Good afternoon, ladies and gentlemen. Welcome to the TD Bank Group's Q3 2019 Conference Call. I would now like to turn the meeting over to Ms. Gillian Manning, Head of Investor Relations at TD Bank. Please go ahead, Ms.
Manning.
Thank you, operator. Good afternoon, and welcome to TD Bank Group's Q3 2019 Investor Presentation. We will begin today's presentation with remarks from Bharat Masrani, the Bank's CEO after which Riaz Ahmed, the Bank's CFO, will present our Q3 operating results. Ajay Bambawale, Chief Risk Officer, will then offer comments on credit quality, after which we will invite questions from prequalified analysts and investors on the phone. Also present today to answer your questions are Terry Curry, Group Head, Canadian Personal Banking Greg Braca, President and CEO, TD Bank, America's Most Convenient Bank and Bob Dorans, Group Head, Wholesale Banking.
Please turn to Slide 2. At this time, I would like to caution our listeners that this presentation contains forward looking statements, that there are risks that actual results could differ materially from what is discussed and that certain material factors or assumptions were applied in making these forward looking statements. Any forward looking statements contained in this presentation represent the views of management and are presented for the purpose of assisting the bank's shareholders and analysts in understanding the bank's financial position, objectives and priorities and anticipated financial performance. Forward looking statements may not be appropriate for other purposes. I would also like to remind listeners that the bank uses non GAAP financial measures to arrive at adjusted results to assess each of its businesses and to measure overall bank performance.
The bank believes that adjusted results provide readers with a better understanding of how management views the bank's performance. Bharat will be referring to adjusted results in his remarks. Additional information on items of note, the bank's reported results and factors and assumptions related to forward looking information are all available in our Q3 Q3 2019 report to shareholders. With that, let me turn the presentation over to Bharat.
Thank you, Jillian, and thank you, everyone, for joining us today. Q3 was another strong quarter for TD. Earnings rose 7% to $3,300,000,000 and EPS increased 8% to $1.79 All of our segments performed well in the quarter. We generated good revenue growth as customers entrusted us with more of their business. Expense growth resulting in positive operating leverage, and we continue to invest in our capabilities to serve our customers better today and tomorrow.
These forward focused investments are made possible by the strength of our business model. It has proven itself over time delivering consistent earnings growth anchored by a strong risk culture and robust balance sheet metrics. That includes a CET1 ratio that held steady at 12% this quarter after the repurchase of over 11,000,000 common shares. This is a powerful testament to our ability to generate organic capital and an important source of strength and flexibility. This impressive enterprise performance was built on positive results in each of our segments.
Let me turn to them now. Canadian Retail had another good quarter in Q3 with earnings up 3% to $1,900,000,000 Revenue growth was strong and the rate of expense growth slowed, contributing to positive operating leverage. We continue to elevate the customer experience introducing a number of innovative solutions. In the personal bank, we launched an international remittance tool that allows TD customers to send money via EasyWeb for cash payout at more than 500,000 Western Union locations around the world. It's a simple and intuitive experience, leveraging our digital and money movement capabilities, a great example of working together as 1 TD to help our customers more, particularly in the important New to Canada segment.
TD Canada Trust also surpassed the $5,000,000 mark for active mobile users this quarter, solidifying our leadership position as Canada's largest digital bank. In our Wealth business, building on last quarter's Greystone fund launches, we introduced a new real estate pooled asset trust for high net worth clients and seeded a global real estate fund. With these product innovations, we are staking out a leadership position in proprietary alternative offerings. In the direct investing side, we refreshed our learning center with extensive online resources, the TD Insurance app is now powered by the same technology behind TD For Me, our banking app's digital concierge. It offers enhanced content and location management capabilities, including the ability to direct customers to the nearest TD Insurance Auto Center.
Across our Canadian retail franchise, we continue to win more business by making it easier for our customers to engage with us. Whether it's giving people the ability to send money to family and friends around the world, equipping investors with investment choices and educational resources to build their wealth or providing support to drivers on the road. It's about being there for customers when and where they need us and providing them with the advice and capabilities they need to feel more confident about their financial lives. Turning to the U. S.
Earnings in our U. S. Retail Bank rose 6% to $747,000,000 this quarter. Revenue increased 4%, reflecting strong loan and deposit growth and higher fee income. We generated over 100 basis points operating leverage.
And with the contribution from TD Ameritrade up 17%, segment earnings increased 9% to US967 $1,000,000 a new high. We also continued to invest in our core infrastructure and digital platforms to power the next generation of personalized connected human experiences for all of our customers, including an active mobile user base that exceeds 3,000,000. We launched a new digital mortgage offering to make the application process simpler, faster and easier. It combines self serve tools for easier access with face to face guidance when customers want it and it has reduced processing times resulting in higher overall experience scores. We also delivered more convenience for customers who have accounts with both TD Bank and TD Ameritrade.
