Q1 2025 Toronto-Dominion Bank Earnings Call
Speaker Change: All participants, please stand by. Your conference is now ready to begin. Good morning, everyone, and welcome to the TD Bank Group Q1 2025 Earnings Conference Call.
Speaker Change: I would now like to turn the meeting over to Ms. Brooke Hales, Head of Investor Relations. Please go ahead, Ms. Hales.
Speaker Change: Thank you, operator. Good morning and welcome to TD Bank Group's first quarter 2025 results presentation.
Speaker Change: We will begin today's presentation with remarks from Raymond Chun, the bank CEO, followed by Leo Salaam, President and CEO, TD Bank, America's most convenient bank, after which Kelvin Tran, the bank CFO, will present our first quarter operating results.
Speaker Change: Also present today to answer your questions are Sona Mehta, Group Head, Canadian Personal Banking, Barbara Hooper, Group Head, Canadian Business Banking, Tim Wiggin, Group Head, Wholesale Banking and President and CEO, TD Securities, and Paul Clark, Senior Executive Vice President, Wealth Management.
Please turn to slide 2.
Speaker Change: As noted on slide 2, our comments during this call may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties.
Speaker Change: Actual results could differ materially. I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results.
Speaker Change: The bank believes that adjusted results provide readers with a better understanding of how management views the bank's performance. Ray, Leo, and Kelvin will be referring to adjusted results in their remarks.
Speaker Change: Additional information about non-GAAP measures and material factors and assumptions is available in our Q125 report to shareholders.
With that, let me turn the presentation over to Ray.
Ray: Thank you, Brooke, and good morning everyone. Before we discuss the quarter, I want to briefly comment on the current environment.
Ray: There's no doubt that tariff and trade risks are clouding the economic outlook.
Ray: Should these risks materialize? A lot depends on their depth and duration.
Ray: and on the actions governments may take to support Canadians and Canadian businesses.
Ray: First and foremost, whatever ultimately happens, we are focused on our customers and clients. We will continue to support the millions of businesses and households across Canada and the United States as they navigate uncertainty and new dynamics.
Ray: Next, we are modeling multiple scenarios, including potential impacts on provisions.
Ray: The bank is well capitalized, with a strong balance sheet, a resilient business model, and conservative risk appetite, all of which provide us with the ability to steer through unknowns and shifts in the macroeconomic environment.
Ray: The current situation is also a clear signal that Canadian governments and businesses must pull together, remove the obstacles that hold back national productivity, and strengthen our competitiveness.
Interprovincial trade barriers are something we must tackle.
Ray: Accelerating critical projects to untap mineral, energy, and resource production and leadership is another key focus area.
Ray: We also need to evaluate tax, regulatory and other policies to retain talent, create the right conditions for businesses to grow and make Canada a top destination for foreign investment.
Ray: I believe Canada has an opportunity to build on its strength and create the right conditions for our economies to thrive in the future. With that, let's turn to the next slide.
Ray: I'd like to start with an update on our strategic review. As we discussed, we are undertaking a comprehensive strategic review at the bank. This will culminate in an investor day in the second half of 2025, but we will provide updates along the way.
Ray: The strategic review is organized around four pillars, and we are making steady progress in each.
Ray: Earlier this month, we sold TD's entire 10.1% stake in Schwab to pursue compelling opportunities to invest in our own business.
Ray: both by buying back TD shares and by seizing opportunities to further support our customers, drive performance, and accelerate organic growth.
Ray: And on Monday, we announced that the share buyback received regulatory approval to start on March 3rd.
Ray: We also gave more authority and accountability to our lines of business for the end-to-end customer experience, streamlining TD's operating model.
Ray: In a few minutes, you will hear from Leo on our U.S. balance sheet restructuring. We are making great progress and are on track to complete the program along our previously communicated timeline.
Leah will also provide an update on our AML remediation.
Ray: Finally, we are focused on operational excellence and on driving efficiency. AML is our number one priority, and we will continue to invest. To accelerate momentum across our businesses, we will also need to make strategic investments.
Ray: We are identifying significant opportunities to restructure operations, reduce costs, and improve processes. Please turn to slide four.
Ray: In Q1, the bank delivered earnings of $3.6 billion and EPS of $2.02.
Ray: We saw volume growth in Canadian personal and commercial banking and strong trading and fee income in our markets driven businesses.
Ray: As you will hear from Ajai shortly, Q1 PCLs reflect certain overlays for policy and trade uncertainty.
Ray: and Kelvin will speak more about expense growth in his remarks.
Ray: Expenses this quarter include the impact of TD shares issued to eligible non-executive colleagues in December to show our appreciation for their hard work and commitment to the bank in a challenging year.
As of quarter end, the Bank C-T1 ratio was 13.1%.
Ray: for the sale of our Schwab steak earlier this month and the completion of the proposed 8 billion share buyback, TDC to 1 ratio would be approximately 14.2%.
Ray: CD is very well capitalized with the flexibility to complete a significant share buyback while investing to drive organic growth and maintaining prudent capital levels.
Please turn to slide 5.
Ray: As I travel across our footprint and meet with colleagues, I am struck by their tremendous pride in TD.
Ray: We have strong momentum across our businesses and that was evident in our Q1 results.
Ray: We operate Canada's premier banking franchise and are very proud that TD was once again named Canada's most valuable brand by Brand Finance.
and Canadian Personal and Commercial Banking.
