All participants, please standby. Good afternoon, ladies and gentlemen. Welcome to the TD Bank Group Q2 2021 earnings conference call. I would now like to turn the meeting over to Ms. Gillian Manning. Please go ahead, Ms. Manning.
Thank you, operator. Good afternoon, and welcome to TD Bank Group's second quarter 2021 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 second 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 to answer your questions today are Teri Currie, Group Head, Canadian 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 Q2 2021 report to shareholders. With that, let me turn the presentation over to Bharat.
Thank you, Gillian, and thank you, everyone, for joining us today. Q2 was a strong quarter for TD as we continued to benefit from a recovering economy. As we look around today, we know the battle against COVID is not over. The devastation we are witnessing in India and Brazil is heart-wrenching and will have far-reaching consequences on those regions. In North America, we see encouraging signs that the recovery is on solid ground and gathering momentum. The rapid start to vaccinations in the U.S. has permitted an easing of restrictions across much of our footprint, and broadening vaccine availability in Canada should support similar trends here. TD will continue to play a key role in driving forward that recovery. As a purpose-driven organization, we know the bank thrives when our customers, colleagues, and communities thrive. Our recoveries must go hand in hand.
That was a core message of our 2020 ESG and TCFD reports, which we released this quarter. I invite you to read them and learn more about what we are doing to build a more inclusive and sustainable future. That includes our approach to achieving the goals of our Climate Action Plan as the first Canadian bank to set a net zero target by 2050. We are accelerating our efforts, have mobilized leaders and experts across the bank, and are working closely with clients in multiple sectors to support their transition plans and create positive change. We also discussed our progress on inclusion and diversity. Over the past year, we have seen what inequality looks like across our communities in stark terms in the Black, Asian, Indigenous, and other communities. TD will never rest on our past success.
We will work to increase our own representation and contribute to the fight against bias, discrimination, and racism. Because we know what gets measured gets done, our ESG report provides expanded and detailed reporting so all stakeholders can track our progress. As I wrote in my CEO message, TD will meet the biggest challenges of our generation with determination and purpose. We will continue to invest in what matters and leverage our resources and the talent of our 90,000 colleagues around the world to help build the better bank. That better bank is powered by our proven business model and sustained and strengthened by the investments we continue to make in our businesses and operations. In this year of accelerated digital take-up and changing customer needs, the capabilities and infrastructure we put in place have enabled us to support a dramatic increase in adoption and engagement.
We are winning with customers by delivering innovative solutions customized to their needs, this quarter crossing the 10 million mark for mobile users across our North American footprint. Our Canadian banking app was honored by the Business Intelligence Group for AI-powered insights developed by Layer 6, our in-house AI team. In the U.S., we were recognized by Celent for our partnership on a virtual assistant that provided advice and support to customers digitally at the height of the lockdown. We continue to maintain a strong pace of innovation as the number one financial institution patent filer in Canada. These accomplishments have been matched by continued growth and strong customer acquisition in each of our businesses. Our Canadian retail segment earned CAD 2.2 billion this quarter, reflecting lower PCL, lower insurance claims, and higher volumes and fee income.
Activity accelerated in our banking businesses, with continued strength in mortgage volumes and a pickup in credit card spend. We also extended our lead in personal deposits and continue to lead in payments, ranking number one in Interac Flash and e-Transfer. We delivered record wealth earnings on strong trading volumes and net asset growth and impressive insurance earnings, including substantial customer premium relief. We also achieved several milestones this quarter. In the business bank, TD Auto Finance ranked highest in dealer satisfaction among non-captive retail lenders by J.D. Power for the fourth year in a row, following TD Auto Finance U.S.' J.D. Power win last quarter. Just at the quarter end, we closed the acquisition of Wells Fargo's Canadian direct equipment finance business.
In our wealth business, we launched the TD Wealth Family Office, a multidisciplinary group that will leverage our 1TD model to deliver bespoke advice and solutions for ultra-high-net-worth families and entrepreneurs. TD Insurance continued to take market share, rising to the number three position for home and auto general insurance. Our U.S. retail bank delivered $853 million in net income this quarter, with another strong sequential recovery in earnings, mainly on lower PCL. We recorded peer-leading consumer deposit volume growth as customers entrusted us with more of their savings. We saw a further increase in customer transaction activity with a return to near-record levels of debit card spend and rising credit card transactions. We are also seeing good early take-up of our new TD Double Up Credit Card, one of the best cashback offerings on the market.
We continue to support small business customers with PPP financing, ranking in the top 10 nationally as we originated some 45,000 PPP loans in the second round of the program and helped customers access over $1 billion in forgiveness under the program. Together with the $194 million contribution from our ownership stake in Schwab, U.S. retail segment earnings exceeded $1 billion. Our Wholesale Banking earned CAD 383 million, a good result with lower PCL, helping offset a normalization in trading activity from last year's elevated levels. This quarter, we continued to build our U.S. franchise with the announcement of our agreement to acquire Headlands Tech Global Markets, expected to close in the second half of calendar 2021. The transaction will expand our capabilities in fixed income, electronic trading, and accelerate TD Securities' innovation and technology strategy.
