Okay, great. Thank you. We'll start the next session with TD Bank. I'm pleased to have Bharat Masrani on the stage. Thank you for joining us today, Bharat.
Nice to be here, Darko. Happy New Year to you and to all of you. Good to see you, folks.
So I've been pretty consistent in starting off our conversations, virtually every single one, with interest rates, so I thought I'm gonna do the same thing to you. So, and I think in this case, slightly different angle. What we saw in 2023 was your NIM expansion was pretty much as advertised. It was one of the best that we saw. Balance sheet, your deposit base, it all came true. Rising interest rates certainly helped your net interest margin. But we're now entering a phase where rates are about to fall, perhaps fall aggressively, perhaps fall quicker than anticipated.
So maybe you can speak to the constant discussion that I'm getting with investors is, "Darko, TD's net interest margin will be pressured more than you think." What are the mitigating factors that are out there, and how should we think about forgetting just NIM? Let's talk about net interest income, right? And how do you think about this as you enter 2024?
Well, two ways. When rates went up, you think of the pace at which they went up. You know, within a year, we had, what, about 450-500 basis points, you know, go up. And when you have that pace going up, betas, you know, kinda lag. So you know, where, how quickly those betas go up. But on the way down, you know, I, I don't expect that this thing goes back down to zero again, because we are not in any extraordinary situation like the global financial crisis or the pandemic. So we should settle in at something, you know, some kind of a neutral rate, which is gonna be much higher than what we've experienced in the last 13-15 years. And betas will become more normalized and not, you know, play out the way they did.
So that's one factor to keep in mind, as to the pace at which these rates drop. You said where there's some uncertainty around that. Yeah, there is, but I don't expect them to go to zero again. Secondly, you know, whatever rate forecast you put out there, as you know, one of the strengths of TD is that we have huge, non-rate sensitive deposits, i.e., checking transactions and savings accounts, and those are tranches. And as those tranches come for repricing, and you know exactly how we do that, you know, the reset rates on those tranches that were put in place a few years ago, much higher, even if you expect the rates to drop. So that's a countervailing, you know, force as to what it'll do to our NIMs.
The other factor, and you—I'm glad you brought up, you know, at the end of the day, you know, you can't eat NIM, you can eat NII. And if rates drop, you know, you would expect that is because, you know, folks are feeling that the inflation, you know, dragon has been slain, that the economy can start growing again at a normal pace, et cetera. And then you look at TD's businesses, the scale we have in each of our businesses, you'd expect us not only keep up, but gain market share, and that would give us the volumes, you know, to help our NII as well.
So, you know, I see how, in a simplistic way, you can try and do the math, saying, "On the way up, they had all that, so on the way down, you know, a similar amount is gonna be given back." But I think the factors that took us up there versus the factors that are gonna, you know, reduce us and what the fundamental balance sheet, you know, behavior through that is gonna be a lot different. So I don't think it's as simple an answer as what some of the people are warning you about. I think there's more to it than what meets the eye.
But I feel comfortable that we've been able to show from TD that even when rates were zero, we are a growing bank, we are a growing NII bank, you know, with very stable and good NIMs and scale businesses that, you know, second to none. And so feel good about, you know, how we are positioned in this particular rate cycle.
So, gathering from that answer, could I maybe pin you down a little bit and ask you maybe a slightly different way? Do you think net interest income growth in 2024 could be at the same pace that we saw in 2023?
A lot will depend on the general economy, and I don't expect us to start losing shares. If the economy is good and if you think, you know, rates, volumes are gonna go up, we're gonna hold our own and probably increase it because we are a growing bank. So a lot will depend on that, exactly the pace at which this goes up. I did provide guidance, you know, we did provide guidance in the Q4 call that, you know, our medium-term EPS growth target is 7%-10%. We think in 2024 it'd be challenging to get there. You know, we've been wrong in the past, forecasts are forecasts in the end.
But given, you know, the volatility in the markets, given all the complexities of, you know, where the regulations, particularly in certain markets, where they may end up or not, where interest rates are... You know, I think there is a bit of euphoria right now that we are over the interest rate issue. We went down by, I don't know, 110, 115 basis points in less than two months. Last week, we gave back 20 basis points. There's too much volatility here. So let's see how all those things settle in. But, you know, that was the... trying to provide you with some sense as to how we see the picture over fiscal 2024.
