Great. Thank you very much. So, we'll start the next session with TD Bank. We have the Chief Financial Officer Kelvin Tran here with us. So Kelvin, welcome to the conference.
Thanks for having me.
So there's a, as I mentioned sometimes yesterday in, in some of my conversations, the timing of this event is pretty unique, and that comes right after the banks have reported first quarter. So sometimes we get a chance to sort of circle back and ask a few lingering questions that maybe we hadn't sorted out on the call, or maybe people have been, and certainly I get a lot of questions from investors on the first quarter. So I think, maybe to start, we can maybe clear up a few things from the quarter and some of the recent events as well. So I think yesterday the CFPB put out a notice that, you know, they will be lowering late fees, capping them. And we know you have credit card portfolios in the U.S. with Nordstrom and Target.
So we were hoping to at least maybe start right off the bat with a discussion on if there's any impact to TD.
Yeah. There will be an impact, but the credit card late fees are not a big proportion of our revenues. Remember, there's a revenue sharing agreement with the partners such as Nordstrom and Target. So, that's what I would say. And like any fees, we continue to evolve our product lines and adapt to the environment.
Where should we be looking? Maybe you can talk a little bit about where we'll see this impact. And I'm not sure when. So that's another big question. But we know that they're reported in the U.S. segment, and as well there's an offset in corporate. Maybe you can just give us a bit of a.
Yeah. It's complicated because the way the accounting works with these partnerships is that we're required to record 100% of the revenues in our financial statements. And then, these fees would be reported under other income. And then, the recovery of that, like the sharing, with the partners, is in the non-interest expense line. But again, it's not a big part of our total revenues, and so we think it's manageable.
Okay. So we'll see that movement, but net- net...
When it comes, if it comes, we'll see.
Okay. And then maybe just a few other things, from the quarter that stood out to me because there was a lot of discussion around, expenses. And we were looking at the corporate segment, and we were trying to, in the middle of that conference call, sort of sort out to ourselves, you know, what are we thinking about with respect to the incremental costs that are required for the AML compliance program in the U.S.? And so maybe I thought I'd give you a chance to sort of discuss how you see these costs rolling in.
Mm-hmm.
Are they coming in a steady fashion? Like, are they already there in Q1 or will they start to increase throughout the year? So maybe you can give us a little bit of an idea on how to think about that.
Sure. Sure. It's a great question. So, the risk and control infrastructure, the investment, would be recorded in Corporate segment. And then the, running the bank, the BAU, you know, there's gonna be billed as well. That would be in the various segments. What we provided our expectation for 2024 is that on a total expense base, it's a growth of, mid-single-digit growth, right? But I would say I'll break it down into a few parts. Recognizing that there are significant risk and control costs that we need to, invest in, we still want to continue to invest in the business to drive growth, right? So we're not, like, dialing that down. And so therefore, in Q4, we announced a restructuring plan to drive savings, of, expected CAD 400 million this year and then CAD 600 million on a run-rate basis in 2025.
When you look at our BAU expenses, investment for growth net of these savings, you're looking at a year-over-year growth of about 2%. Okay. So we're self-funding a lot of those investments through this restructuring program. And then when you add the TD Cowen four months this year because of the year-over-year, it, we call TD Cowen was not part of the bank in the first four months of last year, plus the risk and control costs, so that would add to [5, like], mid-single digit expense growth in 2024.
I see. I'm picking up the Cowen.
Yeah. Because I think it's just part of the M&A equation, but that's, like, that it was actually a big driver of the Q1 expense growth as well, right?
Okay.
Mid-single digit for 2024. Another way to triangulate that is to look at the corporate segment losses. Like, previously it was on an after-tax basis, CAD 100 million-CAD 125 million. Now we're expecting CAD 200 million-CAD 250 million. Now, when you look at that amount, there are a lot of moving parts in the corporate segment, right? Timing is really different. What is in the corporate segment that could impact that amount? Hedging, P&L volatility would be part of that. Earnings on excess capital would be part of that. As you buy back shares, that would impact it. Your forecast of rates would have an impact on that amount. Ex other expenses and productivity would also be part of. So when you look at that, there are a lot of moving parts.