We were also proud to act as joint lead for the International Finance Facility for Immunisation, CAD 750 million 5-year vaccine bonds, which will provide Gavi, the Vaccine Alliance, with immediately available funding to support routine immunization in lower-income countries, reaching nearly half the world's children. At the midpoint of fiscal 2021, TD Bank remains strong and our business is well-positioned for the future. While the COVID-related impacts we saw last year, including margin pressure from low rates, high savings rates, delaying loan growth, and PCL, will continue to affect year-over-year comparisons, we will maintain our disciplined approach to investing for the long term. It served us well through the pandemic, and as the recovery progresses, it will support our continued readiness to meet changing needs, adapt to shifting dynamics, and build for growth.
We are also supported by a very robust CET1 ratio, which affords us strategic flexibility to invest in our competitive position, to grow organically, to pursue acquisitions that add capabilities, and to build our franchise, to return capital to our shareholders when that becomes possible, or a combination of those things. As always, we will use our capital responsibly and be thoughtful about making the right investments for the long term. Our investments also support how we operate the bank. As we plan for a future when more of us can return to TD premises, we know that flexibility will remain critical and that our people need the capabilities and infrastructure to continue to serve customers. Backed by a clear strategy and strong balance sheet, we look ahead with confidence.
Our bank has proven resilient, our brand is among the strongest in the industry, and our unique and inclusive culture remains a distinct competitive advantage. Our people bring that culture to life, and I'll finish by thanking them for their continued hard work and dedication. With that, I'll turn it over to Riaz.
Thank you, Bharat. Good afternoon, everyone. Please turn to slide eight. This quarter, the bank reported earnings of CAD 3.7 billion and EPS of CAD 1.99, and adjusted earnings are CAD 3.8 billion and adjusted EPS was CAD 2.04. Revenue decreased 3%. We saw strong volume growth and higher fee income in our retail segments, which this quarter more than offset lower margins. The downward pressure came from premium rebates for insurance customers, which I will discuss in a moment, lower wholesale revenue, and the impact of foreign currency translation. Provisions for credit losses were the recovery of CAD 377 million, lower by CAD 690 million sequentially, reflecting a recovery in performing PCL and lower impaired PCL.
Expenses increased 12% year-over-year, mainly reflecting an increase in the retailer program partner share of the net profits from the U.S. strategic cards portfolio, primarily on lower PCL. Absent the partner share, expenses increased 1%, as higher employee-related expenses and U.S. store optimization costs were largely offset by foreign currency translation and lower legal provisions this quarter. Because of the large year-over-year change in PCL this quarter, the accounting for the U.S. Strategic Card Portfolio program had a significant impact on expenses as well as total bank pre-tax pre-provision earnings and operating leverage. Slides 21 and 22 of this presentation show how we calculate PTPP and operating leverage at the total bank level by removing this impact along with the impact of foreign currency translation, which is also significant this quarter.
These adjustments show that the total bank PTPP and operating leverage each declined approximately 3% year-over-year, which is mostly a reflection of lower revenue and higher expenses in Wholesale. Please turn to slide nine. Canadian retail net income was CAD 2.2 billion, up 86% or CAD 1 billion year-over-year. On an adjusted basis, net income increased 82% year-over-year. Revenue increased 1%. Higher transaction and fee-based revenue in the banking and wealth businesses and higher volumes were largely offset by lower margins and premium rebates for insurance customers reflecting reduced driving activity. Average loan volumes rose 5%, reflecting growth in business and personal volumes. Average deposits rose 20%, reflecting double-digit growth in personal, business, and wealth volumes. Wealth assets increased 21%, reflecting market appreciation and new asset growth.
Margin was 2.61%, a decrease of four basis points from the prior quarter, reflecting changes in asset mix and the ongoing impact of the low interest rate environment. Total PCL was a recovery of CAD 37 million, lower by CAD 179 million sequentially, mainly reflecting a recovery in performing PCL. Total PCL as an annualized percentage of credit volume was negative 0.03%, a decline of 15 basis points quarter-over-quarter. Insurance claims decreased 34%, primarily reflecting lower current year claims, a decrease in the fair value of investments supporting claims liabilities, and more favorable prior's claim development. Reported expenses increased 4%, reflecting higher volume-driven and employee-related expenses, partially offset by prior charges related to Greystone. Adjusted expenses increased 5%. Please turn to slide 10. U.S. Retail segment reported net income was approximately U.S. $1 billion, up U.S. $786 million.