I mean, one of the things that we're certainly encountering now is a far, far lower level of concern with these mortgage renewals that are coming up, since the forward curve is implying that rates are gonna go down. There is, however, a marked difference amongst the Canadian banks in terms of their mortgage books. I mean, well, I have one bank that's had the mortgage balances go and run off. And your bank, and you had an investor day on this, and you're following through on this, have very strong growth in mortgages. Can you talk a little bit about, you know, what you're doing in the mortgage market, what the rationale is? Some, we're hearing in some places that you've got the best rate out there to attract clients.
Can you talk a little bit about your strategy around growing the mortgage book when others are far more concerned about the margin? And is this just the simple, the answer is that you got tons of capital, tons of deposits, so why not go after mortgages? Or is there something more, more to it than just that?
Well, we've been working hard to improve our mortgage processing, and how we're running our mortgage business. We increased our sales force. We have something called a mobile mortgage salesperson. We increased the number that we have, you know, across the country, and we've put in, you know, a sizable amount of investments in improving the experience at the branch level. And frankly, through the pandemic, you know, through that time, TD was underperforming in originating mortgages. And folks are wondering, you know, why is that? You know, why is TD not doing well? Well, what you know, after the fact, what turned out to be the case is that through the pandemic, 40% of our branch network was closed down, you know, for a long-ish period.
Once it came back and came back with force, and TD started to, you know, show itself on again, because that particular channel at TD matters. Our distribution matters, you know. And so when you combine all those, would suggest that operationally, what are we doing to have improved that business quite dramatically, and we're seeing that part. You know, with respect to what might be going on now, yes, we... I like to think we are the lowest deposit cost bank. You know, so we have a funding advantage. We have huge amount of funding available. If you're doing business because, you know, we have a funding advantage compared to a competitor, but that the origination margin is the same, what's wrong with that? You know, we're still making the same amount of money.
The cost of goods, you know, is lower for us than perhaps for somebody else. You know, that's the way to think about it, and we have the capital. So, you know, listen, it's a good competitive market. People like to talk about why TD is growing and why they're not, but we are very comfortable with our business. It makes good money for us, and we have a scale positioning that we are not prepared to give up on.
Could we think about the same thing happening in commercial lending, or why is commercial lending a little bit more balanced when I look at the growth profile across you?
Yeah, because mortgages are a bit more of a-
Commoditized.
Well, I don't want to call it commoditized, you know, completely, but there's a particular box in which they operate, whereas commercial banking is one loan at a time, and you're gonna look at it differently from that perspective. And in commercial lending, like, you know, one thing for sure, I'm telling you from a TD perspective, you know, we are not gonna be gaining share, by taking on undue risk on a product or frankly, to give the product away. That's just not the TD style, you know. Will we take advantage of inherent strengths that we have? Of course, we will. You know, that's the business we are in. But are we gonna give it away in any way or take undue risk? That's not gonna happen.
Okay, fair enough. And maybe, you know, switching gears a little bit, but at year-end, you know, you announced your results and a restructuring charge. And one of the unique things that came about in your Q4 is that, you know, you had to build risk and control infrastructure at TD. As I process that, I need to sort of think about what it is that you're actually doing in the U.S. So, presumably, you already have risk and control in place, and it seems like it's a fairly large spend. So I'm wondering if you could maybe give us a bit of an idea of what it is that you're actually spending on in the U.S.
Is this a complete tear down and rebuild? How should we think about this, and why might this take more than a year? Is really the question.
Yeah, so of course, we have a risk and control infrastructure. We are a bank. We are a, you know, highly regulated, you know, entity. But think about it, you know, when we look at what's going on in various markets in which we operate, you know, the operating environment might be different. New technologies have been introduced. New types of ways of looking at certain types of risks have changed. Talent, you know, is changing. You know, use of these particular technologies, like AI, generative AI, also is evolving pretty fast. So, you know, you'd say: All right, does it make sense for a bank of TD's scale? You know, we're serving close to 30 million customers. You know, we are a very large balance sheet. We serve more than 10 million Americans now in the U.S.
