Toronto-Dominion Bank Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Meny Grauman - Scotiabank Global Banking and Markets - Analyst : I want to talk about capital. And specifically, it's not clear to me why you needed to sell down your Schwab stake to Capital, especially even if I take into account the guidance on operational RWA coming in Q4. So if you could help me understand sort of the thought process there? It seems like there's something else going on here in terms of other considerations. Again, and especially in the context of buying back $1 billion in shares in the quarter as well, so hopefully, you could help me understand that. Bharat Masrani - Toronto-Dominion Bank - Group President, Chief Executive Officer, Non-Independent Director Meny, this is Bharat. You know that traditionally and historically, the bank likes to be well capitalized and frankly, like to carry more capital than what may generally be necessary. In line with that, we think it's prudent to have capital. There is still a lot of volatility, and economic conditions are not as predictable as one would like, so this is just to be prudent and it makes sense. That's the capital framework we use, and we think it made sense to have the capital levels that we are projecting for the next quarter.

Question: Meny Grauman - Scotiabank Global Banking and Markets - Analyst : And just another follow-up. So is it fair to assume that you're not comfortable going below 12.5% CET1? Is that sort of where you're thinking that in terms of your comfort level? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: John Aiken - Jefferies - Analyst : With the sale of the Schwab stake, is it safe to assume that if some future point when you end up below 10%, you'll lose Board representation, and it will no longer be accounted under the equity method? Bharat Masrani - Toronto-Dominion Bank - Group President, Chief Executive Officer, Non-Independent Director Our current intention is not to go below where we are.

Question: John Aiken - Jefferies - Analyst : Okay, Bharat. And is it safe to assume that the sale of the stake has no bearing in terms of the agreement you have on the sweep accounts? Bharat Masrani - Toronto-Dominion Bank - Group President, Chief Executive Officer, Non-Independent Director Yes.

Question: Matthew Lee - Canaccord Genuity Corp - Analyst : Maybe one on expenses. So your guidance is now high single-digit growth in '24, a bit of an increase versus mid-single-digit you mentioned prior. Maybe just breaking it down, is the core expense growth still 2% and now the investments have pushed it to high single digits, or are there other factors that maybe have played in terms of updated guidance? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Matthew Lee - Canaccord Genuity Corp - Analyst : All right. And then maybe a follow-up just on the AML cost themselves. It sounds like a lot of the investment is being made is predicated on hiring additional talent kind of building on and maintaining some sort of AML infrastructure. Should we just assume those FTEs will kind of remain with TD even after that build out is complete? And does that essentially mean the OpEx associated is kind of recurring? Leovigildo Salom - Toronto-Dominion Bank - Group Head U.S. Retail, TD Bank Group and President and Chief Executive Officer, TD Bank, America's Most Convenient Bank Yeah. Let me take that one, Matt. This is Leo Salom. Just to give you a sense, and I think Bharat outlined where we are making critical investments in the program, and obviously, hiring the right leadership has been the first priority. And I think we've been very fortunate to bring really subject matter leaders from other G-SIBs, from the Department of Homeland Security, from the Treasury Department as well as the FBI and other law enforcement organization. So we're really pleased with the leadership team that we brought on board. We've added over 500 colleagues to support this effort. And to your point, A good portion of those are program management resources that are scaling up data, technology, other process management changes that will, over time, those will fade away, but we're also making some important investments in investigative capacity in advanced analytics. And I would suspect that those would stay. So to give you a sense, there would be a portion of it that will be repurposed to other initiatives as we move forward, but there's going to be an increase, a structural increase to represent the model we want to run going forward, which I think will be a very strong AML program going forward.

Question: Gabriel Dechaine - National Bank Financial, Inc. - Analyst : The expense commentary, I guess, Kelvin, you were saying that the corporate loss could be above that guidance range, the $200 million to $250 million, again in Q4 because of risk controls investments and that type of stuff. If I look at your full year consolidated adjusted expense growth adjusted for the strategic card portfolio, you're running at 10% growth, 9%, if I exclude variable comp. At the start of the year, you guided to mid-single digits. Is that delta solely because of additional investments of this nature?

Question: Gabriel Dechaine - National Bank Financial, Inc. - Analyst : Yes. Well, no, I mean, I think it was on the Q4 call, you said mid-single digits, including these AML- type costs and Cowen.

Question: Gabriel Dechaine - National Bank Financial, Inc. - Analyst : Okay. Now what -- and refresh my memory, please. This year, I think it was -- you'd quantified $500 million after tax of the risk control type expenses and then another amount of that magnitude in 2025. Is that correct?

Question: Gabriel Dechaine - National Bank Financial, Inc. - Analyst : Nothing for 2025. Is it like -- it seems likely that these costs could persist, though, into 2025. Is that unreasonable to expect?

