these are the items of note that you back out at the top of the house in terms of driving cash EPS, just helping to make sure that that's the case.
So Doug let me take the first part of that with regards to the fee income to were really two factors that played into the drop in the fee income. One is just the drop in value in certain certain investments specifically, our low income housing tax credit portfolio that tends to move around quite a bit not as predictable.
So we did see a bit of a write down in value on on that portfolio in the quarter. The second one.
Is a drop in overdraft fees, but specific it's related to our remediation effort around a specific type of overdraft fee. That's referred to in the industry is authorized positive settle negative and we took a reserve for client remediation in the quarter. It is a one time charge them.
And so as you think about it.
Our normalized fee income number force 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.
Okay, and then those two items I assume all of them went back to them.
Alright, those are part of the adjusted earnings none of them are an item of note.
And that those two items are impacted and then the other the other items that you mentioned Calvin like the restructuring charge and other.
Other investments that seem to flow through in the U S. I can confirm this offline, but those are those are in the Kashi P. S are back to those are backed out so the restructuring charges would be considered item of note in those are backed out of those.
And then if I could just squeeze one last one in maybe for me is a big increase in capital market expenses, adjusted I think Calvin talked a bit about some some items here can you maybe just shed some light on what's what's going on to the expense line there.
Yeah, Doug I think look no doubt that we'd.
We'd have to characterize this is a tough quarter for our TD securities are for the bottom line, but I think it's worth unpacking it a little bit for you I think you're zeroing in on expenses, but I think I should start with the revenue growth story.
And if you look at their growth in the global markets and corporate investment banking revenue from $2 9 billion last year in global markets to $3 3 billion. This year 1 billion eight CIB last year to two point.
$8 billion this year.
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. ECM revenue, we're getting more U S. Institutional equities revenues, so our market share at corporate our rankings in.
U S investment grade bond and U S high yield bonds are in U S equity underwriting are all increasing smartly and in an environment, which is still moderated by by a market challenges and we've just started optimizing our client coverage and extending our capabilities in the Oh.
In two towards a wider set of verticals and and to a wider set of clients. So I.
I think that are you know when you look at the our expenses that are haven't been added. This year you remember that we were growing organically are in 2020 'twenty, one and 'twenty two.
And then added a 1600 colleagues from TD Cowen and a couple of hundred deaf people, who are working on the various integration. So as we are just continuing to.
Ah, yes build out our corporate coverage models are integrate our can continue their integration, we announced that we had are integrated the equity platform. So that was a big milestone.
I 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.
Look I think that as we integrate over the three year period that we said we would to get the 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.
I appreciate the color. Thank you.
Thank you.
Next question is from Ebrahim <unk> from Bank of America. Please go ahead.
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 <unk>.
Half a billion next year potentially another half a billion in.
In 2025 that continues.
Give us a sense of like.
When we think about BD bard and like you've talked about just the consistent management et cetera.
So where did the lap soccer.
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 and what actions you've taken in terms of changing your approach.
Approach towards risk management tech spend on the risk side would be helpful.
Nice to hear from you Ebrahim and hopefully it's not your birthday as well today.
Good good good would have nothing but three banks supports everyone takes off for next year as well.
I imagine.
Okay.
We look at opportunities 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 their risk and.
And this includes investments you know do and we've talked about it before.
Our U S. AML program and that will include you know people training them data technology et cetera.
Because you know there are.
Sort of the evolving areas Oh, 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 in an X.
Then we will get there and we will get there in.
In a manner that you would expect out of TD and so.
I think that's the best way I can describe it it Brian.
And maybe the other side bar.
Two other quick sort of follow ups. They had 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 south east, which sounded like a good plan in terms of when you think about household growth.
Give us an update is that.
It's still in the works or is that on a postal you solve for this over the next year or so.
Well I'll start by simply saying this year, we did focus on building out distribution, but broadly distribution with a broader definition so.
We 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 they'll always be a view on both physical and virtual.
But I I would just point out 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 of the major loan.
Our loan categories as you and I spoke I in one of our analysts 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.
And likewise on the commercial side I'm 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.
Good fundamental momentum.
We will continue to leverage our core and I 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 in 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 I'm a bit of a long winded way of saying I feel quite comfortable with the franchise, but as Barrett said, we're also committed to strengthening our core our risk and control environment.
It's it's a it's a major priority we are interested not only growth, but doing it in a sustainable and responsible manner.