Ray: We introduce Resil Specialist in-branch to enhance a proprietary distribution strategy.
Ray: The distribution ecosystem deepens customer relationships and improves retention while delivering a strong, profitable profile.
Ray: And in credit cards, the team delivered a record quarter in active accounts and cardholder spend.
Ray: CD Auto Finance saw record originations in Q1 and added dozens of new dealer floor plan relationships.
Turning to U.S. retail.
AML remediation remains our number one priority.
Ray: We have seen good customer momentum with five consecutive quarters of customer deposit growth.
Ray: You're also seeing momentum in our U.S. wealth business with total client assets of 52 billion U.S. dollars up 11% year over year.
Ray: As you know, our IDA with Schwab remains unchanged. We are pleased with the current arrangement and confident that we can manage the Schwab balances while complying with the asset limitations.
Wealth Management and Insurance at a Strong Quarter.
Let me start by congratulating the Direct Investing team.
Ray: For the third year in a row, we were named the number one digital broker in Canada by the Globe and Mail, a fantastic accomplishment that further extends our leadership in this critical category.
Ray: Last year TD introduced partial shares capability, unique among Canadian banks and a big hit with young investors.
Ray: Just over 50% of our clients that have traded partial shares are Gen Z and Millennials.
Ray: In TD Asset Management, we won $3.2 billion in new institutional mandates this quarter. Our strong performance was recognized with 24 Fund Grade A-plus awards, including 15 for ETFs.
Ray: A testament to our momentum in this rapidly growing segment of the market.
Ray: Finally, in TD Insurance, we became the first Canadian issuer to sponsor a catastrophe bond solely focused on catastrophe perils in Canada.
Ray: This 150 million issuance is an example of our OneTD strategy, with TD Securities acting as joint book runner on this placement.
Ray: Through the CAP bond issuance, TD Insurance leveraged capital markets to manage risk exposure and support resilience against natural disasters.
Ray: In wholesale banking, we continue to demonstrate the power of our broader platform with quarterly revenue over $2 billion for the first time.
Ray: PSAT, TD's leading U.S. municipal bond trading dealer, expanded into a new asset class and is now trading U.S. investment grade corporate bonds.
Ray: P.D. Cowan was recently named IFR's 2024 U.S. Mid-Market Equity House of the Year, an award given to the leading underwriter of U.S. equity offerings between 50 and 500 million U.S. dollars.
Ray: And after quarter end TD Securities acted as lead book runner on TD sale of its Schwab stake. This critical role in a milestone transaction is already opening new opportunities for a wholesale banking business.
Ray: Across our Canadian personal and commercial banking and wealth management insurance segments, we continue to make progress against the medium-term financial targets that we laid out at our 2023 Investor Day. Slides 29 and 30 in the appendix provide an update on our progress.
Please turn to slide 6.
Ray: Digital leadership is a critical component of both customer experience and business performance and it's an area of focus and investment in our strategic review.
TD Invent is our bank-wide umbrella effort to power innovation.
Ray: Last year, we deployed a Genitive AI virtual assistant in our contact centers supporting the Canadian Personal Bank. We have seen reductions in called hold times, escalations to second level support, driving efficiency while enhancing the customer experience.
Ray: We are now rolling out this Gen-AI virtual assistant to our contact center supporting our wealth and insurance businesses.
Ray: We are determined to keep innovating, elevating the experience, and driving growth through digital leadership. Please turn to slide seven.
Ray: Before I turn the call over to Leo, I want to note that we will release our 2024 Sustainable Report soon.
Leo Salaam: It will outline our progress and our commitment to our clients as they adapt their businesses and seize new opportunities.
Let me conclude with a quick comment.
Leo Salaam: I've been CEO for just under a month. The strategic review is advancing as planned. We will continue to drive change and unlock new opportunities.
What remains constant is the commitment of our colleagues.
Leo Salaam: I want to thank them for their tremendous effort, as together we build the bank for the future. With that, Leo, over to you.
Leo Salaam: Thank you, Ray, and good morning, everyone. Please turn to slide 8.
Leo Salaam: U.S. AML remediation, as we've said previously, remains our top priority.
Leo Salaam: And I'm pleased with the progress that we've made over the past quarter.
Leo Salaam: We're moving forward with focus and purpose, and we continue to bring additional AML specialists with proven experience onto our team, and together with the exceptional team that we've already built, we're building the capabilities we need for the future.
Leo Salaam: An important component of our resolutions was the appointment of a monitor. The DOJ and FinCEN have jointly selected guidepost solutions as we look forward to working with them to strengthen and enhance our USBSA AML compliance program.
Leo Salaam: Operationally, we are making progress on the technology slide, including centralizing all investigative cases onto a new single case management system.
Leo Salaam: We will also be implementing enhancements for transaction monitoring, including adding a further round of scenarios in upcoming quarters.
Leo Salaam: We have designed machine learning tools to help analyze customer data more effectively to detect potential activity of interest with speed. We expect to begin implementing these capabilities in Q3.
Leo Salaam: Collectively, building these capabilities will enable us to detect, escalate, and report potential activity of interest earlier and more effectively.
Leo Salaam: We remain focused on completing the remediation actions as outlined. There is still much to do, and this is a multi-year process, but we remain unwavering in our commitment to build the AML program we need, and we will continue to provide updates on a quarterly basis.