U.S. Retail Bank net income was $853 million, up $766 million, primarily reflecting lower PCL. Revenue increased 2%, reflecting volume growth, higher valuation of certain investments, and fee income growth, partially offset by lower deposit margins. Average loan volumes increased 1% year-over-year, and deposit volumes excluding sweep deposits were up 28%, including 37% growth in core consumer checking. Sweep deposits were up 18%. Net interest margin was 2.15%, down nine basis points sequentially, reflecting balance sheet mix. Total PCL, including only the bank share of PCL for the strategic cards portfolio, was a recovery of $173 million, lower by $276 million compared with the prior quarter, reflecting lower impaired PCL and a recovery in performing PCL. The U.S. retail net PCL ratio was - 0.41%, down 66 basis points from last quarter.
Expenses increased 4%, primarily reflecting $49 million in store optimization costs and higher employee-related expenses, partially offset by legal provisions. The contribution from TD's investment in Schwab was $194 million. As a reminder, amortization of acquired intangibles and acquisition of the integration-related charges associated with Schwab's acquisition of TD Ameritrade are reported in the Corporate segment. See slide 27 for further details. Please turn to slide 11. Wholesale net income was CAD 383 million, an increase of 83%, reflecting lower PCL, partially offset by lower revenue and higher expenses. Revenue was CAD 1.2 billion, down 8%, primarily reflecting lower trading-related revenue and lower debt underwriting, partially offset by higher advisory fees. PCL was lower by CAD 83 million sequentially, primarily reflecting a recovery in performing PCL. Expenses are up 14%, primarily reflecting higher variable compensation. Please turn to slide 12.
The Corporate segment reported a net loss of CAD 186 million in the quarter, compared with a net loss of CAD 202 million in the second quarter last year. The year-over-year decrease reflects a higher contribution from treasury and balance sheet management activities and lower net corporate expenses, partially offset by acquisition and integration charges related to the Schwab transaction. Adjusted net loss for the quarter was CAD 106 million, compared with an adjusted net loss of CAD 143 million in the second quarter last year. Please turn to slide 13. The CET1 ratio ended the quarter at 14.2%, up 63 basis points from Q1. We had strong organic capital generation this quarter, which added 47 basis points to CET1 capital. Actuarial gains and employee benefit plans added another 17 basis points.
Risk-weighted assets decreased by approximately CAD 12 billion in the quarter on lower retail and commercial balances in U.S. retail and FX, which the bank hedges. The impact of FX on our CET1 ratio was therefore muted. OSFI's transitional adjustments for ECL provisioning reduced our CET1 ratio by seven basis points this quarter. The leverage ratio was 4.6% this quarter, and the LCR ratio was 128%, both well above regulatory minimums. I will now turn the call over to Ajai.
Thank you, Riaz, good afternoon, everyone. Please turn to slide 14. Gross impaired loan formations were 14 basis points, remaining at cyclically low levels, reflecting the impact of support programs, customer resilience, and the continued economic recovery. Please turn to slide 15. Gross impaired loans were CAD 2.8 billion, decreasing CAD 254 million quarter-over-quarter, primarily related to resolutions outpacing formations in the Canadian and U.S. consumer lending portfolios and the impact of foreign exchange. Please turn to slide 16. Recall that our presentation reports PCL ratios both gross and net of the partner share of the U.S. strategic card PCLs. We remind you that PCLs recorded in the corporate segment are fully absorbed by our partners and do not impact the bank's net income. This quarter, the bank recorded a gross PCL recovery of CAD 373 million, reflecting a performance allowance release, partially offset by cyclically low impaired provisions.
Please turn to slide 17. The bank's impaired PCL was CAD 385 million, continuing at low levels and decreasing CAD 84 million quarter-over-quarter. The decrease was primarily reflected in the U.S. consumer lending portfolio. Performing PCL was a recovery of CAD 758 million, lower by CAD 605 million quarter-over-quarter, largely due to allowance releases across all segments. Please turn to slide 18. The allowance for credit losses decreased CAD 968 million to CAD 8 billion quarter-over-quarter, reflecting a performing allowance release largely related to the improvement in our economic outlook and consumer credit attributes, and a CAD 289 million impact of foreign exchange.
Now to summarize the quarter, bank-led deferral and ongoing government support programs have had the desired effect of helping our customers and reducing initial expectations for credit losses, as reflected in our allowance release this quarter as well as cyclically low gross impaired loan formations and gross impaired loans. Credit results may continue to vary by quarter as there is a wide range of possible outcomes. The uncertainty associated with the ultimate credit impact remains elevated but has reduced over time. As a result, PCLs may continue to be relatively low through the remainder of 2021. To conclude, we remain well-positioned to manage through the balance of the pandemic, given we are adequately provisioned, we have a strong capital position, and we have a business that is broadly diversified across products and geographies. With that, operator, we are now ready to begin the Q&A session.