But because we know we're investing more in risk and control in, in infrastructure, overall, when you add all those out, on average, I think it's gonna be that range in 2024. And then the question is, well, how should you look at it via, via versus prior quarters? And if you look at our investor presentation, the CFO deck, like, we go have by segment. And even in the, SFI, like the supplemental financial information pack, like, there's a table that shows corporate net expenses and then other. When you look at quarter-over-quarter increase in the losses, one-third is because of expenses, and two-thirds is because of other items. And other items, one of the contributor would be less earnings on excess capital because we're buying back shares. But if you look at year-over-year, most of that increase in loss is all driven by expenses.
I see.
When you look at that, we've been investing. You're not gonna see a sudden step-up expenses, but it would continue to increase throughout the year. Then the losses in corporate segment would depend on a lot of these other items.
I see. Okay. That's very helpful. And, you know, thank you for that. That was, that was good. And so maybe just we'll just switch gears here and talk a little bit more about some of the longer term. But I am very curious. I know that you mentioned the, the investments that you wanna continue over and above just the AML program, but also invest for growth.
Mm-hmm.
There's going to be some of that going on. Then I wanna weave that into, all right, let's think about, you recently had Investor Day.
Mm-hmm.
Right? You shared a lot of targets. Some of them we thought, myself anyway, I thought were pretty aggressive targets for Canada in particular, and certainly in the mortgage side. So maybe you can give us a bit of an update on how that's progressing, where you see things going, and is the investment pace kind of where we thought it would be at this point, for the Canada business? So broad-ranging question.
Mm-hmm.
But, we are seeing, you know, we are seeing TD certainly more aggressive in the mortgage market today than we have seen in the past.
Mm-hmm.
Relative to peers, it looks like you're gaining share. So maybe we can talk a little bit about that and sort of weave that into the Investor Day targets and where you are.
Sure. You know, we're very excited about the business itself. We're working hard at executing on our strategies since we laid out those goals. We're making good progress. So I'm very pleased with the progress we've made, and we believe that we continue to be on target. But remember, these are medium-term goals, right? So it's not a year-over-year or quarter-over-quarter goal. And so that means that it's gonna ebb and flows depending on the year, especially when you have market-dependent factors that are driving that. And you mentioned Riaz Ahmed with real estate is a good example because once we set out that goal, rates have risen dramatically. You saw a slowdown in the market. But we're still doing well.
And the way we do that is to continue to work on, first of all, retention of existing clients, right? Because what you wanna do is optimize, maximize your retention rate. If you have a leaky bucket, it's very hard to replace and then drive growth, right? So we're doing well there. And then also making sure that we get leads early, leads that we can execute on, and work on that funnel to bring leads to transactions. So that would be actions that we continue to take to optimize that growth. And that's gonna ebb and flow, but we believe that, you know, CAD 500 billion continues to be an achievable target. And then on, on the other side, like, new customers that we're driving growth. And that one, we've outpaced where we thought we were gonna be at this point in time. Right?
But that doesn't mean that we stop. It just means that it's working, and we continue to fine-tune and optimize our strategies. And when you look at the Canadian P&C results for the quarter, it was a very strong quarter. And why we said that is not just the earnings, or PTPP, number, but it's also growing both sides of the balance sheet and then growing your margin. Like, that's really hard to do. Like, it's a little Rubik's Cube that you're trying to optimize various metrics. And so we're able to do that, continue to gain share, grow your balance sheet, and still improve on margin.
And one of the things that you sort of guided to, medium-term goal.
Mm-hmm.
Totally understand.
Yeah.
We're talking about, you know, a 16%-plus ROE.
Mm-hmm.
Last year it came in around 14%.
Mm-hmm.
Maybe we can talk a little bit about your path to 16.
Right. Right.