We are one of the largest domestic banks in the United States. We're one of the largest domestic bank in Canada, and we have a global business in TD Securities and to some extent, TD Asset Management. That's a big, you know, initiative for us. So in the overall scheme, when we say we want to improve our risk and control infrastructure because it makes sense given the forces that I just talked about, of course, we're gonna do it. And it makes sense for us, you know, given our size and scale, that we want to keep up with what you'd expect out of TD. So that's the way to think about it. Listen, I know where you're going with this because of our disclosures.
Of course, I can't talk about a specific issue we are dealing with, but this is, you know, going to help our business globally. It is not just specifically just to the U.S.
What will inform your decisions on building this out? Is it gonna be a mixture of, "Hey, we need—we see this gap, and we want to fix it," or is there somebody telling you, "Hey, there's a gap here, and you need to fix it?" Like, how should we think about it?
Well, you should think of TD, you would think we are disciplined operators, that we have a strategy, we are already doing it, and we're executing against that. And we know, you know, what we need to do, and we are already in the process of doing that. So this is, you know, a program that we've put in place, feel very happy as to the type of resources we are putting into it, the type of technologies we are deploying, and the type of capabilities that we have actually hired in order for us to be able to, you know, deliver this in time and on budget.
So just to, you know, just my last question on this, and I promise we can move on, but there's a large spend, and then there's sort of a thought that it could come back down. So is that the way I should think about this, is that certainly next year, maybe into 2025, and then a significant reduction? Or should I think about run rate expenses as essentially being elevated and sort of continue from there?
Let me actually explain it. I think hopefully it'll be helpful in understanding it. You know, post our restructuring that we announced, we said, you know, we took CAD 363 million in Q4. We'll probably have a similar amount in the first half of this year.
Right.
You know, post that, our core run rate expense growth should be around 2%. And, but because of these additional amounts we are spending on risk and control infrastructure, that run rate in 2024 will go up to mid-single digits. Now, within that, there's a one-time build, as you say, as we build, you know, new platforms under this risk and control infrastructure. But running of those is core. It's, it's, you know, it's part of the 2% that we just talked about. So that's the way you should think about it.
Okay. All right, that's helpful. Thank you. And so maybe, before we touch on capital, since we're talking on, you know, operations and so on, maybe we can touch a little bit on, sort of how to think about in... I mean, there's, I'm not going to sugarcoat it. I mean, it looked like TD Securities had a tough year, right? And you added Cowen, at the very end of the year. So in an environment where rates are coming down, I'm hearing that pipelines are building and things are improving. So how do you view that business, and what do you think we could, you know, is there a chance that... I know you talk about a certain run rate of revenues, and Riaz talked about it on the call.
In my mind, after everything that I've been hearing for the last couple of days in discussions with people, I kind of get the sense that investment banking revenues look like they're gonna be better than normal run rates. What's your view on that, and what are you seeing so far?
Yeah. Firstly, really happy with the TD Cowen acquisition. You know, it did various things for us. You know, we had recognized that we needed to be a scale player in equity capital markets, particularly in the United States. Not only for our aspirations in the U.S., but to actually support our global franchise, because, you know, the U.S. does matter. We were lacking in U.S. research, and research generally, and there were certain verticals in the investment banking side where we needed to build out. Because, you know, if you're going to have a franchise, particularly in areas where TD Securities is already strong, we needed those verticals, you know, to be more mature than where we were. And frankly, TD Cowen fits perfectly for that profile, and hence, we acquired it. And very happy.
Like, if you adjust, you know, you said 2023 has been a tough year for that market generally, and you're right. If you adjust for market movements and then say, "All right, if I adjust what our business case would have said from a revenue perspective," quite happy as to what they're doing, you know, the deal flow, et cetera. Where, I think Riaz did a good job in, in explaining this, where we've been more deliberate is in integrating, ensuring, you know, what makes sense, you know, over the long term, and not to rush to a particular number because it might feel good for a quarter or two. We are long-term players in this. And so over time, you know, the, the efficiency ratio in, in that business is gonna be better than what we are seeing today, and we think we can get there.