Thank you. We will now take questions from the telephone lines. If you have a question and you are using your speakerphone, please lift your handset before making your selection. If you have a question, please press star one on your device's keypad. You may enter your question at any time by pressing star two. Please press star one at this time if you have a question. There will be a brief pause while participants register for questions. Thank you for your patience. The first question is from Ebrahim Poonawala from the Bank of America Securities. Please go ahead. Your line is now open.
Good afternoon. I guess maybe just to start out, Riaz, maybe at the consolidated level, just talk to us in terms of when you see NII stabilizing or actually growing or have you already hit that point where you think NII bottomed out this quarter? What's your outlook barring obviously rate hikes for the margin both in Canada and the U.S.?
Thanks, Ebrahim. Look, I think that when you look at the whole question of margins and quarter-over-quarter comparison, I think it feels like we still have some moderated downward pressure from LPs being particularly tight because of the amount of cash that is overall in the system.
However, the level of interest rates is definitely starting to show some upward momentum. In addition to that, I think asset mix is an important factor. Obviously as our deposit growth continues and more customers are trusting us with their deposits, we're still at an all-time low interest rate , and therefore that is also a headline impact on our net interest margin. Card balances have been coming down, as you know, but we're very encouraged to see card spending starting to return very smartly. As liquidity in the system wanes, we expect to see some of the card balances as well as loan growth remaining. We remain quite optimistic that as the economy is starting to open here and economic activity is taking on momentum, that we're very well geared to upward interest rates.
As you know, we've disclosed our NII sensitivity in the MD&A, but I should also tell you that 25 basis points increase in short-term rates would mean CAD 275 million to NII, as well as $220 million in the U.S. segment.
Got it. Just on a very separate note, in terms of capital, obviously means you have a monster capital build over 14% CET1. Bharat just talked to us, if you could elaborate on the comments you made at the AGM around your openness towards M&A. We've talked a lot about M&A over the last few years. Try to give us a sense of what is it that you're going after in terms of as far as inorganic capital deployment is concerned, either in terms of the type of asset that you're looking or are there new markets or new geographies that you could consider in the U.S. relative to your existing footprint?
Yeah, so the story has not changed, Ebrahim. It has been a consistent story that from a capital deployment perspective, acquisitions is an important part of that. We've said that we will not be shy to do a bank deal. It could be in the southeast of the U.S. or any part of our footprint. We've said that we would look for asset-generating type of businesses as well. We like certain spaces, and we've talked about it. We continue to monitor the situation. The U.S. is very fluid. There are some deals that have gotten done. For us, our approach has been consistent. We have said any potential deal has to make strategic sense. It has to make financial sense. It has to make sense with respect to our risk appetite and cultural.
As long as we can meet those thresholds, then of course, we would look at anything very seriously. We do have the flexibility, but we are not forced to do anything that is out there because we are not strategically challenged. We have a scaled business in the U.S. that continues to grow. As Riaz mentioned, and I said in my remarks earlier on, we have a growing franchise. We are taking share in the markets that we are in. Should a compelling opportunity present itself, we do have the flexibility to look at it very seriously. If it makes sense for us, then obviously, we'd go ahead with the transaction. Nothing has changed, Ebrahim, but you should expect us to be consistent with our approach going forward.
Got it. Thanks for taking my questions.
Thank you.
Thank you. The next question is from Meny Grauman from Scotia Capital. Please go ahead.
Hi, good afternoon. Bharat, given your interest in M&A, does that mean that you will carry more excess capital going forward, even through a recovery than you would normally? How do you think about excess capital in relation to your M&A aspirations?
Well, we have always maintained good capital levels. That's been a tradition at TD. You look at historical levels, we've always had good capital levels. I think the part that gets underestimated with respect to our diversified business mix, proven business model, is that we do generate capital on a regular basis as well. I don't think you should take my comments or the circumstances we are in as a departure from what our normal capital deployment framework is. I remind you, the framework consists of we always want to make sure that we have adequate capital to invest in the strategies that we have laid out. We always want to make sure that we have flexibility around capability builds, either organically or inorganically.
We always look at, from an M&A perspective, if something compelling is going to be emerging in the markets in which we operate, we want to have some flexibility. We've also been consistent saying, if we exhaust all those requirements and if we still have excess capital, we will not be shy to return that to our shareholders. I think nothing has changed through this to suggest that we will change our framework in any way.
Thanks for that.
Thank you. The next question is from Paul Holden from CIBC. Please go ahead. Your line is now open.
Thanks. Good afternoon. First, I wanted to ask a point of clarification on that additional interest rate sensitivity you provided, the 275 in Canada plus 225 in the U.S., so 500 total. Is that something you'd expect to accrue in a very short order, or is that something that would accrue over multiple quarters or multiple years as that 25 basis points works its way into margins?