Leo Salaam: Now, if I can ask everyone to please turn to page 9.
Leo Salaam: I'd also like to provide an update on our balance sheet restructuring activities. You will recall this effort has two critical objectives. First,
Leo Salaam: to strictly comply with and maintain a buffer to the ACID cap limitation.
Leo Salaam: and second to ensure that we can continue to serve our clients and communities as their needs evolve.
We have made meaningful progress against our objectives.
Leo Salaam: Most notably, we have reduced assets from U.S. dollar $434 billion in September to approximately $402 billion in January, due largely to the reduction of borrowings using excess cash and investment maturities.
Leo Salaam: Our asset reduction is proceeding on track as well. This week we signed an agreement to sell $9 billion corresponding lending portfolio, and we do expect that transaction to close in Q2.
Leo Salaam: Our investment portfolio reposition is also proceeding well. To date, we have sold approximately $19 billion of notional bonds for an upfront loss of $1.1 billion pre-tax.
Leo Salaam: In total, the investment portfolio repositioning is expected to generate an NII benefit in fiscal 2025 at the upper end of the $300-$500 million pre-tax estimated range that we provided in October.
Leo Salaam: I feel confident that we will complete the investment portfolio repositioning in the upcoming months and largely complete the identified loan sales by the end of the fiscal year.
Leo Salaam: We are assessing further portfolios with lower returns that are not scalable for potential sale or wind down as part of the broader strategic review that Ray referenced.
Leo Salaam: Collectively, we expect these actions will enable us to improve return on equity through fiscal 2025 and into fiscal 2026.
With that, I'll turn it over now to Kelvin.
Thank you, Leo. Please turn to slide 10.
Leo Salaam: Earnings were relatively flat year-over-year, reflecting higher revenues offset by higher expenses.
including Governance and Controlled Investments and Higher PCLs.
Leo Salaam: Total bank PTPP was up 6% year-over-year after removing the impact of the U.S. strategic card portfolio FX
and insurance service expenses.
and Canadian personal and commercial banking and insurance premiums.
Expenses increase 12% year-over-year driven by
Leo Salaam: with approximately one-third of the growth driven by variable compensation commensurate with higher revenues and foreign exchange.
Leo Salaam: and the U.S. strategic cards portfolio to be in the 5-7% range.
Leo Salaam: However, given the ramp-up in our governance and control investments over the course of fiscal 2024, we expect elevated year-over-year expense growth in Q1.
Thank you, too.
Leo Salaam: We have provided slide 27 in the appendix to today's presentation to help stakeholders better understand TD's expense growth profile. Please turn to slide 11.
PTPP, Deposits and Loans.
Leo Salaam: Average loan volumes rose 4% year-over-year, with 4% growth in personal volumes reflecting real estate secured lending up 3% and cards up 9%.
and 6% growth in business volumes.
Leo Salaam: Rezo, we saw the uptick in customer activity that began late in Q4 carry into Q1 driven by lower interest rates with the tariff uncertainty emerging only late in Q1.
Leo Salaam: In commercial banking, demand was strong in Q1, but customers are now pivoting to a wait-and-see approach.
Leo Salaam: Average deposits rose 5% year-over-year, reflecting 4% growth in personal deposits and 7% growth in business deposits.
Leo Salaam: In the personal bank, we saw good growth in non-term deposits and moderating growth in term deposits as customers value liquidity in the current environment.
This next shift was margin accretive.
Leo Salaam: Net interest margin was 2.81%, up one basis point quarter-over-quarter, primarily driven by changes to balance sheet mix.
Leo Salaam: As we look forward to Q2, while many factors can impact margins, including the impact of a further Bank of Canada rate cut.
Leo Salaam: Competitive market dynamics and deposit reinvestment rates and material profiles we expect NIM to be relatively stable.
Expenses increased reflecting higher technology spend.
Leo Salaam: the impact of TD shares issued to eligible employees and various other operating expenses.
Please turn to slide 12.
Leo Salaam: U.S. retail delivered business momentum while executing against our balance sheet restructuring program.
Leo Salaam: Loans grew 1% year-over-year or 3%, excluding the impact of the loan portfolios identified for sale or runoff.
Leo Salaam: Bank card balances grew 12% year-over-year and the small business and middle market verticals both grew 7% year-over-year.
Leo Salaam: While our business clients generally foresee potential investment opportunities, many are proceeding with caution given uncertainty around tariffs and long-term rates.
Leo Salaam: That interest margin was 2.86%, up 9 basis points quarter over quarter.
Leo Salaam: reflecting the impact of the U.S. balance sheet restructuring activities and normalization of liquidity levels, which positively impacted NIM by five basis points, partially offset by lower deposit margins.
Leo Salaam: As we look forward to Q2, we expect NIM to deliver substantial expansion benefiting from ongoing balance sheet restructuring activities and further normalization of our elevated liquidity levels.
Leo Salaam: Expenses increased 11% year-over-year, reflecting higher governance and control investments, including costs of $86 million for U.S. BSA AML remediation and higher operating expenses.
Leo Salaam: As a reminder, effective this quarter, certain U.S. governance and control investments, including costs for U.S. BSA AML remediation previously reported in the corporate segment are now reported in the U.S. retail segment.
We have reclassified prior periods to conform with this approach.
Leo Salaam: Governance and control investments were higher this quarter compared to the first quarter last year as remediation efforts progressed over this period. We expect this year-over-year trend to continue into the second quarter.