And how you see it evolving, and if the path has altered a little bit since you've had that Investor Day, or is it really still sort of on track?
Still on track.
Okay.
So let me break it down into a few buckets here. First, we look at revenue growth. And so even though forward rates would imply that there would be rate cuts, you would have heard on our earnings call that we're guiding to stable margins. And because of the positive reinvestment income generating through maturities, right, we have a laddered bond portfolio, investment portfolio, where the rates that we're now investing in as these investments mature is much higher than several years ago. That's gonna continue to provide positive impact. And then volume growth is also good. And so even though margin may be stable, we continue to believe that net interest income would grow in 2024. So let's not confuse margin because of balance sheet mix.
Right.
Whatnot with net interest income growth. Sorry. And then when you look at the positive of integration with TD Cowen, you know, we had a record quarter in Q1 on in the wholesale bank. And so if the market continues to be supportive, then it's not just on growing on the retail bank side, but also on the wholesale and fee-based income, including wealth and TD Direct Investing trading. And then on the expense side, we already talked about it. You know, we announced a restructuring program. We wanted to go harder at productivity. And that's gonna drive, you know, $400 million savings in expected 2025. And then meanwhile, we have the share repurchase program. We've announced 90 million shares. We've repurchased almost 50% by the end of Q1. And so that's gonna reduce your denominator.
All these three would put us to continue to be on track to deliver that ROE goal.
Maybe just to follow up on that, though, so if you complete the program, the buyback program.
Mm-hmm.
It's probably an integral part of getting to the ROE. But would it. You maybe perhaps need another buyback program to help kinda give you that final push to get towards the 16%? Or do you think the, the revenue, the NII growth, and the expense savings can get you there on its own without another buyback program?
Yeah. So we don't have anything to announce on the buyback, like, another buyback program or not. If you look at the volume, it was quite healthy.
Mm-hmm.
So we continue to see good opportunities in the market to gain customer relationships. And so, who knows what the future would hold? But, you know, we continue to focus on organic growth.
I said maybe, maybe just taking it from another different angle, like, you'd still have a high capital ratio.
Mm-hmm.
Even after that.
Mm-hmm.
that buyback program. And I think you're still generating capital.
Mm-hmm.
Per quarter.
Mm-hmm.
Over and above. So it seems as though, you know, there's going to be excess capital here for some time.
Yeah.
Yeah.
If it's good, great. It is an uncertain environment.
Yeah.
We're very proud of the fact that we could be a defensive play and an offensive play at the same time. And.
Right.
You know, let the first program end first, and then we'll.
Sure.
We'll see what the environment holds.
Sure. Okay. Yeah. I'm just wondering, like, where, where's the long-term?
Mm-hmm.
Common Equity Tier 1 ratio? Thank you.
Right.
What, what do you think you wanna?
We said the goal is 12%.
12%.
And then between now and then, it depends on the environment. Like, even the pace of share buyback, as, as you know, depends on market conditions.
Sure.
So a lot of moving parts. But we continue to look at the environment, adapt, look at the opportunity. If we can, gain clients, good client relationship for long-term shareholder return, we'll do that every day.
Okay. So maybe we wanna turn attention a little bit to the U.S. operations.
Mm-hmm.
and talk a little bit about what we were just kind of talking about, which is, you know, you're trying to grow both sides of the balance sheet up here in Canada, difficult to manage, difficult to do. You're doing it. But in the U.S., we have seen deposits run off a little bit.
Mm-hmm.
The Schwab deposits have been coming down, a little bit of pressure there. So how do you see that evolving over the course of 2024? And, can you talk a little bit about deposit competition? Because there's been some of that discussion around here, in terms of the deposit market in the U.S. So how is TD faring on that front?
Sure. Sure. We're faring well. I think it was at this, sorry, side chat last year where I said, "We don't compete on price, but we will be competitive," right? And.
We don't lead on price, let's say.
So, what we've seen is that, yes, deposit migration continued to occur, but that has slowed down.