I think, Paul, those particular numbers are on the basis of an immediate 25 basis points rise in the central bank rates, and therefore would accrue almost immediately. The NII sensitivity table that is in the MD&A that talks to 100 basis points that would take into account the data considerations as well as factoring considerations over time. This amount, CAD 540 or odd million would be immediate.
Got it. Thank you. Thanks for that. The one additional question I had is with respect to U.S. auto loan growth, and I guess particular to this quarter. I was expecting a little bit more given the volume of car sales as well as some of the auto loan growth we saw from U.S. comp. Wondering why it wasn't better in the quarter and sort of maybe also an update that we'll tie to that loan segment as well.
Paul, so it's Greg, and thanks for the question. I would just say that this is a business that we're pretty mature in, and we've been managing this for a number of years. We've said that it's not just about the growth of the business for us, it's also about the margin of the business, and it's about the quality of the growth. As you can imagine, over the last year, we've wanted to be obviously particularly careful during the pandemic about how we were going to grow it, and we were going to grow it smartly. Obviously we're also not just with an eye on margins, but with an eye on credit quality. As things are firming up, including used car prices, stability in the consumer market from a credit and a liquidity standpoint.
Obviously, this is a space in a lot of consumer asset classes that are quite favorable. We've also seen that margins have been holding up quite strong as well. If this level of new car, but also used car sales continue, we could see a little bit more moderation of increased growth. The other thing I juxtapose that against is we're also seeing record paydowns across all consumer categories. Even though these are term loan facilities over anywhere from 48- 72 months, we're seeing some of these schedules paid down quicker than normal given the excess cash that's in the market. I think there's a number of factors going on, including excess consumer liquidity they're applying to debt, and certainly our mix of the business between prime, super prime, and some near prime that we do.
Quite frankly, we like the margins for the volume that we're taking on right now.
Okay, got it. I'll leave it there. Thank you.
Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Good afternoon. Maybe just sticking on the U.S. side with housing, I noticed the residential mortgages and HELOCs were down quarter-over-quarter. We all know the story in Canada, where it was up sequentially for TD as well. Maybe give an update on maybe the housing market in the U.S. if it's slowing a little bit more than Canada and how that is affecting kind of those two TD buckets.
Sure. Scott, it's Greg, and thanks for the question. First I'd start with home equity that you've seen this trend going back over the last really one and a half to two years about pressure on home equity balances given the ultra low rates that we've been in for a while now. Quite frankly, even though we're down, which we don't like to see on a quarter-over-quarter, year-over-year basis, we're actually down a lot less than a lot of our U.S. peers if you look at their home equity numbers. We continue to originate home equity and this is a space, depending on where interest rates and market demand lies we will be interesting in continuing to first stabilize and then grow it.
I would just say that across the entire industry, people have been retiring home equity in favor of refinance out to fixed mortgages and fixed term for extended period of time given where rates are. On the mortgage front, what I would say is yeah, over the last couple of quarters, there's been very, very strong growth, although had let up a bit as you got into the second half of Q2 because it was just running so hot from a refinance standpoint really since 2020 and rates going so low. We're seeing a lot of the volume now on the purchase side, and we're still seeing refinances getting done, but it's really moved to more of a purchase market and that's split between conforming and jumbo mortgages.
A little bit of a cooling on the refinance side as this has gone on for quite a while, since last year. Again, year-over-year up 4%. This also I should note includes.
Us increasingly engaging in the conforming and for sale business, and you're seeing that in our fee income lines as well as we're originating more than we have historically in the conforming for sale business. A little bit of a shift in our mix as well as not just a jumbo for our own balance sheet, but also a conforming business that we would sell off to Fannie and Freddie.
Okay, thanks very much.
Thank you. The next question is from Sohrab Movahedi. Please go ahead.
Yeah. Thank you. Just wanted to go to Teri very quickly. Within the Canadian Personal Banking and commercial banking segment, Teri, I think you provide disclosure that wealth earnings were about CAD 490 million this quarter. Can you tell me how much of that was discount brokerage, please?
I don't think we provide that level of detail. As you noted, we do disclose the discount, the BI results in the wealth results. What I would just point out, since given the platform, is it was a very strong quarter for wealth overall with record trade volumes, record account openings, strong market levels and strong net asset growth. Also the work across our businesses through 1TD, despite lockdowns, we're seeing activity, in terms of referrals, across our businesses back to pre-pandemic levels. Some really strong momentum to build upon as we go forward.
No disclosure on the dollar value associated with discount brokerage?
Not as a part of the wealth business, no.
Thank you.
Thank you. The next question is from Nigel D'Souza from Veritas Investment Research. Please go ahead.