Leo Salaam: We continue to expect U.S. DSA AML remediation and related governance and control investments of approximately 500 million U.S. pre-taxed in fiscal 2025.
Please turn to slide 13.
Wealth Management delivered record revenue, earnings, and assets.
Leo Salaam: New accounts were up 30% year-over-year, with new accounts up 44% in direct investing, as the business continued to compete and win in the competitive market.
Leo Salaam: Insurance delivered gross written premium growth of 13% year-over-year with our marketing efforts yielding leading brand awareness in a crowded category.
Leo Salaam: To help support analysts and investors' analysis of our business performance, we have provided new disclosure on return on equity for each of the wealth management and insurance businesses.
The business is driving efficiencies at its gains scale.
Please turn to slide 14.
Leo Salaam: Wholesale Banking delivered record revenue this quarter driven by its global markets business demonstrating the power of our franchise.
Leo Salaam: We saw higher PCLs this quarter, with performing PCLs reflecting policy and trade uncertainty and impaired PCLs reflecting a few new impairments.
Leo Salaam: Expenses increased 7% year-over-year reflecting higher verbal compensation, front office and technology costs.
Please turn to slide 15
Leo Salaam: As I mentioned earlier, effective this quarter, certain U.S. governance and control investments, including costs for U.S. BSA AML remediation previously reported in the corporate segment are now reported in the U.S. retail segment.
This slide reflects these changes within the corporate segment.
Leo Salaam: Corporate net loss for the quarter was $266 million, and net corporate expenses were $370 million.
Please turn to slide 16.
Leo Salaam: The Common Equity Tier 1 Ratio ended the quarter at 13.1% up two basis points sequentially.
Leo Salaam: Strong internal capital generation was offset by the increase in RWA, excluding the impact of FX and the impact from our U.S. balance sheet restructuring activities.
Leo Salaam: We expect the impact to CT1 from the Schwab share sale to be approximately 238 basis points in Q3.
Thank you.
Leo Salaam: This differs modestly from what we disclosed on February 11 as that was based on Q4 risk-weighted assets and Q1 risk-weighted assets are higher.
Leo Salaam: Our average LCR for the quarter, which does not reflect the impact of the Schwab's Share Cell post-quarter end, was 141%.
Leo Salaam: They are comfortable operating at more typical LCR levels and have begun to manage liquidity levels down.
Leo Salaam: However, we expect LCR to remain elevated in the near term, reflecting proceeds from the Schwab's share sale.
With that, Ajai, over to you.
Ajai: Thank you, Kelvin, and good morning, everyone. Please turn to slide 17.
Ajai: Gross impaired loan formations were 25 basis points, a decrease of three basis points quarter over quarter.
Ajai: reflected in the Canadian and U.S. commercial and wholesale banking lending portfolios.
Please turn to slide 18
Ajai: Cross-impaired loans increased five hundred and four million quarter over quarter to 5.45 billion of 56 basis points.
Ajai: The increase was recorded across the Canadian and U.S. consumer and business and government lending portfolios and includes a $181 million impact of foreign exchange.
Please turn to slide 19
Ajai: Recall that our presentation reports PCL ratios both gross and net of the partner's share of the US strategic card PCLs.
Ajai: We remind you that U.S. card PCLs recorded in the corporate segment are fully absorbed by partners and do not impact the bank's net income.
Ajai: The bank's provision for credit losses increased three basis points quarter over quarter to 50 basis points.
Ajai: The increase is largely reflected in Canadian personal and commercial banking and U.S. commercial, partially offset by lower provisions in wholesale banking.
Please turn to slide 20.
Ajai: The bank's impaired PCL was $1.2 billion with an increase of $63 million quarter-over-quarter driven by the U.S. Cards portfolio related to the adoption impact of a model update and seasonal trends.
partially offset by lower impaired provisions in wholesale banking.
Ajai: A nominal performing PCL recovery of $4 million this quarter was related to
Ajai: The adoption impact of a model update in the U.S. Cards portfolio and improvement in our macroeconomic forecast
Ajai: reflecting recent positive economic data, though tempered for policy and trade uncertainty.
largely offset by overlays.
Ajai: in the business and government lending portfolios, again, for policy and trade uncertainty.
Please turn to slide 21.
Ajai: The allowance for credit losses increased by 457 million quarter over quarter to 9.6 billion or 99 basis points.
Ajai: primarily due to a 214 million impact from foreign exchange overlays in the business and government lending portfolios related to policy and trade uncertainty and credit migration.
partially offset by an update to our macroeconomic forecast.
In summary,
Speaker Change: The Bank exhibited strong credit performance this quarter, in line with expectations as we progress through the credit cycle.
Speaker Change: While we have taken initial steps to bolster our reserves for policy and trade uncertainty, the situation remains fluid.
Speaker Change: There are many potential scenarios that could play out that may impact the economic trajectory and credit performance.
Speaker Change: Some of which could drive PCL results beyond the 45 to 55 basis points range I provided last quarter for fiscal 2025.
Speaker Change: That being said, TD is well positioned to manage through this period.
Speaker Change: considering our prudent provisioning, broad diversification across products and geographies, our strong capital position, and our through-the-cycle underwriting standards that have served us well through challenging conditions in the past.
Speaker Change: With that, Operator, we are now ready to begin the Q&A session.