They can now get an integrated view of their banking and investment accounts on TD's digital site and access their Ameritrade accounts from the TD website or mobile app, a better experience for our customers and another step forward in our strategic relationship with TD Ameritrade. Our wholesale bank earned $244,000,000 this quarter, up 9% from a year ago, as higher trading related revenue offset lower advisory and equity underwriting fees. Our U. S. Dollar strategy continues to show steady progress.
Since the beginning of the fiscal year and against the backdrop of softer industry wide new issuance volumes, we gained market share, were lead bookrunner on more than 100 U. S. Investment grade deals and more than double the number of U. S. ABS led lead bookrunner mandates.
We were active in the green bond space again this quarter, participating in 12 green or sustainable bond insurances, including joint leads on the World Bank's inaugural Euro Mandate, KfW's 1st sterling green SSA offering of the year and LBBW's inaugural U. S. Dollar green covered bond out of Europe. TD Securities was named 2019 Canada Derivatives House of the Year by Global Capital for the 2nd year in a row as well as coming force in SSA bonds reflecting the strides we made in building out our Capital Markets business. And for a 2nd year in a row, we tied for 1st place in overall Canadian fixed income as a Greenwich share leader and Greenwich quality leader.
These results demonstrate the success of our strategy to build long term client relationships as well as our commitment to quality service and excellence in execution to deliver for our clients. All in all, a good performance by our wholesale business as we continue to execute on on our performance at this stage of the year. 3 quarters into fiscal 2019, EPS is up 6%, a good result given the uncertain macro environment and difficult start to the year in wholesale. As you know, macroeconomic uncertainties persist. Trade and geopolitical tensions continue to escalate.
Central banks are cutting rates and yield curves have declined and remain inverted for long periods. However, our diversified retail focused model has demonstrated its resilience in a variety of operating environments. And with the investments we've been making to modernize our operations and increase our efficiency, we are well positioned to continue meeting our customers' changing needs and delivering value for our shareholders. As ever, we move forward united by our purpose to enrich the lives of our customers, colleagues and communities. They are at the heart of everything we do.
We expressed our commitment to them in a variety of ways this quarter. In July, we celebrated TD Thanks You, our annual customer appreciation day. In particular, we recognized small business banking clients who've shown exceptional dedication and service to their local communities. The work they're doing, promoting female entrepreneurship, children's health, sustainable food practices and employment opportunities for people with disabilities, to cite just a few examples, is an inspiration to us all. We've always believed that we win the most customers at TD because we have the best people.
So we were proud to be named 1 of the top 3 employers in this year's indeed top rated workplaces in Canada and to make a big move up in DiversityInc's top 50 companies in the U. S. These rankings reflect many things, but above all, our unique and inclusive employee culture. That culture was on full display this summer as celebrated Pride 2019 in Canada and World Pride in New York. Thousands of employees joined together for events in over 100 cities across North America in support of the LGBT Q2 plus community.
And we launched the 2nd annual TD Ready Challenge focused on better health, one of 4 drivers of change we are supporting through the REDI commitment, our corporate citizenship strategy. This year's 10 brands of $1,000,000 each will go to organizations that are helping improve access to early detection and intervention for disease with a goal of driving more equitable health outcomes for everyone. To wrap up, I would like to thank our more than 85,000 people for their hard work and dedication. They live our purpose and shared commitments each day and truly bring the TD brand to life. I'm proud of what we've accomplished together and I look forward to a successful finish to the year.
With that, I'll turn things over to Riaz.
Thank you, Bharat. Good afternoon, everyone. Please turn to slide 7. This quarter, the bank reported earnings of 3 point $2,000,000,000 and EPS of $1.74 Adjusted earnings were $3,300,000,000 and adjusted EPS was 1.79 dollars up 8%. Revenue rose 6% with increases across all our business segments.
Provisions for credit losses increased 3% quarter over quarter. And expenses increased 5%, reflecting business growth and investments in strategic initiatives. Please turn to slide 8. Canadian Retail net income was $1,900,000,000 up 2% year over year, reflecting higher revenue and positive operating leverage. Adjusted net income increased 3%.
Revenue increased by 6%, primarily reflecting volume growth and higher insurance and wealth fee based revenue. Average loans increased 5% year over year and average deposits increased 3%, reflecting growth in both personal and business volumes. Margin was 2.96%, down 3 basis points sequentially, reflecting a prior period refinement in revenue recognition assumptions in the auto finance portfolio and competitive pricing in term deposits. Total PCL increased 13% quarter over quarter with increases in impaired and performing PCLs. Total PCL as an annualized percentage of credit volume was 29 basis points, up 2 basis points quarter over quarter.