Mm-hmm.
A little bit. And the same thing with the pricing side on customer rates. And we've seen good deposit growth quarter-over-quarter, but again, more on the term side, term deposit. And, you know, when you look at rate decline in the future, I think we need to separate into two things. Like, there's the rate component, and there's the volume component, right? And so the rate component, a rate cut, because of where we are at in terms of the beta, there would be some of that that would go to the customer. But then there's also, like, when that happens, you would expect inflation to moderate, to come down. And also because rates are down, people would be spending less in servicing some of the debt as well.
And so part of the deposit attrition that you've seen over the last year is because people have to pay more for goods and services and pay more to service that. So even without that pressure, we expect that there would be growth. People would be able to retain more of their cash, and that's helpful to deposit. I've already talked about the slowing down of the migration or continue to occur because there's gonna be a smaller gap between various products. And so I think, and then I think the wild card is how competition would play out because the competition is not just on profitability of client relationship. You know, some banks would depend on that to fund their balance sheet. And so depending on the competition's needs, that could drive a very different dynamics.
That is yet to be seen at this point in time.
For the U.S. business.
Mm-hmm.
I mean, we're still seeing you know, we outlined some pretty good growth, ambitions for 2024.
Mm-hmm.
2025. And so as I think about that in a falling-rate environment, it could spur growth.
Mm-hmm.
Again, I just wanted to sort of better understand from your seat at the CFO level, when you look at the U.S. business and you say, "Wow, I've got all these moving parts. I've got falling rates. Maybe there'll be pressure on NIM, but I've got volume growth coming in the backside." Where do you see that growth potentially coming at TD in a falling-rate environment? Like, where is it gonna be, a big commercial push, or do you think it's gonna be on the no, there's big plans for credit cards, but maybe you can talk a bit more about.
Yeah. I mean, see if you look at our balance sheet, in Q1, there was healthy growth in all product classes, on the asset side of the balance sheet. And what we're very pleased about is our performance on commercial banking, as you've mentioned, in the middle market and C&I area. And our customers are telling us that, you know, they are waiting a little bit, given some of the uncertainty in the environment, and the cost of credit is high. And so there are pent-up demands, especially on the efficiency side. What we're hearing is that they are. How can I invest to drive efficiency? So we're excited about all of those prospects. And that's why there's another reason for let's wait and see what we do with the capital because there's a lot of opportunity to support our customers through this growth.
And with that, plans for branch expansion and geographic. Can you just touch gently on what we should be expecting to see in terms of you guys call them stores? I'm sorry.
Yeah. Yeah.
store growth for the near term. And medium term, maybe.
Yeah.
Is a better way to put it.
So, I mean, our stores continue to be a very important part of our customer service. You know, during the pandemic, obviously, digital played a bigger part. And what we see now is that the customers want to see people face to face. And store continues to be an important part. And so what we do is we think about it as a portfolio of investment, whether you invest in bankers because now you have commercial banking growth or whether it's credit cards. And so we look at all of that. And in this environment, given the risk-control infrastructure, where do you wanna spend the next dollars? They're all important levers, and it depends on the year.
Okay. So it would be remiss if I didn't have this conversation have a little bit of touch on credit quality. So, maybe we can talk a little bit about what we saw in Q1. But more importantly, you know, what we're hearing as a general theme here at this conference is, you know, although there's going to be issues with commercial real estate, there is not a great sense of concern.
Mm-hmm.
That they will develop into losses that are not manageable.
Mm-hmm.
Maybe you can give everybody a bit of a reminder of your commercial real estate, what we've seen to date, and how you look at that portfolio, going forward.
Sure. So high-level, commercial real estate makes up about 10% of our loans and acceptances. And then for office CRE, that people are very more focused on the overall portfolio. You know, we feel good about it. We have experienced bankers. We have good experience, and it's a diversified portfolio. And it's a portfolio that we stress often. And it's a bottom-up approach, looking at their cash flow, looking at various situations. And as a matter of fact, our reserves are 2.5 times that of the pre-pandemic level. And so we're adequately reserved, but obviously, the scenarios need to be played out. And we continue to monitor that, but we believe that it is manageable.