Thank you. Good afternoon. I wanted to touch on deposits. From my understanding, carrying excess deposits on your balance sheet weighs on your margins. When I look at it on a quarter-over-quarter basis at the bank level, it looks like deposits actually declined. I was wondering if you could provide an update on your outlook for the deposit runoff. Do you expect to retain a lot of the excess deposits you're currently carrying, or are you seeing a runoff or withdrawals of those deposits pick up as the economy reopens?
Maybe we go U.S. and Canada separately, Riaz. That'll make sense. We can come back to the consolidated. Maybe, Teri, if you want to start first and talk about Canada.
For sure. Thanks, Bharat, and thanks for the question, Nigel. In terms of overall deposit growth in Canada, obviously, both sequentially and year-over-year, we continue to grow our lead in deposits in Canada. We continue also to lead in money movements both Interac e-Transfer and Flash, as Bharat mentioned in his remarks, as well as leading in global transfer remittance type payment capability. We're also seeing Visa debit volumes grow significantly through the pandemic. We're feeling very comfortable across our businesses in Canadian retail that the core deposit growth and customer acquisition continues to be an important factor for us moving forward. On your question around retention of balances, I think, knowing what we know today, we wouldn't see large runoff in 2021 as we project forward. In fact, we're having great success in putting those deposits at work for our customers.
Our mutual funds net sales results in the quarter were the strongest we've seen since 2017, as an example. Having really good success in terms of helping our customers who may be a segment of stay-at-home savers who hadn't anticipated having the liquidity that they have today, is now getting the advice they need from us to help make that investment or goal planning for themselves for the longer term. That's how we think about it in Canada. Maybe I'll turn it over to Greg.
Yeah, Nigel, thanks for the question. Maybe I would just first clarify that if you look at, I'll back out sweeps deposits for a minute and just look at the core business of consumer and business deposits. If you look at a year-over-year basis, consumer deposits are up 23% on a very large base year-over-year, quite strong. Business deposits are up 33% year-over-year, quite strong. If you look at a quarter-over-quarter sequentially, personal deposits are still up from Q1- Q2, up over 6%. Another CAD 7 billion came in from Q1 to Q2, business deposits up nearly 3% at around CAD 2.8 billion Q-over-Q, Q1-over-Q2. Still quite strong growth. My comment would be on this is that, yeah, we would've expected some smoothing out given the strong pace of growth over this past year.
Between government stimulus on PPP or the Paycheck Protection Program on the business side, continue to fund more accounts, customers were still raising cash, and you saw quite robust balance sheets on the business side. On the consumer side, obviously, you had the $1.9 trillion stimulus on top of the $900 million stimulus at the end of 2020. Accounts continue to be flush on the consumer side. We would expect some normalization at some point, depending on the shape of any additional government or support programs out there. What I would say is that as the economy begins to open up and some of this gets to be spent, as we are seeing in real time, we are also seeing record or near record volumes in terms of debit and credit card and interchange and things like that beginning to ramp up over the last couple of months.
Eventually, this will turn into additional fees for the bank and lending opportunities as cash balances get spent down. For right now we're actually quite happy because we continue to open accounts, attract new households, and certainly it's the quality of the deposits that matter too. It's not like we're paying up or these are coming into high rate accounts. These are coming into very low rate or no rate accounts, and they're core checking accounts for new households or added balances to existing checking households. Just to give you a little color on that.
Nigel, this is Bharat. Just to add, TD has traditionally been strong in the deposit business, particularly checking. You should expect us to continue having that strength through any cycle. We consider that business to be core to our model in the sense that it provides us with the key relationship from which we can deepen that relationship. The numbers can go up and down, as you heard from Teri and Greg, that they do go up and down and there's puts and takes. Fee income goes up and deposits go down a bit. That given a diversified model, you should see that strength ongoing. Just want to leave you a message that this is a core strength of the bank. We like our strength in this area, and you should expect us to continue having that strength going forward.
That's a very detailed and helpful response. If I could just quickly touch on the expense side. It looks like your expenses are running a bit elevated, and I was wondering if there's any factors you would point to for that. You mentioned real estate optimization in the past, and it looks like your other expenses are running a little bit elevated. Is there anything specific that's causing expenses to run a little higher than you anticipated? Do you see expenses trending lower? What's your outlook on the expense side?
I think Nigel, the main thing on expenses I called out in my remarks would have to do around the share of the retailers, share of their net profits in the Strategic Card Portfolio, which makes it look particularly elevated. Other than that, at the top of the house, expenses would have grown 1%. I would say to you that there are not any particular trends to call out there other than to just say that we continue this year to see higher employee-related expenses. Of course, the foreign currency translation would have an impact as well.
If you look at the non-interest expense lines that I set up in the Supp P ack, you'll see that there are some fluctuations from quarter to quarter, but overall trends seem to be fairly stable, and we're making the investments that we need to make to continue to grow the business.