So overall, we feel pretty good about it. You know, if the rates continue to sort of moderate and go down, you know, M&A activity should go up, issuance activity should go up, and it should play out exactly where we thought it would with the capabilities that we've acquired. So feel pretty good about the business, the type of talent we've acquired, the culture that is being, you know, integrated. So this is a good story for us and frankly, good for TD Securities, because it is a business that is very important to TD, and this was something that we needed to either build ourselves or to buy, and we decided to buy it.
If you had to handicap the CAD 1.6 billion of revenues, I think per quarter is typically the sort of, you think that this year could be better than that?
I hope so, you know, like we all—but it's, it's more market related.
And then your forecast on where market conditions are gonna be as good as mine, and it's hard. I mean, these market-driven businesses are volatile in their nature, and, you know, we recognize that, and that's why we keep TD Securities at the size that it is.
Okay. So wanted to move on to capital, 'cause we've had some discussions today on capital, and there was a little bit of a fall in Q4 for TD, and there was a modest negative expected in Q1, and I think those numbers are well understood by everyone. And yet, at the end of the day, you're still gonna end up with a high ratio, even one of the highest ratios of the... if not the highest. And I get the sense, and from all my discussions today, that there isn't that much of a concern that the regulator will raise again in June. So given that backdrop that maybe we're at peak capital requirement, I got the sense in the Q4 call that there was a little bit of a reluctance to do a lot of buybacks.
So, so can you maybe correct me? Am I wrong in that thinking? There was an aggressive move. There was some aggressive buybacks. Now, are you taking the foot off the pedal, or, or is there something more nuanced that I'm missing?
So, I don't know why you get that, but anyways, let me explain. You know, we announced, soon after First Horizon termination, that we're gonna buy back 30 million shares. And we said, you know, we issued approximately 30 million shares for a dividend reinvestment plan in order to finance that deal, in order to acquire First Horizon. Since we are not going ahead with it, we're gonna give that, you know, that money back to our shareholders. Now, we made money doing it, but it's not the right way to make money. That's not what we, what we do for a living, is, you know, issue it at a high price and buy back at a low price. That's not the business we are in, but that's how it turned out.
And so when we completed that, then we announced another buyback because of the position we are in, and then, you know, we've been very consistent the way we think of capital deployment at TD. You know, how much capital do we need to support our core organic strategies? What growth aspirations we have? Are there any capability gaps where we might need to use capital, et cetera, et cetera? You heard that. And if we go through that framework and say, we still have lots of excess capital, we're not shy to buy back. Hence, we announced a further program to buy back 90 million shares. And we said, "We will buy this. Our intention is, in the next 1 year, we want to buy back 90 million shares." That intention has not changed.
We've been telling you exactly every quarter how much we've been buying back. But the level, the pace at which this happens, depends on market conditions, depends on factors such as what kind of volumes we had today, because there are certain rules as to how the bank can operate, what kind of algorithms we can put in place, what's the environment like, and what's our algorithm, and what price do we buy and what? We cannot exactly predict that. So the pace could change based on those conditions out there, but our intention has not changed. You know, that's what we said we wanna do, and we are, you know, hoping we can execute fully. That's what we do.
Okay, that's a good answer. And so the next question is: where do you wanna land with your ratio? Because if you execute entirely on that buyback, I still think to myself, "You're gonna build a lot of capital throughout the year.
Well, but then we'll, we'll decide what else. You know, if we have nothing else to do, we announce another buyback, and then-
So that's what I mean. I'm getting at it.
Right.
Yeah, so like, where do you wanna... where do you want the capital ratio to run?
So we,
Your current level is too high.
We are in a very nice position, you know, where the expectations of minimum regulatory capital is. You know, for us, more important than just the regulatory side is also, you know, what we think is an appropriate level of capital based on the balance sheet that TD has, you know? And in that, you know, I had signaled about a year ago that 12, 12 plus sounds like a good number. I don't think that has changed, you know, from where we are, so that would be a good number. But how we get there, what timeline we get there, what happens in the meantime, is something that is not... You know, you cannot predict that with 100% certainty. So that's how we think about it, but our framework has not changed.
If we continue to be where we are, and if it means that buybacks make more sense, we're not shy to do that, as we already demonstrated.
So I should be modeling longer term, your capital ratio, to come down to somewhere in the neighborhood of 12-12.5, or 12. You said 12.