It certainly consistent with what <unk> has done historically.
So do you expect to open more stores this year or is that better.
We are done for now.
We are we did open up six stores in the quarter.
No, but looking into 'twenty four I'm just wondering you had expense growth guide how many stores new stores is it making it we haven't we haven't released the number but we do intend to make investments in both physical as well as you know virtual distribution.
But thank you.
Thank you Ebony.
Thank you.
The next question is from many Rodman from Scotiabank. Please go ahead.
Hi, Good afternoon, I, just wanted to clarify going back to the restructuring program.
600 million a pretax when fully realized annual cost savings how much of that is is actually going to be able to fall to the bottom line in 'twenty four and 'twenty five given the.
The reinvestment a requirements that you have so just wanted to clarify make sure I'm thinking about that correctly.
Yeah. So so we've given you the net amount.
So the bulk of that would be.
In into the business, it mostly into risk and control.
Okay. So the bulk of that into risk and control in 'twenty four 'twenty five potentially 25 mm.
The other question I had was just in terms of your EPS growth guidance, you're guiding to below them.
Medium term target and I'm just curious what.
That forecast what is it what is it baking in in terms of buybacks is it assuming that the buyback activity continues at the current pace.
Yeah. So first.
Just two.
Minder, our medium term target is EPS growth of seven two times.
And give it.
Uh huh.
The markets are.
Do you need to be challenging and also.
Jay said, the normalization of <unk>, that's going to make it oh.
<unk> that.
That range and that would include a 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.
That's what I'm asking about the buyback just in the context of the the decline in the CET one ratio this quarter and just wondering if if you're viewing the buyback a little bit more.
Cautiously going forward I'm also as you know there are some headwinds that you highlight in terms of regulatory changes the FDIC Levy.
Yep potentially maybe a legal charge in the U S. I'm just wondering how you're.
Fueling the buyback are going forward.
Factoring all that in.
Many of this is Barry.
As Kelvin said, you know we bought back a lot and it gives us great flexibility.
Pace of buybacks buybacks as you.
Probably no and you know for sure will depend on market conditions, you know how are we thinking about that.
Programs, we put in place.
And the banks you know the level of capital. We have you know we like our position in every quarter you know we add to that so.
You know I feel very comfortable as to where the banks capital position isn't buybacks largely influenced by market conditions and hard to predict exactly you know what.
Those markets would be and then we would adjust the you know that you would expect us to do.
Just on those conditions.
Got it thank you very much.
Yes.
Thank you. The next question is from Paul Holden from CIBC. Please go ahead.
Thanks, Good afternoon, I'm wondering if anyone on the call I would like to provide guidance on capes H.
[laughter], what's the consensus.
Therefore, once the consensus sorry, I just had I have to roll with the birthday joke.
Okay. So first for serious question is just looking at the PCL trends across the books 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.
Or and then also maybe you can give any sort of expectation going into 2024 again, given the different trajectories of the two economies.
So I think you've got to look at those trends over a longer period of time, so if I.
I have the numbers in front of me if I look at the full year.
T cells are both in Canadian P&C and in the U S B and C.
And if you look at impaired and performing actually embed in performing a boat.
Forming is greater in Canada and its for the full year. So would you may be seeing as maybe a fluctuation between quarters and the reason for that is the Canadian consumer.
As more vulnerable in our view than the U S consumer both from a leverage standpoint and also in.
Exposure to interest rates this quarter I think there were some puts and takes and there was some divergence between embeds in performing between the two are.
The two segments, but I do feel the quality in both segments as 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, okay, but farmer, but what are your comment makes sense. Thank you for that.
And then a question I guess for you guys on the on our wholesale banking business when I look at the current quarter I understand that's.
That's not the standard your operating too, but I see an Roe of 5%.
Last quarter was something around 10 or 11.
What what do you think is required to get this business to be <unk> neutral at the all bank level or maybe perhaps are ROE accretive over time and does that is that a fair way to think about it is there's always going to be ROE dilutive business.
I don't think so Paul like in a global trends for wholesale banks are would you say that are always tend to be in the 11% to 12% range are true.
Michael and you know full year 2022 that's kind of exactly where we were in the mid 11 range for our O E. I do think that as we gain the revenue synergies that we were talking about and get a more normalized our expense ratio.
That that that that basically solve the issue. If you just do some normalizing math and just say you know if we think a $1 5 billion in six of our revenue per quarter, which is sort of a run rate of the full TD Cowen quarters in Q3 and Q4.