Expenses increased 6%, reflecting higher costs supporting business growth and charges related to Greystone. Please turn to Slide 9. U. S. Retail net income was $967,000,000 up 10% year over year on a reported basis and 9% on an adjusted basis.
U. S. Retail Bank reported earnings rose 6% year over year on revenue growth of 4% and positive operating leverage. Average loan volumes increased 6% year over year, reflecting growth in the personal and business customer segments. Deposit volumes excluding the TD Ameritrade sweep deposits were up 5%, including 4% growth in core consumer checking accounts.
Net interest margin was 3.27 percent, down 11 basis points sequentially, primarily due to lower deposit margins and balance sheet mix. Total PCL, including only the bank's contractual portion of credit losses in the strategic cards portfolio was $191,000,000 up 12% sequentially as a decrease in impaired PCL was more than offset by an increase in performing The U. S. Retail net PCL ratio was 48 basis points, up 3 basis points from last quarter. Expenses increased 3% year over year, reflecting business and volume growth and higher investments in business initiatives, partially offset by productivity and elimination of the FDIC surcharge.
The contribution from TD's investment in TD Ameritrade increased to US220 $1,000,000 Segment ROE was 12.9%. Please turn to Slide 10. Net income for wholesale was $244,000,000 up 9% year over year, reflecting higher revenue and partially offset by higher noninterest expenses and higher PCL. Revenue increased 13%, reflecting higher trading related revenue, partially offset by lower advisory and equity underwriting fees. Expenses increased 12%, reflecting continued investments in the global expansion of our U.
S. Dollar strategy and the impact of FX translation. Please turn to Slide 11. The Corporate segment reported a net loss of $173,000,000 in the quarter compared to a net loss of $113,000,000 in the same quarter last year. Net corporate expenses were lower year over year, largely reflecting lower net pension expenses and lower enterprise projects in the current quarter.
Please turn to Slide 12. Our common equity Tier 1 ratio ended quarter at 12% level with the prior quarter. We had strong organic capital generation this quarter, which added 41 basis points to our capital position. This was mostly offset by the repurchase of over 11,000,000 common shares in the quarter and growth in RWA. Looking ahead to Q1 2020, we expect the implementation of IFRS 16 and the revised securitization framework to have a 20 to 30 basis point impact on CET1 capital, which we expect will be mitigated by internal capital generation.
Our leverage ratio was 4.1 percent and our liquidity coverage ratio was 132%. I will now turn the call over to Ajei.
Thank you, Riaz, and good afternoon, everyone. Please turn to slide 13. The bank's credit quality remained strong in the 3rd quarter. Gross impaired loan formations were $1,460,000,000 or 21 basis points, stable quarter over quarter and up 3 basis points year over year. Please turn to slide 14.
Gross impaired loans ended the quarter at $2,900,000,000 or 42 basis points, down 6 basis points quarter over quarter and down 3 basis points year over year. The bank's $351,000,000 quarter over quarter decrease in gross impaired loans primarily reflects the sale of impaired loans in the U. S. Commercial portfolio attributable to the power and utility sector and resolutions outpacing formations in the U. S.
RESL portfolios, partially offset by higher impaired loans in the Canadian commercial and wholesale portfolios. Please turn to Slide 15. Recall that our presentation reports PCL ratios both gross and net of the partner share of the U. S. Strategic card credit losses.
We remind you that credit losses recorded in the corporate segment are fully absorbed by our partners and do not impact the bank's net income. The bank's PCLs in the quarter were $664,000,000 or 38 basis points, stable quarter over quarter and up 3 basis points year over year. Please turn to slide 16. The bank's impaired PCL was stable quarter over quarter, reflecting migrations in the Canadian Retail and Wholesale segments, offset by a decrease in the U. S.
Retail and Corporate segments. Performing PCL increased quarter over quarter, largely reflecting normal cost parameter updates in the Canadian and U. S. Consumer lending portfolios. In summary, as expected, we've seen some credit normalization this year in the Canadian consumer lending portfolios and the bank's commercial lending portfolios.
You. The first question is from Ebrahim Poonawala from Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Good afternoon. I guess first question, Riaz, if you can talk about just the margin outlook in Canada and the U. S, given that the forward curve in both markets are pricing and rate cuts. Just would love to get your thoughts in terms of the magnitude of compression we should expect as we look out over the next year?
Hey, Brian, thank you. As you know, in Canada, we've said before that margins will bump around for a variety of reasons. And while there are some very strong underlying economic fundamentals with employment and business investment. Clearly, Canada is going to be affected by what really happens in the U. S.