Either it comes down by buyback or we've grown the bank somewhere.
RWA growth. Fair enough. Okay.
Yeah.
All right, that's great. I'm gonna have to build in more buybacks, I think, to my model, Bharat.
Well, it did... The point being that, you know, all of us, we, we've said we put down a ROE target, and people said, "Okay, what assumption I should use?" Well, you should use around 12, 12.5% is the capital target. But how we get there, and, and, you know, what pace we get there, would depend on market conditions, opportunities in the market, pace at which, you know, does it take six months to many years, would depend on what the economy is doing and what markets are presenting by way of opportunities.
In your answer, you didn't really mention, you know, the floors or any other sort of capital requirements coming back. Is it, is it really not that big of an issue for you?
Well, so Basel III is 15 basis points. We announced that, right? The floors, you know, there is some ambiguity in that because of... You know, we've got ample capacity now, but once the floor goes up to, I think, 72.5, then, you know, that it could turn out to be, but in a few years down the road, a binding constraint-
Right
... at some point. We'll see, because there are too many moving parts here, too many changes.... You know, we know Basel III is advertised now, but what's the final Basel III? We will find out. There's a lot of, you know, moving parts there, and how, you know, Canada reacts to those moving parts is gonna be hugely important as to what those numbers are.
So I wanted to touch on credit quality before I jump to any questions that are coming up on my screen, which is okay. You know, very similar to other banks, you know, what we saw from you in Q4 in terms of guidance is not too dissimilar. You moved the goalposts a little higher, so generally normalizing sort of PCLs. But, you know, when I think of it, your Canadian book is a little more retail lending-oriented. You've got an auto loan book in there. You've got a fairly sizable credit card portfolio. So I'm a little bit surprised that you didn't move the goalposts more on your PCL guidance. And so maybe you can give me a hand here.
Is it that you're simply expecting slower growth, and there are other factors at play here? Or why shouldn't I consider in a weaker economy that you wouldn't have a higher loss ratio? I mean, what is it that you're benefiting from that?
We've said, you know, what we've seen in most of the asset classes, that we're still in the normalization phase, you know. We haven't yet normalized. I think one asset class where I think we are now at what we call normalized levels would be auto loans, actually. Credit cards, we are still below what we would call normalization rates. We are not seeing, from an actual numbers perspective, any delinquencies or any indication that we have a major issue brewing here. Notwithstanding that, you know, Ajai said our normal sort of reserving would be 40-50 basis points, right? And he sees that, you know, for 2024. We also, you know, through the pandemic, had built up, you know, large allowances that everybody would have expected and have been slower to release those as well.
You know, we're running our allowance. I think it's 89 basis points now. And so when you take a combination of that and based on, you know, the IFRS 9, as you know, there is modeling there, and then, you know, what we're seeing from actuals, et cetera, we feel comfortable as to the way we are managing this book and how it is playing out and feel quite comfortable with that. Having said that, you know, I think the PCL expectation in 2024 is gonna be quite a much more than 2023 because of just the normalization effect.
So that might be the missing link for me. So, essentially, if we're peaking on losses in 2024, maybe at the peak, you don't need to build reserves, and maybe that helps? Is that-
Well, a lot will depend on volumes as well at that time. If, you know, like, those are the other factors. You know, if volumes have slowed down because there is a major problem, so that'll be the offset there as well.
Okay. Okay, great. Thank you. Turn to the questions here from the audience. So, with the recent departure of the head of Canadian business, can you remind us of succession planning at the bank?
Well, great! What a great bench we have, you know? It's too bad that Michael, you know, left the bank, but it's terrific. We wish him well. He's got a great role in a U.S. institution. Raymond Chun, who took over from him, Raymond Chun has been with the bank 30-odd years. Ran, you know, most of the businesses within Canadian Personal Banking, you know, in his career, including running a region as well, and, you know, very seasoned, very well-known, and it just illustrates the bench at TD. You know, that we can have a major departure, and, you know, life goes on, and you got a terrific executive who is running it and knows the business extremely well. So very happy with, you know, how we managed through that situation.
And above and beyond the departure and replacement, I think embedded in the question is succession planning. So what do you... Is there anything you can comment on that, or?