Question: Gabriel Dechaine - National Bank Financial, Inc. - Analyst : Okay. And then look, I get you don't want questions on this regulatory matter, but the press release clearly outlined what your estimate of total penalties would be, and I don't dispute that number at all. But there's also mentioned a nonmonetary penalties. What are you thinking of there? Is an asset cap on the table for the US business? Bharat Masrani - Toronto-Dominion Bank - Group President, Chief Executive Officer, Non-Independent Director Nonmonetary means anything that is nothing to do with money. So we said the $2.6 billion that is monetary. So anything that doesn't fit into that category is nonmonetary. I can't speculate. We're in the middle of our negotiations. We are making progress, and it's not appropriate to speculate what the final deal would be. And we -- as we put out in our press release, we expect to come to a resolution by calendar year-end. So I think best here is to remain patient. And when we have more to say, we'll be happy to engage.

Question: Gabriel Dechaine - National Bank Financial, Inc. - Analyst : All right. Well, in any case, I appreciate the transparency you provided last night. Bharat Masrani - Toronto-Dominion Bank - Group President, Chief Executive Officer, Non-Independent Director Good talking to you, Gabe. Thank you.

Question: Ebrahim Poonawala - BofA Securities - Analyst : Just wanted to follow up, Leo, to your response earlier. What I'm trying to figure out is how much of the remediation actions that you're taking or fixing AML sort of risk controls is still a moving target where you're still learning as you dig into in terms of what needs to be done? And from a shareholder standpoint, I think the two questions are: the risk cost expense creep, right, mid-single digit move to high-single digits, could this become low-double digit and then some more next year? So that's what I'm trying to handicap. And the second is, given all these experts you hire, do you -- forget about the regulators, but do you have a sense of the timeline of when you can at least get this at par with management's expectation in terms of where you want the AML controls to be? Leovigildo Salom - Toronto-Dominion Bank - Group Head U.S. Retail, TD Bank Group and President and Chief Executive Officer, TD Bank, America's Most Convenient Bank Thank you very much, Ebrahim. It's a very good question. Let me first just assure you that we've spent a lot of time in building a very comprehensive AML program. And it really looks at the program in its entirety, all pillars to ensure that we've got one of the most robust AML programs in the country. That has been the objective from the very beginning. I believe we have a very robust program, and we're executing. We're well underway in terms of the actual execution program. I talked about the leadership attraction. I've talked about the the increase in complement in investigators and program managers in data specialists in the technology areas. And we are sparing -- we're really moving as quickly as we can to be able to make sure that we've got that mature infrastructure in place. We're also making investments in data and technology. So I feel quite comfortable that we have a roadmap to execute against and that we're doing -- we are executing against that plan. Certainly, over the course of the next year or two years, as our sophistication and advanced analytics increases, we are going to be even more effective at identifying and thwarting the risk that are present in the financial industry, but that's by design. That's exactly what we're trying to drive towards. I believe that the cost that we have forecasted internally are appropriate for the program that we've outlined. And I feel quite comfortable with the outcome. And I just want to stress, we just -- we're not looking to simply meet the minimum standard here. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Ebrahim Poonawala - BofA Securities - Analyst : Right. And then, Leo, the reason I'm trying to sort of drill into this is, I think you said it looks like it's going to be a multiyear program to get to the endpoint. And I think -- I mean, obviously, you don't want to comment on the nonmonetary penalties, but in a world where there's an asset cap, the concern is if this is going to be a two- to three-year deal, the US franchise is going to be under an asset cap and the risk of attrition, like how -- is there a way that you can make us feel better about the US franchise if there's an asset cap and this thing takes multiyear, as you said, as someone who runs that business day to day of why that should be okay, and there's no risk of attrition? Leovigildo Salom - Toronto-Dominion Bank - Group Head U.S. Retail, TD Bank Group and President and Chief Executive Officer, TD Bank, America's Most Convenient Bank Yeah, Ebrahim, I would say, first of all, I just want to emphasize, this is a priority for us. Getting this AML program complete and making sure that we've got that sustainable foundation is the first priority for me, personally. So as I've outlined, we're making the requisite investments there. But I do want to just pivot for a moment and just point to the performance of the underlying franchise. If you look at the third-quarter performance, we did have sequential NIAT and PTPP growth. That was powered by a 3-basis-point increase in NIM and peer-leading loan growth and strong and stable deposit performance. We saw -- some of the areas that we've identified previously, like our