So and if we turn to the U. S. Geography, the U. S. Segment, again, on the ground, as Greg will tell you, the activity is very good.
We have a situation where employment is record levels, consumer activity remains quite strong and business investment is remaining quite positive and quite constructive. And you can see that in the in our performance in loan and deposit growth in the U. S. But clearly, they are main macroeconomic uncertainties that are kind of driving our rate considerations and expectations that at some point perhaps we may see the economy slow. So it's difficult really to give you any particular outlook on the rates because if it turns out that we might see trade uncertainties dissipate, we may see a return to greater macro confidence, which should also help the underlying business conditions.
So I think as a matter of general outlook, it'd be difficult to give you a forward outlook. But clearly if the forward curves do play out, we would expect to see some margin compression as a result of that. But then there are also mitigating factors that as interest rates come down, you might obviously continue to see loan volumes grow faster and credit performance should be better. So I think that's you can see some very mixed conditions depending on which scenario you wish to outline.
Understood. And the 11 basis points margin compression that we saw in the U. S. This quarter, was there anything one off in there that might reverse itself next quarter? Or is the 327 the right base to think about how the margin may trend from here?
It is the right base. There are no unusual items to point out in that, Ebrahim. About half of that is driven by just the rate compression that I talked about earlier. And then the other half is due to balance sheet mix that materializes from continued volume growth.
Got it. Thank you. I'll requeue again.
Thank you. The next question is from Steve Theriault from 8 Capital. Please go ahead. Your line is now
open. I
had a question on KAP and C, but first if I could just follow-up, Riaz, on the NIM, appreciating there's you can think about a lot of different scenarios. Do you think it makes sense at all to look back at either what your margin was or the delta in the margin following the last couple or few rate hikes of 'seventeen and 'eighteen to help us gauge future movements? Or has mix changed or anything else changed to the point where that you don't think that's a useful way to think about it?
No, I think, Steve, doing a little bit of trending is always useful in taking a look at how things would change under various scenarios. And you can see the mix change in the balance sheet as well as we can because the loans and deposit categories are indeed disclosed. So I think it would be useful to look at that trending, but you also have to keep in mind, as I mentioned earlier, that forward if you take a forward looking view, you also have to take into account what changes that might bring along with volumes.
Yes, that's fair. Thanks for that. And then so on Canadian P&C, Terry, for the most part FTE has been for the last at least couple of years pretty range bound between $27,000 to $28,000 and that's stripping away the wealth component. So just looking at the appendix and the supplemental. But this quarter jumped to I think, just under $29,000 Is there anything temporary in nature in terms of that spike?
Or maybe if you could just give us a bit of color on what's going on in terms of FTE in that vision?
For sure. Thank you. So if you look at the kind of our strategy around continuing to be a leader in acquiring new customers and then the embedded growth opportunity in the franchise, we've been working through in branch banking as I've mentioned before our future ready strategy where that's really around ensuring that we're elevating the capabilities of our people in the branch network and adding client facing advisors both in my business and in Paul's business to meet the customer opportunity. So as we're doing that, we're seeing that sort of steady climb of client facing advisers that we're adding. We've also been investing in more mobile mortgage specialists, so you're seeing the growth of them.
And then as we're implementing new initiatives to help the client experience, some of which Barrett talked about earlier is the number one digital bank in Canada. Some of the investments we're making in that IT space or in those capabilities are strong growth in lending in the franchise. And then, we've been adding in the operations and adjudication space as we've had strong growth in lending in the franchise to ensure that we can get answers to our customers quickly when they make requests of us around loans. That's the most important thing to them is helping them to understand what they can afford quickly so that they can make their personal decisions. So in combination, those are the strategic investments we've been making in business that have caused that increase in FTE.
And would you say there is upside from there as you can I think your intention is to continue to hire more mobile banking specialists and so on? Would you and I mean and some of those things have been ongoing for a while, right? So
For sure. In this year with the future value strategy, we've in particular been adding financial advisors in the branch network at an accelerated pace. We had last year a slower we have a slower pace coming into this year of we had more vacancies and then we were accelerating growth. So you've seen some accelerated growth this year for financial advisers in the branch in particular. We will continue to
year.
Operator, do we have another call?
Thank you. And next question is from Meny Grauman from Cormark Securities. Please go ahead. Your line is now open.
Hi. I wanted to
understand a little bit better what was driving the parameter updates that were pushing up the performing loan provisions, if you could highlight some of the key movers here?
Thanks. It's Ajay. So I would say we regularly on an ongoing basis look at our models and look at our parameters across our books. And so for this quarter basically we updated our parameters for the consumer portfolio in Canada and the U. S.