And you know, we're gonna get a lift in that revenue as that market's become more favorable as they have been in the last few weeks, we're seeing a nice nice momentum a little bit off of opening again, and we get our coverage models and our integration correct.
You are very confident that we're well on our way so.
I think if I care, if if we focus on what.
What we said, we would which is expand our client base and deepen it we've got a whole bunch of work to do with Leo in the middle market investment banking side.
To drive revenue growth.
I feel very optimistic about the potential for this for for the wholesale franchise.
Yeah.
Last one from me since expenses is very topical and you provided some guidance around expense growth just and maybe it's for Calvin how how how do you think about.
The efficiency ratio for this bank over time like what what do you think because of the appropriate level because clearly in the short term youre 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 sort of the efficiency target.
Yeah. 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 spoke about.
I understand I'm sorry did you include this in early commentary deficiency or sorry, the operating leverage for 'twenty 'twenty four is that expected to be positive.
No our offering leverage target is medium term, we don't do that for me.
Year to year, Okay, I had to try okay. Thank you.
Thank you. The next question is from Microsoft Novak from K B W. Research. Please go ahead.
Good afternoon, I wanted to go back to Kelvin all your 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 things will basically be offset by additional investments.
Or are you or are we just see that latter part fall to the bottom line.
No. They have the same dynamics because when we look at the expenses savings are we look at the whole program would generate about $600 million pretax in 2024 would be 400 pretax 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.
Okay. So that 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.
It is far out, but that's what where we're.
We're targeting.
Okay, Perfect and then just a follow up on that so what I, I guess, where what I'm sort of wondering about is you have all this excess capital and I would've 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 one.
Why can't some of these costs 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 no.
Oh, the accounting when allowed would not allow you to do that.
The capital and expense on the P&L are just two different concepts.
You cannot reserve.
There's an offset that capital. So when you add people for example, it was just going to be going through your P&L line as an expense item.
Okay. Okay. That's helpful. Thanks for the color.
Thank you.
Next question is from Nigel D'souza from very tough investment research. Please go ahead.
To clarify a point that.
That was made earlier I think I heard that there was some credit migration related to mortgages that have hit the shrink rate.
Many people honorable or may be expected to hit the trigger point and just wanted to clarify that is required to cause negatively amortizing portfolio and.
Those are balances potentially customers hitting a trigger point, where the effective loan to value.
And 80% threshold for the uninsured is that is that what you're referring to yes that is exactly what I was referring to.
So does that include an expectation of a home prices to decline I know your economics team has put out a forecast I believe for home price declines. So just wondering how that's factoring in.
Oh Boy credit.
I think we are assuming if the rates remain the same.
And clients will reach 80% threshold over the next 12 months, we'll book them at a higher rate of reserve.
So it is a COVID-19 is a conservative calculation.
Right. So I guess, what the question I'm asking is that 80% being hit by it balances increasing two negative amortization or <unk>.
Finally, all prices or combination of both occur.
It could be a combination.
And then last question on your on that portfolio.
<unk> of your book, that's negatively amortizing declined from 18% to 40% and correct me if those numbers are.
Our and accurate, but if that's correct could you provide some color on what drove that decline and are negatively amortizing balances.
Yeah, I think the way I would describe it is we're 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 right 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 two positive payment behavior.
Alright, that's it for me thank you.
Thank you. The next question is from Sohrab move ahead here.
From BMO capital markets. Please go ahead.
Okay. Thank you I appreciate you taking the call I know you've kind of over time here just a couple of quickie Sam.
Kevin what was the average price of.
The shares you bought back in the quarter.
Well, we'll get back to you we have those disclosed yet.
Okay, and then presumably Barrett he said, it's dependent on market conditions as to the pace I assume.
Share price ends up drifting lower than that average share price than you would.
Pick up the pace is that the right way to think about it.
Now is that.
I don't want to you know create a formula where you sort of you know we are.
We look at you know how the market is behaving looked at you know what this is going.
This is the 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 our Calvin gave you the numbers and and you know.
In turn our current intent is to continue doing that but as to the pace and how we do it will depend on market conditions.
Okay. Thank you and.
I appreciate that.
<unk> that are getting done in risk and control and I think the quantification of the expenses and the duration over which probably that that has to happen.
Is there going to be Kevin estimate as to what sort of an impact that may have on your operational risk Argo anyways.