And so then thinking about, and I'll pause there. If there's any questions from the audience, please raise your hand now 'cause we're gonna quickly run into sort of the end of my questions. So if you have any questions, let me know. But then switching gears to the consumer.
Mm-hmm.
TD's got a fairly good portfolio of credit cards and mortgages in Canada.
Mm-hmm.
Maybe you can just touch briefly on your outlook for credit losses there and some of the trends that we're seeing. We're starting to see, across, I wanna say, the industry, a rise in delinquency.
Mm-hmm.
Rates in credit cards. So maybe you can talk a little bit about the behaviors that we're seeing and some of the loss characteristics there and, maybe dovetail that into mortgages if there's if there's anything to talk about there, really.
Sure. Sure. It's interesting. Like, the Canadian market is quite different than the U.S. market, both as a market that they're different but also in terms of our business on both sides of the border. So when you look at our credit card business in Canada, it's mostly indexed towards travel and luxury categories. And so our the credit losses there are not yet at pre-pandemic level, and revolving rates are still below pre-pandemic levels. But are they rising? Yes. As we expected, these are unsecured exposures, whereas 'cause of the partnership portfolio that we have as well. And for those ones, we're actually seeing them slightly above pre-pandemic levels already. And when you talk about, like, what we're seeing in terms of consumer behavior, we're seeing that consumers are adjusting.
What we do is, so we monitor the excess cash that they have in their accounts. And in Canada, you know, the theory is that because people understand that rates are high, their debt-to-service ratio, they're more indebted, you actually see them adjusting their behavior, spending less, holding more cash cushion. And then when you look at the RESL renewal over the last 12 months. Good actions taken by the customer, meaning they either pay a lump sum down or they are increasing their payments. And when you look at mortgages that hit the trigger rate, which is, like, non-amortizing on our variable interest rate mortgages, those amounts have been coming down quarter-over-quarter. So that means that people are adjusting to the scenario, and they are taking the appropriate action.
And we as a bank, we proactively go reach out to them before the situation arises and help them manage through that situation. So all in all, I, we feel good about it. And RESL losses continue.
With that, I suppose, there would be some concern that if people are making these mortgage payments and there's less discretionary spend happening in the in the marketplace.
Mm-hmm.
That there would be some concern with some industries, like service industries, hotel. Is there anything on the commercial side that you are seeing, in Canada, that might be connected in any way to lower discretionary spend from the consumer? Or is it still too early?
Yeah. I think nothing that would be alarming to us.
Okay.
In the rising-rate environment to have an impact. That's the intent of the rate increases. But I would say still, you look at it all depends on the customer segment as well. You know, you have customers who are in the mass affluent market. You know, they continue to be gainfully and that's why an employment rate is so important. Like, they continue to be gainfully employed. And then through this environment with inflation, they got real pay increases. So when we monitor the direct deposit chequing amounts that goes into the account, that continues to grow.
Interesting.
So, yeah. I think it's, we'll, we'll have to see how this plays out.
Okay. Maybe just a final question, Kelvin. So it's been a pretty unique year last year with the cancellation of FHN but Cowen coming on board. So, what is it that you're most excited about for 2024?
Well, as a Chinese, I'm excited about the Year of the Dragon. Special year. It's gonna be great, from that perspective. What I would say is that we're off to a great start. Look at our Q1 results. Canadian Personal and Commercial Banking, which is our biggest, most profitable business, delivered a strong quarter. And then very pleased with the results of the integration of TD Cowen and TD Securities. And it just shows you the power of putting these two franchises together. So I think there's a lot to be excited about and, you know, look forward to continue to execute on the strategies that we've outlined to you.
All right. Great. Well, with that, we can end with about a minute left. So, thank you very much. It's been great to have you.
Okay.
Thank you.