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 third quarter 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 third-quarter operating results. Ajai Bambawale, Chief Risk Officer, will then offer comments on credit quality, after which we will invite questions from pre-qualified analysts and investors on the phone. Also present today to answer your questions are Teri Currie, Group Head, TD Personal Banking; Greg Braca, President and CEO, TD Bank, America's Most Convenient Bank; and Bob Dorrance, Group Head, Wholesale Banking. Please turn to Slide two. 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 2019 report to shareholders. With that, let me turn the presentation over to Bharat.
Thank you, Gillian, and thank you, everyone, for joining us today. Q3 was another strong quarter for TD. Earnings rose 7% to CAD 3.3 billion, and EPS increased 8% to CAD 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 moderated, resulting in positive operating leverage. We continued 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 million 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 CAD 1.9 billion. Revenue growth was strong, the rate of expense growth slowed, contributing to positive operating leverage. We continued 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 one TD to help our customers more, particularly in the important new to Canada segment. TD Canada Trust also surpassed the 5 million 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, TD refreshed our learning center with extensive online resources, including curated video learning journeys and live online workshops.
In our insurance business, 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 Centre. 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 our 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 million this quarter. Revenue increased 4%, reflecting strong loan and deposit growth and higher fee income. We generated over 100 basis points of positive operating leverage. With the contribution from TD Ameritrade up 17%, segment earnings increased 9% to $967 million U.S., 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 million. 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 Banking earned CAD 244 million 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 a backdrop of softer industry-wide new issuance volumes, we gained market share, were lead book runner on more than 100 U.S. investment-grade deals, and more than doubled the number of U.S. ABS-led lead book runner mandates.
We were active in the green bond space again this quarter, participating in 12 green or sustainable bond issuances, including joint leads on the World Bank's inaugural Euro mandate, KfW's first sterling green SSA offering of the year, and LBBW's inaugural US dollar green covered bond out of Europe. TD Securities was named 2019 Canada Derivatives House of the Year by GlobalCapital for the second year in a row, as well as coming fourth in SSA bonds, reflecting the strides we made in building out our capital markets business. For the second year in a row, we tied for first 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 our strategy to add scale and diversification to our client-focused franchise dealer. Overall, I'm pleased with our performance at this stage of the year. Three 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. 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 are 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.
We were proud to be named one of the top three 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 we celebrated Pride 2019 in Canada and WorldPride in New York. Thousands of employees joined together for events in over 100 cities across North America in support of the LGBTQ2+ community. We launched the second annual TD Ready Challenge, focused on better health, one of four drivers of change we are supporting through the TD Ready Commitment, our corporate citizenship strategy.
This year's 10 grants of CAD 1 million 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 seven. This quarter, the bank reported earnings of CAD 3.2 billion and EPS of CAD 1.74. Adjusted earnings were CAD 3.3 billion, and adjusted EPS was CAD 1.79, 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 eight. Canadian Retail net income was CAD 1.9 billion, 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 three 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 two basis points quarter over quarter. Expenses increased 6%, reflecting higher costs supporting business growth and charges related to Greystone. Please turn to slide nine. U.S. retail net income was US$967 million, 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%, 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 US$191 million, up 12% sequentially, as a decrease in impaired PCL was more than offset by an increase in performing PCL. The US retail net PCL ratio was 48 basis points, up three 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 US$220 million. Segment ROE was 12.9%. Please turn to slide 10.
Net income for Wholesale was CAD 244 million, up 9% year-over-year, reflecting higher revenue and partially offset by higher non-interest 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 CAD 173 million in the quarter, compared to a net loss of CAD 113 million 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 the 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 million 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%, and our Liquidity Coverage Ratio was 132%. I will now turn the call over to Ajai.