Okay. Appreciate the color. Thanks.
Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead. Your line is now open.
Hey, good afternoon. I just wanted to ask about the Canadian banking segment. I look at it on the P&C basis from your appendix, and it's easier to compare. Kind of a theme here of pre-tax pre-provision profit growth that's been down on a year-over-year basis. It looks like we're entering the back half where the comps are looking pretty easy. I'm just wondering what your view is on that, whether we can resume positive growth of that segment in Q3 and Q4 on that PTPP basis.
Gabe, it's Teri. I think I'll take the question. Thank you. I think, as you've mentioned, we would have had actually positive PTPP if you take out the insurance customer remediation at the Canadian retail level this quarter year-over-year. At the P&C segment level, I think to the conversation we've been having certainly, notwithstanding strong volume growth and increases that we have seen and anticipate in customer activity we do think there'll be margin pressure through the balance of 2021 as assets reprice, kind of the conversation Riaz said earlier. Having said that, if I look out further and think about economies reopening and how we're positioned and some of the factors we've been talking about there is the potential for the interest rates increases and that sensitivity that has been mentioned earlier.
We will over time potentially see the on/off rates of the tractor repricing start to become more favorable. We're well positioned. We've seen the credit card spend in Canada in Q2 actually above retail sales were above Q2 of 2019. That's in an environment where travel spend is down 80% in the industry and recreation and entertainment is down 40%. With our breadth of credit card offerings, I feel very comfortable that we're well positioned as that activity comes forward. We've continued to show strength in real estate secured lending at three debt origination quarters back to back ever.
The 1 TD strength that we've talked about and the mutual fund sales that I mentioned earlier, where we're seeing the cash being activated to help customers invest for the long term. If I put all that together, I feel like we're very well positioned for our customers to meet their needs going forward, and over time that should improve the trends at PTPP.
Timing wise, there's a lot of moving pieces in there, and it sounded like the margin pressures are still going to be weighing down on you through Q3- Q4 sufficiently enough that we're going to have negative growth. Is that?
I think there are a lot of moving parts, and so it's very hard to call, which is why I tried to give you color. I do think that we will see the margin compression for the balance of 2021 as assets reprice all other things being equal.
Okay. Just a capital question for Bharat. The M&A question, whatever it is there, it's been a consistent one, so I don't want to go down that path again. I do want to ask about the options that are at your disposal if and when OSFI removes the distribution restrictions. Is an acquisition mutually exclusive from stuff like an accelerated buyback program or a big dividend increase? That's kind of the expectation some other banks are setting, that once those restrictions are removed, maybe more so on the dividend front, we could see larger than normal increases because they sort of cap the payout ratio. I'm just wondering how you foresee things shaping up.
Again, it's hard to give you precise answers on something that may or may not happen in the near term or whatever. The way I've laid out the framework that we've used and that has been there for many, many years does not change. If we don't have use for that capital, as I laid out earlier, then we are not shy in returning capital to our shareholders. We've done it previously, and we will do it again if circumstances warrant. There are, yes, the levels are, as you said, pretty lofty. All those vehicles are available to us, and we look at what makes sense from an ongoing basis expectations wise, what our sense might be of the earnings potential in the future, et cetera. All those inputs would be considered.
Like I said, the framework has not changed, and I don't see it changing again.
Probably, I guess you kind of touched upon that. The numbers are so large that you could do a bit of everything. Acquisition, buyback, dividend increase, and of course, organic growth.
Yeah. It's hard to pin down a specific formula here for you because there isn't one. All those options are available to us as they are to others. You would expect us to be prudent and use those options that make sense for the bank over the long term.
All right. I'll look forward to that. Thanks.
Thank you.
Thank you. The next question is from Darko Mihelic from RBC Capital Markets. Please go ahead.
Great. Thank you. My question centers around Canada P&C as well. I just wanted to drill into the premium rebates. Despite the premium rebates, insurance put up very good earnings. Maybe you can talk a little bit about how you're measuring. Are you excluding the claims from the expense part when you're doing Pre-Tax, Pre-Provision and operating leverage? Is the premium rebate, is that like a one-off just this quarter, or do you anticipate that there's more of that to bleed into Q3?
Thanks for the question, Darko. Teri. Maybe on the premium rebate, so it was CAD 165 million this quarter. We have had an earlier rebate that had been in our results in the prior period. The basis for doing this is obviously activity being lower during the pandemic. Given the uncertainty around how things will move forward, it's hard to say whether there will be another period where more customer remediation might make sense. We'll obviously pay close attention to how the situation is evolving. The number when I talked about Canadian retail PTPP, if you excluded that remediation, you would get to a positive year-over-year result for Q2 for Canadian retail. In terms of the performance of the business, feeling really good about how that business is performing.