And over how quickly, we'll see that sort of any impact.
If any you're right.
Anticipated.
The increase in spending for <unk>.
Risk and control does not have an impact on operational risk.
So you're not anticipating any increase in your operational.
Scott.
Outside of.
They are spending.
The operational risk capital with 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.
Thank you for squeezing.
Thank you.
The next question is from Lamar Prasad from <unk> Securities. Please go ahead.
Hi, Thanks, most of my questions have been asked and answered, but Ive got a couple of quick ones here.
Wondering if you guys know the size of the restructuring charges that are to come in 2024 Ah why not just put them through today.
So I'll give you. Some examples so when you look at real estate optimization, there are specific accounting rules on.
On what conditions, you need to meet in order to be able to take those charges in and those would come over time.
And so we expect some of that would be in Q <unk> Q1, or Q2 for example.
Okay. So it's not related to the impact that it would have on tap on today for example, it's strictly due to accounting rules.
That and the pace of the programs that we're initiating.
Okay, and then could you guys talk about it or help me understand which business lines are going to be most impacted by the 3% reduction in FTE.
It's pretty broad based.
Okay. So just assuming it goes across all business lines would be a fair characterization of it.
Correct Okay.
Okay, and then just a last one here in terms of our rapid fire questions.
I think last quarter, you guys are guiding to flat margin in the U S. But that's seven basis points. This quarter and then you guys just thinking about flat margin guidance against moving forward like what drove the surprise on U S margins this quarter and why not offer a little bit more of a constructive outlook.
[laughter] Omar Thanks for the question and I'll try to be constructive.
I'm just.
It I wouldn't say it was a surprise a couple of factors.
That actually materialize in the quarter first and probably the foremost is that we had larger maturities and the tractor on rates you know generated a significant positive lift for us that that was that was one significant factor. The other is <unk>.
While we had made a 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.
Ed attract 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.
<unk>, just a bit and I would expect that to continue over the subsequent quarters. So I think the I think it's 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 we feel quite comfortable with the guidance that that margins are going to be relatively stable over the next quarter.
I appreciate the time guys.
Thank you.
And we do have one last question Darko <unk> from RBC capital markets. Please go ahead.
Hey, Thank you for squeezing me in I appreciate that just a couple of quick ease.
Maybe this is for Kelvin.
<unk> you.
U S business I'm looking at it in U S dollars, but what's a reasonable tax rate do you think for 2024, two to think about with respect to that business.
Well.
I'll take that so on on an average basis right now it's sitting just under it.
One 8%, but at the margin I would expect that number to be slightly higher it.
Might be higher okay.
Question 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 it into corporate.
No.
It's a very good question Darko.
There was a there was a benefit in our cost. So let me just break those two out we did there was a breakage onetime breakage fee.
Fee that was paid by Schwab as they bought down flexibility in terms of the fixed rate obligations.
Which was which was a condition that we put into our into the agreement with them and they exercise 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 and management fee earnings from the actual agreement itself. So net net schwab in the quarter force on it from an NII perspective was a drag.
Was a drag and.
Essentially moving forward now unless there's other.
Charges or something we should really assume that I mean, what was it you or is there anything you can provide to us in terms of I mean, I think I can calculate the fee that they paid you, but I can't I can't calculate all the negative can you is there a number you can put around the NII it darko.
We have traditionally not provided that number but if you're 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.
Okay. Thank you.
And last question for me and I promise I'll stop here.
But again a question on net interest margin.
And you know maybe this is for Calvin but anyone can pipe in I guess when I 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 <expletive>.
Declined over the last 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 and the balance sheet.
Structurally has just moved in such a way.
That you have less sensitivity to falling rates going forward.
Yeah, So I would say it's Kelvin here.
Deposit composition mix changes from.
Lower beta to higher beta deposit than you actually see less sensitivity.
And then also as we look at attracting maturities, we may refine that the margin in locking forward tractors and that may have an impact as well.
Okay. Thank you so to confirm nothing's really changed its just.
Sort of a structural change with respect to the balance sheet. That's helpful. Thank you Kelvin.
Thank you there are no further questions registered at this time I'd like to turn the call back over to you Mr. Mr. Tony.
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, a happy holidays and to you all on the phone as well happy holidays and all the best and see you next year. Thank you.
Okay.
Thank you.
France has now ended please disconnect your lines at this time and we thank you for your participation.
Okay.