Question: Paul Holden - CIBC Capital Markets - Analyst : I want to follow up on that question a little bit, Leo, and I think you've already answered it to some degree. But when I look at the numbers for the US segment, I see efficiency ratio effectively flat year over year, which I think is pretty impressive given the additional investments you've had to make in risk and control. But I guess the counterargument to that would be, well, then you've had to reduce branch count, you've had to reduce headcount. And so the concern would be, how does that impact revenue and productivity of the US segment? Again, I think you've addressed it a little bit already, but maybe you can talk us a little bit through in terms of the strategies you're using to maintain market share and to grow productivity per branch and FTE because that's kind of what I am seeing in the numbers? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Paul Holden - CIBC Capital Markets - Analyst : And second question is a little bit of a follow-up on, I think, what Meny asked to begin with and sort of the second part of this question on why the share buybacks this quarter and then sell the Schwab stock? Like that's a decision you must weigh, I would assume, sort of around the beginning of the quarter when you had a fairly good idea of where the provisions may come in. So obviously, it's a decision you weighed. Why did you decide to go ahead and repurchase TD stock, sell Schwab, like why does that benefit shareholders? Bharat Masrani - Toronto-Dominion Bank - Group President, Chief Executive Officer, Non-Independent Director So the accounting rules on this, Paul, are very straightforward. Our view is that the $2.6 billion is our current estimate and in addition to the $450 million we have taken. And so we made sure that we follow that standard. I think our buybacks have been continuing right through the year. And as Kelvin said, we have now completed 85% of what we had targeted and the program now expires at the end of August. So I don't think I can add any more. We've always prudently capitalized, conservatively capitalizing the bank, and it made sense for us to do exactly what we outlined. And it makes sense in a sense that our capital levels will continue to be where one would expect given TD's history and the way we manage capital, so we're comfortable with how we got to where we did. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Sohrab Movahedi - BMO Capital Markets - Analyst : Okay. Maybe just for Riaz. If there was a desire on the part of the bank for the wholesale bank to grow faster than maybe what had been contemplated when you executed on the Cowen acquisition, how much faster could you grow? And what sort of resources would you need for each incremental 100 basis points of growth? Riaz Ahmed - Toronto-Dominion Bank - Group Head, Wholesale Banking, TD Bank Group, President and Chief Executive Officer, TD Securities Thanks for that, Sohrab. Look, I think if you just look at historic development in our revenue over the last five years, the wholesale bank has more than doubled. And I think that this is a business that it does move quickly. And to your point, it can be growing fast or slow. But I think we have to make a balance in growing out our strategy as well as weight our risk considerations from the perspective of making sure that we have the right talent in seats, and we've been able to hire just fantastic talent over the last two years in the various seats, but also continue to build our infrastructure to make sure that we have the right visibility over the risks in the business. But look, I think we've been -- there's a lot of room for us to continue to grow, whether it be in prime businesses, transaction banking businesses, electronic trading, sponsors, leverage finance, we've been able to bring up our revenue now to a consistent performance of $1.8 billion a quarter through this period of integration and build, and market conditions seem like they're only getting more supportive right now. So I do feel that the growth trajectory that we're on is a good one for the bank in aggregate. And maybe we can speed it up a little bit, but I wouldn't anticipate that we're looking to double it in the next year or two.

Question: Nigel D'Souza - Veritas Investment Research Corporation - Analyst : I wanted to turn to your disclosure on reasonably possible losses. I noticed that the high end of that range is still at around $1.3 billion and is a little change from last quarter. So trying to understand why that hasn't come down given the AML provision you've taken this quarter? Are there any other legal or regulatory matters outside from AML that could lead to outsized fines or penalties?

Question: Nigel D'Souza - Veritas Investment Research Corporation - Analyst : Okay. And then on Schwab. You talked about capital, but was liquidity a consideration in the decision to sell those Schwab's shares? Could you have sourced liquidity from other avenues other than selling your equity stake in Schwab? You have the securities portfolio, are the unrealized losses there preventing you from, I guess, selling back the liquidity to crystallize? Just trying to understand, is liquidity at all one of the considerations here?

Question: Nigel D'Souza - Veritas Investment Research Corporation - Analyst : Okay. And then just switching to credit loss provisions. Could you kind of provide some color on performing PCLs this quarter? You've seen some deterioration in unemployment rates in the labor market, but your performing PCLs are moving lower. So any color there on what's offsetting the unemployment trends that we're seeing that's leading to lower provisions?

Question: Nigel D'Souza - Veritas Investment Research Corporation - Analyst : Got it. And on impaired PCLs in the Canadian banking specifically, I assume that's not driven by rate cuts due to a lagged effect. So anything else that you could point to that's leading to provisions improving quarter over quarter?

Question: Nigel D'Souza - Veritas Investment Research Corporation - Analyst : Correct, Canadian P&C.