And there was a bit of an uptick because of that. The uptick was in Canadian auto. There was an uptick certainly in Canadian cards and then in U. S. Cards as well particularly in the performing category.
On the impaired side in the U. S, we actually saw a benefit. So really what these parameter updates are doing is they are adjusting for under prediction or over prediction of PCLs. And they are sort of a one time true up. So it's
higher probability higher probability of recession. I'm wondering if those factors or factors like that changed or get captured in the modeling for performing loan provisions?
Yes. So we certainly consider macro changes. But the macro change impact, I would say, was slightly beneficial. So it's not macro is not driving this parameter related increase.
And in terms of that net positive for macro factors, what's the key positives? I can think of a lot of negatives, but what would be the key positives?
So good follow-up. So I would say that in Canada, we certainly updated our 2019 GDP numbers. There were slightly better employment numbers in Canada. And as you're aware, home prices are firming up as well. And in the United States for 2019 in particular slightly our growth for 2019 was updated.
Those were really the drivers.
Thank you.
Thank you. The next question is from Robert Sedran from CIBC Capital Markets. Please go ahead. Your line is now open.
Hello. Good afternoon. A question for Terry, please. I just I noticed the mortgage growth is starting to pick up a little bit after a period where HELOCs were definitely dominating the business mix. I know you've kind of talked about this a little bit in the past, but is this reflecting more of a maturation of the new HELOC product?
Or is there something a conscious decision to shift more business toward the mortgage product?
Thank you. It's not a I mean customer by customer, we will help them make the right decision about the mortgage product that makes sense for them or the resol product that makes sense for them. And it is often the case that the hybrid HELOC product with its flexibility makes sense. You're seeing a little bit right now and just in terms of rates of people going to fix rate versus float and so that would explain a little bit of the mortgage growth. But in general, really pleased with the continuing sort of 5% growth in total resul and the investments we've made in that business.
Is that a kind of growth rate, especially as Ajay noted the prices are firming a little bit? Is that a rate of growth that you think is reasonable as we look out? I know it's difficult to look too far out, but is 5% resol growth something you're comfortable with continuing?
We're certainly comfortable with the business that we have done and we've been at that sort of rate of growth over the last number of quarters as you know. There's lots of factors to consider. But with the investments we've made in this business, we've talked about kind of mid single digit growth in this business and that's certainly what we expect for this year.
Thank you. And just to clarify, Riaz, when you were talking about that Canadian margin, it sounded like the decline this quarter was more about the prior period than it was about this quarter. Is that
right? Well, I think in both quarters there are some adjustments that contributed to that. And so you're right, most of the decline would be due to those items. Fundamentally would have been down 1 bps 1 bps. Okay.
Thank you.
Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead. Your line is now open.
Good afternoon. I just wanted to go to Wholesale Banking and on the expense side. I guess for 3 straight quarters, it's been low double digits. And you called out continued investments in the global U. S.
Dollar strategy. Does that dissipate at some point? And should we expect expenses to normalize to a lower level?
Yes. I think the run rate, as I've commented in the last couple of quarters that we're seeing this year overall, which has been sort of in that $600,000,000 level is what the steady state would appear to be. So that plays out. We've made a lot of investment in 2017 2018 and that's rolling through into 2019. That'll reduce and I think the run rate where we are now will be at that level.
So the year over year should come down then.
Okay.
Thanks. And just on the U. S. Side, I just noticed on commercial, it was a bit light on the quarter. And I know it's just 1 quarter.
If you kind of compare it to peers on the U. S. Side. Was there something on the commercial side that you guys maybe pull back on? Or should we expect this portfolio to still outpace personal going forward?
Yes. I just want to make sure I confirm the question. You you saw
it as a bit light?
The commercial, on the U. S. Side, it was up 1% quarter over quarter. But still on a year over year basis, it still outpaced personal.
But if I
kind of look across here
Thank you. I just wanted to make sure I was on a quarter over quarter between paydowns and movement and seasonality that's going to move around a bit. But I would say fundamentally, we've actually been seeing strong and very supportive C and I in overall commercial loan growth. Commercial loan growth for the quarter was roughly 7% all in with commercial real estate. And if we went back just a couple of quarters ago, we would have been talking about more moderate rates of growth.
So it's good to see that we've actually been accelerating the growth in the C and I business over the last couple of quarters. The market's been constructive. We've been spending a lot of time on various strategies for middle market and the commercial bank and we think it's performing quite well right now.
Okay. Thank you.
Thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead. Your line is now open.