Thank you, Riaz, and good afternoon, everyone. Please turn to slide 13. The bank's credit quality remains strong in the third quarter. Gross impaired loan formations were CAD 1.46 billion or 21 basis points, stable quarter-over-quarter and up three basis points year-over-year. Please turn to slide 14. Gross impaired loans ended the quarter at CAD 2.9 billion or 42 basis points, down six basis points quarter-over-quarter and down three basis points year-over-year. The bank's CAD 351 million 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's 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 CAD 664 million or 38 basis points, stable quarter-over-quarter, and up three basis points year-over-year. Please turn to slide 16. The bank's impaired PCL was stable quarter-over-quarter, reflecting credit 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.
Overall, credit quality remains strong across the bank's portfolios, and we remain well-positioned for continued growth. With that, operator, we are now ready to begin the Q&A session.
Thank you. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. 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 in 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.
Ebrahim, thank you. As you know, in Canada, we've said before that margins will bump around for a variety of reasons. While there are some very strong underlying economic fundamentals with employment and business investment clearly Canada's going to be affected by what really happens in the U.S. 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 at record levels. Consumer activity remains quite strong, and business investment is remaining quite positive and quite constructive. You can see that in our performance in loan and deposit growth in the U.S. Clearly there 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.
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 would also help the underlying business conditions. 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. 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. I think you can see some very mixed conditions depending on which scenario you wish to outline.
Understood. 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? 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. The other half is due to balance sheet mix that materializes from continued volume growth.
Got it. Thank you. I'll ring you again.
Thank you. The next question is from Steve Theriault from Eight Capital. Please go ahead. Your line is now open.
First, if I could just follow up, Riaz, on the NIM. Appreciating 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 2017 and 2018 to help us gauge future movements? Has mix changed or anything else changed to the point where 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. You can see the mix change in the balance sheet as well as we can because the loans and deposits categories are indeed disclosed. I think it would be useful to look at that trending. You also have to keep in mind, as I mentioned earlier, that if you take a forward-looking view, you also have to take into account what changes that might bring along with volumes.
Yeah, that's fair. Thanks for that. On Canadian P&C, Teri, for the most part, FTE has been for the last at least couple years pretty range-bound between 27,000 and 28,000, and not stripping away the wealth component, so just looking at the appendix and the supplemental. This quarter jumped to, I think just under 29,000. Is there anything temporary in nature in terms of that spike? Maybe if you could just give us a bit of color on what's going on in terms of FTE in that division.
For sure. Thank you. If you look at 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. As we're doing that, we're seeing that sort of steady climb of client-facing advisors that we're adding. We've also been investing in more mobile mortgage specialists, so you're seeing the growth of them.
As we're implementing new initiatives to help the client experience, some of which Bharat talked about earlier, as the number one digital bank in Canada, some of the investments we're making in that IT space or in those capabilities are contributing to the growth. Finally, 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. In combination, those are the strategic investments we've been making in the business that have caused that increase in FTE.
Would you say there's upside from there? I think your intention is to continue to hire more mobile banking specialists and so on. Some of those things have been ongoing for a while, right?
For sure. In this year, with the future-ready strategy, we've in particular been adding financial advisors in the branch network at an accelerated pace. We had a slower pace coming into this year. We had more vacancies than we were at accelerating growth. You've seen some accelerated growth this year for financial advisors in the branch in particular. We will continue to add advisors and invest at a pace that makes sense to deliver both short-term and long-term growth. The pace would likely come down a little bit as we go into next year.
Thanks for that.
Operator.
Operator, do we have another call?
Thank you. The next question is from Meny Grauman from Cormark Securities. Please go ahead. Your line is now open.
Hi. 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 Ajai. I would say we regularly, on an ongoing basis, look at our models and look at our parameters across our books. 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. 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 pretty much normal course activity.
Okay. I guess where I'm getting at is we saw a big move in the yield curve over the last little while and 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. We certainly consider macro changes, but the macro change impact, I would say, was slightly beneficial.
Macro is not driving this parameter-related increase.
In terms of that net positive for macro factors, what's the key positives? I can think of a lot of negatives. What would be the key positives?
Good follow-up. 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. 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. The line is now open.
Hello. Good afternoon. A question for Teri, please. 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 a conscious decision to shift more business toward the mortgage product?