Speaker Change: Thank you. We will now take questions from the telephone lines. If you have a question, please press star 1.
Speaker Change: You also can cancel your question at any time by pressing star 2.
Speaker Change: So, again, please press star 1 at this time. If you have a question, there will be a brief pause while the participants register.
We thank you for your patience.
The first question is from Paul Holden from CIBC.
NII Accretive.
Leo Salaam: Paul, thanks for the question. This is Leo. Yes, the short answer is at the end of the first quarter, so January 31st, we were sitting on $25 billion of bank borrowings, having already reduced nearly $25 billion.
Leo Salaam: previously. So there will be an opportunity to further reduce that over time. How quickly we can do that will depend on the term structure of some of those bank borrowings. So we will be able to deploy a good portion of the nine billion to reduce
a portion of those bank borrowings in the second quarter.
Leo Salaam: You know our overall loan portfolio. We'll do that gradually during the course of the year So you may not see the same size of decline in the second quarter But you will see over time an opportunity to further reduce The 25 billion dollars in bank borrowings on the balance sheet at the end of the first quarter
Okay, and then second question.
Speaker Change: expected risk and control remediation costs of U.S. 500 million. So that's good. Two questions related to that. I guess first one is can you give us a sense of what the actual costs incurred in Q1 were relative to that?
Leo Salaam: $500 million bogey. And then two, I just want to get confidence that Ray in particular
Leo Salaam: You've really gone through this, checked off all the nuts and bolts to make sure there is no future upside risk that this U.S. $500 million may grow into something larger.
Leo Salaam: Paul, maybe I'll address the first part of it and then I'll hand it over to Ray. On the total expenses for the first quarter for the AML remediation was $86 million, and I think we disclosed that number.
Leo Salaam: which is slightly lower than what we spent the fourth quarter. That's to be expected. There'll be some ebbing and flowing in terms of...
expense timing related to some of the remediation activities.
I do expect that the...
Leo Salaam: will become much more material in the second half of the year. So there'll be a little bit of staging, but we feel quite comfortable with the guidance of $500 million.
As I've shared with you in the past
Leo Salaam: a number of releases on our transaction monitoring platform, which are some of the longer poll-type items. So, generally speaking, feel quite comfortable with the overall guidance of $500 million. Right.
Leo Salaam: And Paul, I think Leo's covered it well, the, you know, we have a, you know, been at this for a little bit and we have a detailed action plan on what the remediation efforts need to be.
Leo Salaam: I think the piece that he flagged on the look-back is the piece that, as we go through that, Paul will update you if there's anything that comes from the look-back, but that's the one that I would say that'll take a little bit of time as we go through that process.
Leo Salaam: But we have actually, you know, budgeted in the sense of the $500 million. And then if there's more beyond that, we'll update all of you as we go along. I'll leave it there. Thanks for your time.
Thank you.
Thank you.
Thank you.
Speaker Change: The next question is from Gabriel Deschain from National Bank Financial, please go ahead.
Gabriel Deschain: Good morning. I guess I'll start with expenses. 12% expense growth, a third of that was variable
Speaker Change: to, you know, measure up against your guidance, a little bit about that.
Speaker Change: You're saying Q2 you'll have another expense uptick and then I would assume that means in the second half expense growth, you know, maybe doesn't fall off a cliff but drops well below that full year range? Is that how we're expecting it to play out?
Speaker Change: Kelvin, that's right, Gabe. So the year-over-year increase in Q2 is really due to the profile from last year.
Speaker Change: Q2 was a little bit lower back in 24 and because of the ramp-up you would see a higher year-over-year uptake and you're right that in we expect the second half the year the year-over-year expense growth would be moderating.
Speaker Change: Okay and that's despite what Leah was just saying as far as you know there's going to be a seasonal increase in AML remediation costs in the second half?
Speaker Change: That's right like that we're talking about total bank expenses. Yeah
Speaker Change: Leo's business also in Q2, you would expect a year-over-year higher expense growth as well.
Speaker Change: But to the point that Kelvin raised, and very similar to the shape at the overall group level, notwithstanding that some of the remediation costs might increase, the year-on-year comparisons will moderate. Yeah.
So I just wanted to leave you with that clarity.
Speaker Change: Fair enough. Now, other question, about the performing provision this quarter, a release, and you gave an explanation there that was helpful, the model refinements for the U.S. carbon portfolio. I don't even know what goes in that.
Speaker Change: and that's fine I guess. But then the improvement to the macroeconomic outlook kind of made me spit out my coffee a bit.
Speaker Change: What are we talking about here? I think we're all in agreement there's a lot of uncertainty out there. The Canadian economy at least is really decelerating and you know is it a matter of
You had really conservative...
Speaker Change: Assumptions and they're just not as bad as you assumed or I'm trying to understand why there's a deviation in your messaging versus certainly what we're seeing from other banks
Thank you.
Speaker Change: GDP slightly better, unemployment lower, better HPI. So that and again keep in mind this is all done in a point in time. The scenario and the models drove a release in macro.
Okay, then we add a model update in cards.
Speaker Change: and that model update essentially we used better predictive variables and there was better segmentation of risk across the PD bands.
That drove another release in performing.
Speaker Change: What we did is we took a step back and looked at all the industries that may be impacted by tariffs. We looked at potential risk migration, again this was based on an initial view and keep in mind this is all as at January 31st.
and we created an overlay of $149 million.