Thank you. Good afternoon. Just on the credit side, I wanted there's 2 things. I guess there is an uptick in PCLs and gross impaired loan formations in Canadian Retail and hopefully hoping you can elaborate a bit on the drivers. And I think the MD and A there's a mention of insolvencies or whatnot.
So I was hoping you can unpack that. And then the second thing on credit, there was a reversal in performing loan PCLs in Capital Markets. I originally thought it was to do with PG and EBIT. I guess that's actually in the U. S.
Retail. So just wanted to understand what that reversal in Performance Loan PCLs and Capital Markets was related to? Thank you.
Thanks for the question. So first on Canadian impaired, yes, there's an uptick. I'd say a fair bit of that is commercial. And really what's occurring in commercial, we are moving off some very low numbers. And it's across 4, 5 industries, 4, 5 borrowers.
So again, off low numbers, but that's part of the numbers. And then I would say in the rest of the book, the personal book, there is an uptick particularly in unsecured credit, some in other personal, some in cards. In other personal, it's driven by some seasoning that's occurring because of some select risk cards. Again, a bit of an uptick because of cards, again a bit of an uptick because of insolvencies. And then the second part of your question on capital markets, again, the reversal there is largely model driven.
So we updated our ECL models in Capital Markets and so that's a model related release.
And what was updated in the model that would have driven that rollout?
Yes. It's all the parameters that would drive the release.
Is anyone in particular?
Or is it just across the board?
It's across the board.
But it doesn't sound like on the Canadian retail side, although you note and you call out certain items, it doesn't sound like they're concerning to you. Is that a fair statement?
Yes, because again, we are moving off very low numbers. If you actually go back and look at Q3 of 2018, we were at 24 bps. We're at 29 bps now. So overall, we're still operating within a very acceptable range. But again, I will remind you, we're late in the cycle and I do expect some gradual normalization in credit losses.
I actually, in our Q1 call did message that and it's actually turning out as expected.
I mean would you say 29 basis points is normal? Or would you where would normalization land on the PCL rate for Canadian?
So good question. I don't think that's a number we disclose, but what I will tell you is that 25% to 30% still is a low number and normal would be higher than that.
Okay. Thank you.
Thank you. The next question is from Sumit Malhotra from Scotia Capital. Please go ahead. Your line is now open.
Thanks. Good afternoon. Start with a numbers related question for Terry in Canadian Personal and Commercial. Looking at your fee income line for the quarter, up 1% year over year. And we didn't see the normal seasonal increase from Q2 to Q3, which at the very least, the day count usually helps.
Was there anything that depressed the fee number this quarter that was out of the ordinary that maybe resulted in overall revenue being a bit lighter?
Thank you. So there were a couple items this quarter and a couple items last year that would represent a couple of points in the other income. So that would definitely be part of the story there. So think of it more like 3% to 4% growth. And then I'd say just to comment on the business itself, really strong core checking and savings growth at over 4% and retail card sales up 2%, so maybe a little bit lower, but certainly good momentum there and we're still looking forward to the Air Canada partnership in the future.
Couple of small items mortgage discharge fees were a little bit lower. I think that's probably timing. And our wealth referral fees were a little bit lower. And as we've gone through this change in the branch banking network, I think that's just really a sort of a function of the change we're going through and it's not something that worries me. I'd say there's been a good trend on other income and good growth momentum and
would continue to expect to see that. Okay. And
then, I think, good growth momentum and would continue to expect to see that.
And then across the border to U. S. Personal and Commercial for Greg. I think both in this quarter and also 9 months over 9 months, your expense growth in the business is 3%. Off the top, Bharat mentioned the technological spend and the offering to customers.
When we take into account some of the comments on the rate backdrop and what that might mean for revenue, how are you thinking about your level of investment spend and expense growth of the business? Is 3% a reasonable level that you can keep? Or is it perhaps a little bit low in light of some of those investments that were discussed?
Well, maybe just backward looking, I'll start with that. I think we've tried to strike the right balance and you've seen that bump around quarter over quarter just in 2019 from Q1 to Q2 to Q3. And just given the nature of the business, you'll probably continue to see that bump around from quarter to quarter. I do think it's part of the art as much as anything is how do we strike the right balance with making sure that we are building the digital bank for the next decade, that we are making the right investments, that we're investing in frontline facing capabilities and employees and digital. And quite frankly, I think you're seeing that in the growth numbers play out real time, both in terms of the consumer bank, small business, the commercial bank and things we're doing around a wealth business that is certainly we spent a lot of time and energy building the capabilities around that in the U.
S. And a lot of these capabilities didn't exist 5, 7, 8 and certainly 10 years ago. So do I think we're getting the right balance right? I think we are. I would also say that we're also trying to make sure we're as efficient as possible.