It's great, and succession planning is a core part of what we do in the bank for every major position, including my own, as to know how the bank operates and how it thinks about it. It's a, it's a major mandate of our HR committee, and frankly, I spend a lot of time doing that in part of my role, and we feel very comfortable that whenever we have situations, we've been able to manage it quite effectively.
Okay, thank you. The next question is: "So 2024 sounds like a transitional year for TD. What should investors look forward to in 2025 outside of credit?" So, like, let's assume credit's not. "Can TD return to 7%-10% earnings per share growth in 2025?" So I realize it's a bit of a futuristic look, but let's try and pin you down.
Well, you know, medium-term target EPS growth is 7%-10%, and that has not changed.
Yeah.
TD has the means to provide that level of growth, absent, you know, any major market movements, et cetera. Generally, at the end of the year, we say how we're feeling about the following year. So that's when I said at the end of 2023, that I feel in 2024, it's gonna be challenging to get to the 7%-10% because of the complex environment and various reasons that I outlined. That's the best I can give you. We still feel that, you know, medium-term 7%-10% EPS growth is doable, and that's why we still have it out there.
I'm gonna press you a little bit on that, though, because if I sit here and think, you know, I don't, I don't have my model right here in front of me, but if I, if I looked at that model and I say to myself, "Well, you know, they are gonna do a lot of buybacks, and they are growing mortgages at higher than industry average." So I think about the loan growth as being better than average in 2024 versus your peers. As I enter 2025, I've got a lower share count, a higher kind of loan growth. NIMs are stable. I kind of have to think that, yeah, the 7%-10% is probably very easy. So, you know, again, we're-
The-
We're notwithstanding credit, 'cause that was the question. So is it the expense side that maybe gives you reason for pause on that?
Geez, there's a career for you outside of being an analyst, you know? Too many moving parts. Like, you know, it's hard to, like, we give a medium-term target, 7%-10%, feel very comfortable with that, and then we give you a sense as to what we feel for one year at a time. And I think that's the appropriate way to think about it. To try and say, you know, "What's gonna be your expense growth in Q3 of 2025?" Nice question, hard to actually say what it is, you know. And, like, if this conference was a month and a half ago, we would not be talking about interest rates dropping as quickly as they have.
You know, if we were talking a year ago, you'd have said, "Oh, my God, we're gonna look at a major credit problem," because the way the rates are, inflation, et cetera, et cetera, playing out. So things move too quickly, too dynamically, you know, we, let's not forget, we've got, you know, elections coming up in major economies that have probably more impact than historical experiences we've had. In the U.S., the U.K. is also having and probably will have an election, India, Indonesia. These are major moves, and we've got two major wars going on in the world.
Too many moving parts here to pin down what's gonna happen in a particular year, except to say from a trend perspective, given the type of businesses we have, the way we operate them, the type of risk appetite that we have articulated, is it reasonable to think that TD can deliver 7%-10% EPS growth, you know, on a, on an annualized basis over the medium term? The answer is yes. What we might do in a specific year, hard to say based on all these moving parts.
Okay. With that, we're running up to the end of our session together. So Bharat, I'm gonna ask you to maybe just to summarize for investors and shareholders, your key takeaways for 2024.
Well, firstly, you know, thank you for your support of TD. You know, we have scale businesses in every market in which we operate. You know, we have a fantastic business in Canada that is growing, as you've rightly pointed out. You know, we have a wealth business that is, you know, taking share, with lots of new positioning. You know, we just introduced TD Active Trader last month, which is going exceedingly well, tested well in the market. We have... In the credit card space, given travel is back, the luxury sector is back, a very growing business. In the U.S., we surpassed 10 million Americans that are banking with TD today, and we're one of the largest domestic banks. Not many foreign banks can actually say that, and we were able to do that in about 15 or 17 years.
And in our capital markets, in our wholesale business, with the addition of TD Cowen, feel very excited. So overall, you know, we have businesses that are at scale, working well, and we're looking forward. And with the advantage of capital and funding costs that are probably one of the lowest in the industry, gives us specific advantages that we certainly will leverage. So, and thank you for all your support and look forward to meeting many of you over the next few hours.
Okay. All right. Thank you, Bharat.
Thank you.
Thank you very much.