Speaker Change: and I do believe that's pretty similar to the approach of others. I think the difference with us is there are certain factors, the model being a material one that drove a release, so we overrode those releases through the overlay.
Speaker Change: Okay, in the interest of time, I'll just sign off here. Thanks.
Thank you. Thank you.
Thank you.
Speaker Change: The next question is from Ibrahim Poonawalla from Bank of America, please go ahead.
Hey, good morning.
Ibrahim Poonawalla: I guess maybe first question maybe for Ray and Leo both, but I think Ray in your prepared remarks you mentioned you identified the need to make strategic investments
Ibrahim Poonawalla: And then I think Leo mentioned about looking for other portfolio exits.
Ibrahim Poonawalla: Is that going to be concurrent with savings that you talked about? And same thing on the portfolio exits. Is that partly the reason why you're operating with a much higher C81 is to give yourself room to restructure and exit some loans or sort of small business lines?
Ibrahim Poonawalla: and take charges and move on. Would love color on both those. Thank you.
Maybe I'll start, Ibrahim, and good morning.
Speaker Change: On our strategic review, as I outlined on slide 3, one of the pillars is on the drive efficiency operational excellence. So from a cost optimization, we're going deep to
Speaker Change: right size, our cost base, Ibraham, and some of that then will provide us the opportunity to invest in the capabilities in some of the areas of the organization and so sort of self-funding in many cases some of those opportunities, but we also then have identified
Speaker Change: through the strategic review some significant organic growth opportunities and we'll be using
Speaker Change: Some of the proceeds from that side of it. So think of it as in that fact that we will manage our expenses So the guidance for the balance of this year is still five to seven percent and as we move forward We will continue to invest in our business, but then manage our expenses back down to a more normalized growth
Thank you.
Comment on
Speaker Change: We're following the same logic. Maybe if I could just take a step back to give you a sense of how we're thinking about the U.S.
First and foremost,
Speaker Change: I feel like we're making very good progress on both the AML remediation and the investment.
Speaker Change: bond repositioning and the broader balance sheet restructuring program. I think on all three fronts.
Speaker Change: We've essentially executed on the things that we've laid out to do.
Speaker Change: I think as we think about the outlook for the business,
Speaker Change: a very positive outlook. First, we're trading, as a result of the investment bond repositioning, we will be on the upper end of our range, and that's positive. So we're ahead of schedule with regards to our overall investment bond repositioning. I think we're also seeing medium-term rates a little stronger, and as a result, tractor-on rates.
Speaker Change: are a little bit better, and therefore that will be constructive from a revenue standpoint.
Speaker Change: We are seeing in our core areas of growth, we're seeing
Speaker Change: Good volumes. Our cards, our bank cards business was up 12% and our mid-market business up 7%. Just to highlight two areas that we've previously expressed a degree to
Speaker Change: to sort of lean into. And our wealth business was up 11% in the quarter. So some of the businesses that you and I have talked about in terms of the criticality for the franchise to perform well, from an expense standpoint, to your question,
Speaker Change: You know, our challenge is that we've got to absorb the restructuring costs.
Speaker Change: And so we are being very deliberate and very mindful about generating productivity where we can.
Speaker Change: to be able to create the space to invest in those significant remediation efforts and nothing, you know, that is our first priority. We're going to do what we need to do to make sure that we're addressing that fully. But I do think that some of the work that we're doing will allow us to be able to invest.
Speaker Change: selectively in the areas that I think will be critical for our future, whether that be cards, wealth, or digital strategies.
We are trying to, as Ray said, create the capacity.
Speaker Change: in order to be able to not only address the foundational investments that we need to make on remediation, but also selectively, and I do emphasize selectively because the strategic review is forcing us to make some significant choices, invest in those areas that I think will be quite positive. You put all that together and I think
Speaker Change: Two big conclusions. One, I do think we'll be able to generate return on equity improvement on a quarter-on-quarter basis through this year and into next year. And secondly, I do think we return to a positive NIAAP profile as we go into 2026.
Speaker Change: That's helpful. And just one quick follow-up, maybe it's quick. Kelvin, you mentioned name expansion should be substantial. Would appreciate if you could quantify that in what you expect either at segment level or consolidate level. Thank you.
just on the U.S. business because it's where that substantial
Speaker Change: the sort of a full quarter's impact of the bond reposition activity that we did in the first quarter. Both of those items will substantially move the NIM for the U.S. business.
Speaker Change: Thereafter, coming back to the point I raised before, I do think that the rate structures right now with higher medium-term rates will be constructive for modest NIM expansion thereafter.
Thank you.
Thank you.
Thank you.
Speaker Change: Thank you. The next question is from Minnie Grommen from Scotiabank. Please go ahead.
Speaker Change: Good morning. I wanted to follow up on some of the expense questions that Paul asked at the beginning of the call. Specifically, if I'm looking at the U.S.
Speaker Change: I'm looking at a sequential decline in expenses on an adjusted basis. I think you touched on it, but I want to make sure I understand it.
Speaker Change: What's driving that sequential decline? I wouldn't have expected that given the incremental remediation costs, but I think you mentioned something about timing, but I just wanted to understand what's going on here and what to expect going forward from a sequential basis.
Speaker Change: Thanks for the question. Just to just to remind you on in the fourth quarter we did have two lumpy items. We had the sign-on bit a sign-on bonus related to Nordstrom.