So we've talked before about the BAU business as usual expenses versus build the bank and making sure we're making those right investments. So how are we getting cost out? How are we digitizing the bank and using new tools and capabilities just as important. I think that narrative has to continue to play out and we're going to be mindful of getting that balance right going forward.
How does that balance I'll stop here. How does that balance take into account the fact that for a period of time your net interest income, which is obviously the bulk of your revenue, is growing at double digits and now it's half of that in this New World order for interest rates. Does that balance getting that balance right allow you to slow the level of investment spend? Or is some of that expenditure already in the pipeline and set in stone so to speak?
Well, the good news is that you've heard us talk about a number of investments that we've made over the last few years in platforms in terms of capability and building the infrastructure. We think that is awfully important and I think that's true. But we will continue to want to make investments going forward and we're going to have to balance the environment we're in. And I think the leading organizations that get this right will be the ones that just don't fold up the tent because the environment they're in that they are still able to find the headroom by freeing up capacity or being efficient in other areas to make sure they are investing in their priorities. So we shouldn't gets more difficult or the slope of the curve continues the way it is.
We're going to have to be smart around that going forward.
Thanks for your time.
Thank you. The next question is from Nigel D'Souza from Veritas Investment. Please go
I had two quick questions. The first, just to circle back on a point you made earlier. I believe, if I got it correctly, the impairments that you were seeing on the Canadian commercial book that was driven by multiple accounts. And if I look in your or multiple sectors. And if I look in your supplement, I see automotive, construction, mills and mining and oil and gas.
Am I identifying the right sectors here that drove that? And is it correct that it wasn't driven by a single account, it was driven by a few sectors?
Yes. You're absolutely right. It's a few borrowers across auto, industrial, other services. You'd see a few dollars in metals. I think there's a bid in retail.
So there's no single borrower and there's no real theme. I'd say these are more idiosyncratic issues.
Okay. So that was my second call. If you still view it as idiosyncratic at this point in the cycle? And the second question I had and this is a more specific one and it's the last one. For the commentary you had on your updates to your modeling expected credit loss models under IFRS 9 for performing loans, I just wanted to check-in with you whether those model updates and the true up, did it include a change or update in your scenario weightings?
In other words, are you weighting the adverse scenario more? Have you changed that? And is that expected to change given the current conditions?
Yes. So we look at our scenario weightings every quarter as part of our governance. We did not change our scenario weightings for this quarter. Having said that, we believe we have an adequate weighting on the downside and our probability weighted allowance continues to be higher than our baseline.
Okay. That's really useful insight. Thank you.
Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead. Your line is now open.
Good afternoon. A couple of questions margin guidance for the U. S, did you provide any for the near term? And if not, can you tell me what the impact of the Fed rate cut will be on Q4 margins given that it took place at the end of the quarter? And then I got a follow-up broader more interesting I hope.
Gabriel, it's Greg. Thanks for the questions. No, we did not provide guidance if you missed the earlier part of the call on what our view is around net interest margin going out. But we did cover off that obviously the Fed rate cut and the general slope of the curve is generally not favorable. And our quarter over quarter number that you saw us down 11 basis points quarter over quarter is a combination of lower short end rates in front running the actual Fed rate cut we saw in the market as well as balance sheet mix.
So
that's how I'd answer that from
a quarter over quarter perspective.
Another way, would you expect a linear relationship in your margin visavisfedratecuts plural or does it moderate over time? That's what another bank is saying.
Yes. So I think what we've talked about in the past is what it means on the way up. On the way down, all things being equal, on the short end of it from a spot number, just for the U. S. Retail Bank I'm talking about now.
In U. S. Dollars, every 25 basis points of cut is worth roughly $90,000,000 pretax.
And Gabe, it should be as Greg qualified it all things being equal, if you do the same book and you're dealing with the same float mix of the book, it should be linear.
Okay. And my broader question, this issue combined with Ameritrade, let's say, because their revisions have been pretty substantially negative reflecting their more challenging growth outlook as well. The combination of your U. S. Business and the Ameritrade has been at least 20%, if not more of your growth over the past few years.
How does the possible slowdown in these businesses affect your confidence in the 7% to 10% growth, maybe roll that out over the next year as well perspective wise?
Gabe, what I'd tell you is that, first of all, when you look at the U. S. Retail businesses over the course of the last 3 or 4 years, you're quite right in pointing out that they have been fabulous for us and for delivering the franchise growth. Now what we look at in terms of the winning strategy for us over the years have been that we have built a franchise that is focused on delivering its customers' needs and we underwrite consistently through various cycles So I So I think if we focus on the right strategy, the macros will be what they will be. But as I indicated earlier, when you see rates coming down, there can be a number of offsetting factors in volumes or the economy does a little bit better.