Thank you. Customer by customer, we will help them make the right decision about the mortgage product that makes sense for them or the RESL product that makes sense for them. It is often the case that the hybrid HELOC product with its flexibility makes sense. You're seeing a little bit right now just in terms of rates of people going to fixed rate versus float. That would explain a little bit of the mortgage growth. In general, really pleased with the continuing sort of 5% growth in total RESL and the investments we've made in that business.
Is that a kind of growth rate, especially as Ajai 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% RESL 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.
Okay. Thank you. 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 were some adjustments that contributed to that. You're right, most of the decline would be due to those items. Fundamentally, we'd have been down one basis point.
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 three straight quarters it's been low double digits, and you called out Canadian 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?
Yeah, I think the run rate as I've commented on in the last couple of quarters that we're seeing this year overall, which has been sort of in that CAD 600 million level is what the steady state would appear to be. That plays out. We've made a lot of investment in 2017 and 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. The year-over-year should come down then.
Okay, thanks. 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 one 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 pulled back on, or should we expect this portfolio to still outpace personal going forward?
I just want to make sure I confirm the question. You said you saw it as a bit light?
The commercial on the U.S. side, it was up 1% quarter-over-quarter. Still on a year-over-year basis, it still outpaced personal. If I kind of look across peers.
No. Got it. Thank you. Quarter-over-quarter, between pay downs and movement and seasonality, that's going to move around a bit. I would say fundamentally, we've actually been seeing strong and very supportive C&I and overall commercial loan growth. Commercial loan growth for the quarter was roughly 7% all in with commercial real estate. If we went back just a couple of quarters ago, we would've been talking about more moderate rates of growth. It's good to see that we've actually been accelerating the growth in the C&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, there's two things, I guess. There's an uptick in PCLs and gross impaired loan formations in Canadian retail, hoping you can elaborate a bit on the drivers. I think in the MD&A there's a mention of insolvencies or whatnot. Anyways, hoping you can unpack that. The second thing on credit, there was a reversal in performing loan PCLs in capital markets. I originally thought it was to do with TG and E, but I guess that's actually in the U.S. retail. Just wanted to understand what that reversal in performance on PCLs and capital markets was related to. Thank you.
Well, thanks for the question. First on Canadian impairs, yes, there's an uptick. I'd say a fair bit of that is commercial. Really what's occurring in commercial, we are moving off some very low numbers, and it's across four or five industries, four or five borrowers. Again, off low numbers, but that's part of the numbers. 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 expansion we did couple of years ago, and there is an uptick in insolvencies that's also reflected there. Then the other category I'd call out is cards. Again, a bit of an uptick because of insolvencies.
The second part of your question on capital markets. Again, the reversal there is largely model driven. We updated our ECL models in capital markets, and so that's a model related release.
What was updated in the model that would have driven a release?
It's all the parameters that would drive the release.
Is there anyone in particular, or is it just across the board?
It's across the board.
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?
Again, we are moving off very low numbers. If you actually go back and look at Q3 of 2018, we were at 24 basis points. We're at 29 basis points now. Overall, we're still operating within a very acceptable range. 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.
Would you say 29 basis points is normal, or where would normalization land on the PCL rate for Canadian?
It's a 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.
Great. Thank you.
Thank you. The next question is from Sumit Malhotra from Scotiabank . Please go ahead. Your line is now open.
Thanks. Good afternoon. Start with a numbers related question for Teri in Canadian Personal and Commercial. Looking at your fee income line for the quarter, up 1% year-over-year. 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. There were a couple items this quarter and a couple items last year that would represent a couple of points in the other income. That would definitely be part of the story there. Think of it more like 3%-4% growth. 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%. Maybe a little bit lower, but certainly a 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. Our wealth referral fees were a little bit lower.
As we've gone through this change in the branch banking network, I think that's just really a sort of 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 expect good business growth going forward.
The three to four, in your view, is a more reasonable run rate expectation?