Question: Lemar Persaud - Cormark Securities, Inc. - Analyst : Maybe for Leo and just kind of following up on the conversation with Paul and Ebrahim. Would it be fair to suggest that regardless of what comes out from these nonmonetary fines, bottom line, you feel confident in the ability to grow earnings in 2025. Is that a fair statement? I'm really just trying to understand, just given the peak in expenses in 2025, how will the earnings power of the US franchise kind of play out? Leovigildo Salom - Toronto-Dominion Bank - Group Head U.S. Retail, TD Bank Group and President and Chief Executive Officer, TD Bank, America's Most Convenient Bank I won't front run any discussions on the nonmonetary penalty or any shape. I really want to wait to see the final global resolution. And as Bharat said, we'll certainly bring that forward as quickly as we possibly can because I know how important certainty is as we try to project forward. I'd just come back to I think what we're trying to do is structure ourselves so that we can essentially continue to drive the governance changes in the core business but still grow the franchise that we have. And so I think you've seen the operating momentum over the last several quarters has remained strong. In fact, in many cases, it has been peer-leading. And we've been very deliberate around trying to compartmentalize as best we can the various efforts so that we can continue to grow the franchise. So it's -- I won't provide a guidance as to what 2025 looks like today. But you can -- look, there are some areas that really point and are quite favorable for the outlook. Clearly, loan growth has been strong. Deposit performance has been stable, and NIM performance has been peer-leading in terms of relative performance. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Lemar Persaud - Cormark Securities, Inc. - Analyst : Okay. And maybe if I -- maybe let me try this way. Maybe this one would be helpful. If we park any of the additional operating expense growth related to this AML, is there any tangible reason to suggest that TD's underlying performance would lag US peers? Because it seems like the answer to that is, no. But just curious your thoughts. Leovigildo Salom - Toronto-Dominion Bank - Group Head U.S. Retail, TD Bank Group and President and Chief Executive Officer, TD Bank, America's Most Convenient Bank In terms of leading indicator growth and in terms of the sustained momentum, I think we've been able to demonstrate peer-leading performance, and that would be our objective going forward.

Question: Lemar Persaud - Cormark Securities, Inc. - Analyst : Yes. I'm just kind of thinking about like maybe there's like 100 of these that come on average per year, but we hear about one. Like is there any thoughts you can provide on that? Because I have no -- sitting on the mid side of the table, I have no indication of how often these things are levied against the banks. Is there anything you can share on that or -- Bharat Masrani - Toronto-Dominion Bank - Group President, Chief Executive Officer, Non-Independent Director Unfortunately, I cannot. I mean, these are all -- there are many cases, and we will see how each one turns out. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Jill Shea - UBS Investment Bank - Analyst : In Canadian P&C, the results were strong this quarter with revenue and volume growth. Could you just talk about the outlook there given the macro backdrop and your expectations for loan and deposit growth and how we should think about margins going forward?

Question: Darko Mihelic - RBC Capital Markets - Analyst : I will honor the no questions on AML and instead focus on Canada one more time. I want to come back to what you just spoke about with respect to Canada. And I'll ask this in a manner that highlights my concerns with the quarter and maybe you can beat them down. The first part is the 500 basis points of operating leverage. I mean, historically, whenever we saw TD's Canada business produce revenues of 9%, anything over and above 200 basis points of operating leverage is considered a no-go zone because you were always reinvesting in the business, even if you were taking restructuring charges. In the past, and again, I've been following TD for a very long time, that was the sort of approach. It was always a reinvestment. And today, I'd see 500 basis points of operating leverage an all-time low on efficiency ratio. And it begs the question for me. The question is, are you hitting the brakes really hard in expenses because you need to overearn here for a period of time only to later have to spend again? So maybe you can beat down that thesis for me and explain why this is maybe transitory. Will you, in fact, try to revert back to a historical kind of operating leverage that has never really exceeds 200 basis points? Or is this a new paradigm that we're looking at for TD?

Question: Darko Mihelic - RBC Capital Markets - Analyst : So what would be your long-term target for operating leverage for this business?

Question: Darko Mihelic - RBC Capital Markets - Analyst : So would it be fair to say 500 basis points? Bharat Masrani - Toronto-Dominion Bank - Group President, Chief Executive Officer, Non-Independent Director It's hard to provide guidance at that level. I think the point to make here is, we've got very strong revenue momentum driven by account acquisition, particularly in the new-to-Canada segment. In addition to that, we are finding ways to have the business be more productive through technology. Ray talked about what's happening to traffic and how can we tweak our models. As long as those factors remain where the account acquisition continues to be strong, driving revenue growth, given the strength of Ray's business and Barb's business, we should see good positive operating leverage.