You can better credit performance. And you might see for example in brokerage spaces that cash on IDA balances etcetera might actually increase. So there can be some very good mitigating effects of rate declines.
I'll leave it there. Thank you. Have a good long weekend. You too.
Thank you. The next question is from Darko Mihelic from RBC Capital Markets. Please go ahead. Your line is now open.
Actually, just as a follow-up to that, maybe just I mean, I get the IDEA balances may go up. I guess the there's a yield pickup that you have when the 5 year USDA swap rate is over $150,000,000 I guess it's below that now. How does that factor into the numbers going forward? Is that just something that falls off slowly and gradually over the next few quarters? And am I right in thinking it's about $100,000,000 or so of revenue?
You're correct, Darko, in saying that when those revenue sharing arrangements that go with interest rates come into play, they do play out over the course of the tractoring strategies that are undertaken. So it is a gradual slope up and therefore a gradual slope down. As to the quantification of it, we have not disclosed that
before and I think you
will be quite able to calculate
question for Ajay. On Slide 16, just a question for Ajay. On Slide 16, I mean, I appreciate that the parameter updates on the U. S. Portfolio was in the cards.
The corporate though shows performing as negative. Can you just help me understand? That's the partner share, right? So
just maybe give me a That's right.
So again, parameter updates can impact portfolios differently. So what was happening on the strategic cards is so keep in mind parameter updates are adjusting for either under prediction or over prediction. So if we were over predicting impaired for instance in strategic cards, it's correcting for that. If we were under predicting performing, then we'd correct for performing. So we actually saw a benefit in strategic cards because there was some over prediction.
Okay. And we're going into the seasonal pickup in PCLs, I suppose, because of the indirect auto and credit cards in the U. S. Is there any reason to think that this year it will be different? And in terms of magnitude, like should we sort of be expecting a similar normal sort of pickup in PCLs in Q4 for the cards and auto portfolio in the U.
S?
So I did give you some guidance for the full year, which was 40 to 45 basis points. And I do expect for the full year, we'll be nearer the higher end of the range. And I'd say the main reason for that, I mean, 3 quarters have played out is because U. S. Tends to be high a because of seasonality.
So I think you should look at basically history to see where that number will be, but Q4 tends to be a high number for us.
Okay, great. Thank you.
Thank you. The next question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.
Thanks. Ajay, you're a good guy to go to again. Just a quick question. Are you I know there's been lots of investments on the technology side, but from risk management and collections in particular, are you adequately staffed? Or are you adding to your staff?
Yes. So what I would tell you is that we've done a very comprehensive downturn readiness assessment across the bank and we're continuing to invest in areas including collections both from a a technology perspective and certainly I'd say from an FTE perspective we would ramp up again depending on the situation. I don't think we'd ramp up too much in advance, but we'll certainly have a plan on how to deal with it.
So in other words, you haven't ramped up right now in that from a collections perspective?
I think we're adequately staffed right now.
You're adequately staffed, okay. And Teri, do you think you can generate operating positive operating leverage next year?
So we've talked about this year. Our goal over the medium term is to deliver positive operating leverage, and we expect to do that for this year.
Too early to talk about next year. Is that right?
I think my friends around the table would say
yes. Apart from that,
Saurabh, this is Bharat Mazrani.
We've always said that we would like to continue to invest for the future. That's the hallmark of TD. That's how we create the franchise that we have. That's why you see the growth you do. There will be instances where we may not have positive operating leverage for a particular period because we are not going to compromise on great opportunities to invest.
But our general aspiration, and I think you've heard us say this before, is to generate positive operating leverage, but we shouldn't focus too much on a particular period or quarter or a year even if the right opportunities present themselves.
Bharat, since I just got you, any updated thoughts around inorganic capital deployment?
Inorganic. Generally, Sohrab, TD, there's no doubt that we are good at acquisitions. I think we've showed that in our history. In fact, a lot of the franchises we've built outside of Canada have come through that. So obviously, if there is any compelling opportunity that presents
itself, we will always look at it very seriously.
Uncertainties, there's probably more opportunity will present itself depending on how long these uncertainties continue. So we will make sure that we look at all of those opportunities seriously.
Thank you.
Thank you. There are no further questions registered at this time. I would like to turn back the meeting over to Mr. Bharat Masrani.
Thank you, operator, and thank you to all of you for joining us this afternoon. Once again, as I do every quarter, because it is important, I would like to take the opportunity to thank our 85,000 colleagues around the world who continue to deliver for all of our stakeholders every quarter. Really appreciate all the effort they put into delivering for our shareholders as well. Thank you and see you in 90 days.
Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.