And we also had the CFPB settlement.
Speaker Change: As we move forward, as I've talked about before, I would expect that
Speaker Change: towards the second half of the year, the rate of growth would moderate. We were up 11% on a year-on-year basis in the quarter, of which our governance and control costs represented about 7% of that growth. So our base growth rate was 4%.
Speaker Change: And I do think we continue, as I said before, to look at productivity measures that will give us the space to continue to invest not only in governance and control initiatives, but on some of the critical business priorities that I highlighted previously.
Speaker Change: That makes sense. And then, I just wanted to follow up on, Ajai, you talked about $149 million overlay. I just wanted to understand, on a high level obviously,
How do you derive that $149 million?
Speaker Change: may be impacted by tariffs and what we really considered is risk rating migrations and we use that risk rating migration to extrapolate
Speaker Change: you know, what the impact could be and an ACL process or allowance process.
Speaker Change: was a little different for the U.S. commercial book as opposed to the Canadian commercial
Speaker Change: T.D. Securities book. But again, it was a top-down analysis. It's an initial analysis. There is more work going on. We're doing a lot more bottom-up work.
Speaker Change: for the next quarter and of course we'll have to see how the macro scenario evolves.
Speaker Change: I think you know that there's so many different scenarios that could play out, so saying anything beyond that at this stage, you know, is a little difficult.
Understood. Thank you.
Speaker Change: Thank you. The next question is from Matthew Lee from Kanakor, Danuti. Please go ahead.
Speaker Change: Good morning guys. Maybe a different type of question. On the Canadian mortgage book, flat growth quarter over quarter and a bit lower than some of the peers.
Speaker Change: Maybe just talk about what you're seeing in that business and how we should think about growth as you rest of the year.
Speaker Change: Matt, thanks for that. This is Sona. I'll take that. So let me start by saying we've been very declarative in our Investor Day aspirations. This is a business that we like, that we want to grow, and we're continuing to compete to win profitable business.
Speaker Change: So you know I can just walk you through some of the fundamentals and how we think about this book.
Speaker Change: You know, first of all, we're a through-the-cycle, multi-channel lender. That's really important. That gives us great reach.
Speaker Change: and then within that portfolio especially over the last couple of quarters we've been leaning in to enhance how we go to market especially in our proprietary channels.
Speaker Change: So, a few things that we've done, this quarter, as Ray shared, we rolled out RESL specialists as well as investing specialists in our highest opportunity branches.
Speaker Change: And so we've thoughtfully enhanced that integration between our branch and our mobile mortgage sales force at the same time.
Speaker Change: We're seeing really promising results. So referrals from our branch to our MMS have tripled quarter over quarter.
Speaker Change: It's translating into real dollars. We've delivered 1 billion in funded volumes through that channel alone, and it's been the best quarter on record, sorry, best Q1 on record for our MMS.
Speaker Change: So back to your question. Now, overall growth will vary from quarter to quarter, but the fundamentals are absolutely pointed in the right direction. I think you typically see some seasonality that's lower in Q1.
Speaker Change: But ultimately, this is a good book. We compete to win profitable business. We're seeing really good results in our proprietary channels. We're also seeing depth of relationship improve up nicely year over year among our Ruzzle customers.
Speaker Change: So, I'd probably sum up by saying, you know, our aspirations are declarative, they're bold, we like the strength that we're seeing in our proprietary ecosystem, and we're going to continue to compete to win profitable business.
Speaker Change: OK, great. So nothing in particular in the quarter that might have affected growth other than maybe seasonality.
Thank you.
Speaker Change: The next question is from Doug Young from Desjardins Capital Markets. Please go ahead.
Doug Young: Hi, good morning. Just maybe just a few quick ones, hopefully. US NIMS, just to go back to that, when you say normalize, like, should we be thinking going back to around the 3% level where you kind of were before Q1?
Doug Young: And then expanding out from there, just hoping to get a finer point on that. And then you're gonna have some excess liquidity coming in from the Schwab sale. Is that something, I assume it doesn't impact US NIMS, does that kind of filter up and impact the oil bank NIMS?
Doug Young: Doug, just to give you a sense, while we won't provide a specific guidance on the call, what I can tell you is, if you look back to where we were before...
Doug Young: We put on the liquidity position that we did in late third quarter, fourth quarter, and you look at that NIM level.
Doug Young: returning back to that NIM level would not be an unreasonable assumption. So then you combine that with the bond repositioning piece which will be an enhancement to NII. I think if you if you model that that'll give you a good sense of where we'll probably land from a NIM standpoint.
Speaker Change: Okay, so that would impact and I guess marginally the oil bank.
And then
Speaker Change: on the total bank level. Yeah, on the total bank level, yeah. And then, Leo, just to clarify that $300 million to $500 million
Speaker Change: I mean, that's not a new number. You're looking to be at the upper end of that. Is that three to 500 million or let's call it 500 million? Is that going to be in for the full?
Speaker Change: Are you expecting that to be in for the full year fiscal 25 or be on a run rate exiting 25 at that level? No, no that's a that's an in-year profile and and just to give you a bit more information that we
Speaker Change: We reflected about $46 million related to the bond repositioning in the first quarter. So the lion's share of that number will materialize over the subsequent quarters.
Good morning.
Speaker Change: And then, I guess, you know, over 4% set 1 ratio, we described the buybacks.