Certainly, we've seen good growth momentum and would continue to expect to see that.
Thank you. Then across the border to U.S. personal commercial for Greg. I think both in this quarter and also over nine months, your expense growth in the business is 3%. Off the top, Bharat mentioned the many initiatives that are underway in terms of 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 first quarter to second quarter to third. 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 in digital. 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've spent a lot of time and energy building the capabilities around that in the U.S. A lot of these capabilities didn't exist five, seven, eight, and certainly 10 years ago. 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. We've talked before about BAU, business as usual expenses versus build the bank, and making sure we're making those right investments. How are we getting cost down? 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.
We're going to be mindful of getting that balance right going forward.
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 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, in 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. I think the leading organizations that get this right will be the ones that just don't fold up the tent because of 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. We shouldn't kid ourselves.
If the environment 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 Research. Please go ahead. Your line is now open.
Thank you. Good afternoon. 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 or multiple sectors. If I look in your supplement I see automotive, construction, metals and minings, and oil and gas. Am I identifying the right sectors here that drove that? 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 bit in retail. There's no single borrower, and there's no real theme. I'd say these are more idiosyncratic issues.
Okay. That was my second follow-up. You still view it as idiosyncratic at this point in the cycle. 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?
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 a 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. Couple questions around the U.S. business. I'm sorry if I missed it, but the margin guidance for the U.S., did you provide any for the near term? 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? I got a follow-up, broader, more interesting, I hope.
Gabriel, it's Greg. Thanks for the questions. 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. We did cover off that obviously the Fed rate cut and the general slope of the curve is generally not favorable. 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. That's how I'd answer that from a quarter-over-quarter perspective.
Ask another way, would you expect a linear relationship in your margin vis-à-vis Fed rate cuts plural, or does it moderate over time? That's what another bank is saying.
Yeah. 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, for every 25 basis points of cut is worth roughly $90 million pre-tax.
Dave, 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. My broader question, this issue, combined with Ameritrade, let's say, because their revisions have been pretty substantially negative or reflecting their more challenging growth outlook as well. The combination of your U.S. business and 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%-10% growth, maybe roll that out over the next year as well, perspective-wise?
Gabe, what I tell you is that first of all, when you look at the U.S. retail businesses over the course of the last three or four 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've built a franchise that is focused on delivering its customers' needs, and we underwrite consistently through various cycles, and therefore pick up market share. Sometimes when we've gone through down markets, you've actually seen TD do better. 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.
The economy does a little bit better. You can see better credit performance. You might see, for example, in brokerage spaces that cash on IDA balances, et cetera, might actually increase. 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, I get the idea A balances may go up. I guess the yield pickup that you have when the 5-year USDA U.S. dollar swap rate is over 150 against us 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? Am I right in thinking it's about CAD 100 million 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 tracking strategies that are undertaken. 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 it off the public disclosures.
Yeah. Okay. Thank you. I appreciate that. Just a question for Ajai. On slide 16, 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's share, right?
That's right. Again, parameter updates can impact portfolios differently. What was happening on the strategic cards is, keep in mind, parameter updates are adjusting for either under-prediction or over-prediction. 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. We actually saw a benefit in strategic cards because there was some over-prediction.
Okay. 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'll be different in terms of magnitude? 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.?
I did give you some guidance for the full year, which was 40 to 45 basis points. I do expect for the full year, we'll be nearer the higher end of the range. I'd say the main reason for that, three quarters have played out, is because U.S. tends to be high because of seasonality. 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. Ajai, you're a good guy to go to again. Just a quick question. 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?
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 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.
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. Teri, do you think you can generate positive operating leverage next year?
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, Sohrab, this is Bharat Masrani. 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. 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 a 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, Saurabh, 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. Obviously if there is any compelling opportunity that presents itself, we will always look at it very seriously. In this current environment with all these macro uncertainties, there's probably more opportunity will present itself depending on how long these uncertainties continue. 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, 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. I really appreciate all the effort they put into delivering for our shareholders as well. Thank you, 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.