Speaker Change: A lot of discussion around, you know, an ability to put capital to work organically. I mean, that's a lot of capital to put to work. Can you talk about three to four?
Speaker Change: of the biggest opportunities to really drive where you're gonna invest that capital. I assume it's a bunch of areas, including capital markets, but just trying to get a sense, but better sense of how to think about that.
Speaker Change: Doug, I'll take that. As I said on the strategic review, we're still going through the process. We're about halfway through the strategic review, just so you get a sense of timelines.
Speaker Change: Well, we are looking at it in multiple different buckets, you know, where we are going to allocate our capital. And so, you know, we start with that we've identified these significant organic opportunities, and we'll start to share some of those potentially along the way. And then certainly at the investor day.
Speaker Change: But we are also looking to simplify the portfolios, and you've seen some of the actions that we've already taken. We'll continue to look at opportunities to optimize our balance sheet.
Speaker Change: And that could be in the form of restructuring. That could be in the form of potential, you know, revisiting our investment bond portfolio and see if there's further actions that we want to take there. And then also then looking at our portfolio.
Speaker Change: and to see which businesses that we may look at from an optimization perspective and we've done some of those activities but we have some more to look at.
Speaker Change: And then there's some other efficiency opportunities that we'll be looking at, so...
Speaker Change: Certainly, as I said before, I don't want to front-run the strategic review, but what we will do is, as we continue to make some of these decisions, start to share those with you.
Speaker Change: But I do look forward to sharing the more comprehensive review and where we're going to allocate that capital at the investor day. And at the end of that, if there is still capital remaining, I've said on the previous calls, that then we will look at a potential another share buyback.
Appreciate the call, thank you.
Speaker Change: Thank you. The last question is now from Darko Mijelic from RBC Capital Markets. Please go ahead.
Darko Mijelic: Hi, thank you. Good morning. I have just a couple of detailed questions on the U.S. business as well. I appreciate the
Darko Mijelic: Suggestion that your NIM will expand meaningfully or substantially next quarter. Your NIM and your NII have a few, well a lot of moving parts. So I was just wondering if you could provide maybe a range of NII for next quarter for me to work off from for the model.
Darko Mijelic: Darko, let me just give you a sense of the drivers that you might want to think about.
Darko Mijelic: You know clearly I've given you a sense of where the bond repositioning piece is going to land and you can sort of get a sense of
Darko Mijelic: We take the residual amount and got three quarters left. You can get a sense of what that lift is gonna look like. I can tell you that the on rates right now that we're seeing.
Darko Mijelic: It's about 50 base points higher than what they were just a few months ago, and so obviously that will be a tailwind that we'll start to enjoy, maybe less so in the first half of the year, but more so towards the second half of the year.
Darko Mijelic: I'd say in terms of the underlying growth, we will be exiting a series of portfolios. So as we communicated to you back on October the 10th, there is an NI drag from exiting some of those lower yielding portfolios.
Darko Mijelic: I think at that point in time we did estimate that would be about a $250 million impact. So if you model that and then assume that in our core lines of businesses
I'm using...
C.O.R.B. bank cards business, home equity
Darko Mijelic: line of business and our and our commercial in those segments of commercial
Darko Mijelic: You know, we're seeing good growth. I will say that I do believe, despite the fact that there is general optimism in the U.S. with regards to
Darko Mijelic: Our commercial clients are optimistic about the expansionary sort of deregulatory discussions that the current administration has laid out. I do think that some of the commercial lines might be a little bit more muted, but if you put all those things together, I think it lays out a relatively constructive backdrop.
for NIM expansion and for NII growth.
Darko Mijelic: you know, over the course of the year, and obviously we'll try to continue, as Ray said, we'll try to continue to maximize those actions as we can, but I want to come back to maybe the obvious statement. Our focus here is
Darko Mijelic: to leverage 2025 as that transition year to make the investments we need to in the core franchise to be able to address some of our remediation activities and to be able to exit 2025.
Darko Mijelic: exhibiting the earnings power of the US franchise. And so we're doing those things to be able to enter into 2026 with a more normalized profile.
Speaker Change: Okay, thank you. I'll get back to the training, the drawing board on that. That is useful though. I appreciate that, Leo. Kelvin, just at the all bank level, there was some margin compression and I'm just wondering, you know, given everything that's at play, what would your...
Yeah, so uh
some business volumes, and I'm going to ask them to...
Darko Mijelic: speak to that, those opportunities. Yeah Darko, essentially what's driving that is higher asset levels in in prime.
Darko Mijelic: So as you know those are lower interest paying deposits but extremely attractive from an ROE perspective just given the RWA treatment. So what you're really seeing at play there is the continued focus on on growing our prime franchise.
I see. Okay, that's helpful. Okay.
Thank you. Bye.
Thank you.
Speaker Change: So, we did guide to that PNC NIM is relatively stable, US substantially expansion, and then you also have Telwin from the Schwab earnings as well, so all of those are headed towards on the positive side.
Okay, thanks very much, appreciate that.
Speaker Change: Thank you. There are no further questions registered at this time. I will now return the call back to Raymond Chun.
Speaker Change: Well, thank you everyone for joining us this morning. We look forward to speaking again at our Q2 call in May, and ahead of that is obviously our annual meeting in April, and so hope everyone has a great rest of the day. Thank you.
Speaker Change: Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.