Both the written premiums would've been up double digits again if you exclude the remediation. Sales is strong, retention is strong. The digital capabilities that we have in that business really are distinctive in terms of the general insurance business. Our auto claims collision centers across the country provide a much better experience for TD customers if they become in need of repairs for their vehicle due to an accident. Just overall seeing good growth in the life and health business, like in particular the direct life business. I would say, hard to say whether we'll have more remediation to follow, but very strong core business, and we've been investing in that business over time to really be a premier direct insurance business in Canada.
Thank you for that. Just to be clear, on the expense side, I appreciate Riaz's answer to the previous question on the top of the house expenses are well controlled, but in your division or your segment, sorry, Teri, we do see pretty good expense growth. Even though I appreciate that excluding the premium rebate, you would have positive operating leverage, it still does seem outsized in terms of expense growth relative to what other banks are putting up. Is there one or two specific initiatives that you're spending on that might ease off as we get into the back half of the year or into next year?
Maybe just to be clear, the PTPP was positive for Canadian Retail, excluding the customer remediation. I didn't comment on operating leverage, just to be clear. On the expense story overall, I think Riaz had mentioned the prudent expense management over the full year for the top of the house. I would say that would be the same commentary from my perspective on the Canadian Retail business. When you look at Q2 year-over-year, Riaz mentioned this as well, employee-related expense growth, if you look back to Q2 last year, and in particular employee incentive comp and then Q2 this year, those two would be going in different directions. That would be one item for year-over-year. Then volume-driven expenses with the strong business activity. If I look quarter-over-quarter, it was a pretty modest sequential expense increase for Canadian Retail.
I think, you know, Riaz said this, when we look at the business overall, we're making the investments we need to grow the business, to create efficiencies, to generate cost savings over time, as well as customer efficiencies and capabilities and colleague efficiencies. I think we're doing that in a way that also allows us over a full year period to manage expenses prudently.
Okay, great. Thanks for the color.
Thank you. The next question is from Mike Rizvanovic from Credit Suisse. Please go ahead.
Hey, good afternoon. A couple of quick ones for Greg. Wondering if you can comment on the IDA agreement and the impact of the balances starting to come off in the back half of this year. Can you quantify that for us, at least ballpark it?
Greg, would you like me to take that?
You can, Riaz, please.
Mike, it's Riaz. As you know, under the agreement that we have with Schwab, they're able to reduce the balances that they have on deposit with us by CAD 10 billion a year starting on July 1, and then any excess that went from the date we closed up until June 30th. Just to give you a hypothetical example, if sweep balances at closing were CAD 145 billion, they can take them down to CAD 135 billion on July 1, starting from whatever the current position is, and then CAD 10 billion a year after.
Okay. Just to get a sense of the magnitude, I know you haven't disclosed the spread that TD has earned previously on those balances, but can I look at something like the U.S. call reports just to get some color on what type of securities you might be holding from those deposits?
I think generally, absent the sweep deposits, our loans and deposits are fairly balanced. I think your approach will give you a decent view into the liquidity premiums that are available for the kinds of securities that we purchase.
Okay, thanks. Just quickly on the PPP loans, wondering if you can give us an update on maybe what's been accrued and what's left to be accrued magnitude-wise. It would be helpful to sort of look at it from the perspective of your NII in the U.S. going forward.
Sure. Mike, happy to answer it. PPP has been a very successful program. In the first round, we put on over $8 billion worth of PPP loans for 85,000 small business customers. In the second round, we put on approximately $4 billion net, roughly $3.6 billion, $3.7 billion extra outstandings for another 46,000, 47,000 customers. You can get the average size of round two of each one of those loans is something just shy of $80,000. Obviously very, very small business for the majority. If you put those together, it's obviously over $12 billion between round one, which was really second into third quarter of last year, then round two, which just completed or is in the process of being completed right now. A little over $12 billion.
The way we would think about it is through the end of the second quarter. We probably have forgiven something in the order of 20% of that exposure, and half of those fees would've been accrued into NII during prior quarters, and the other half of that 20% would've been in the second quarter just completed. The way I think about it is we still got 80% more to go to accrue of those fees over, obviously, the next year or two.
Is that relatively straight line over the next six to eight quarters?
It depends on the forgiveness program, because the way they've done this is, first, if loans aren't forgiven or if a customer doesn't seek, they have to actually apply for forgiveness. It would just accrue over the remaining four and a half years or whatever's left on the term of the loan, we would take it into income. I would suspect the vast majority would seek some sort of forgiveness and apply through it, and then once those loans are forgiven, they would immediately accrue, and we would think over the next several quarters, the majority of that would come into income.
Okay. That's very helpful. Thank you for that.
Thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead. Your line is now open.
Good afternoon. I'll try to keep this quick. Just on the expense side in Wholesale Banking, just trying to get an understanding. NIX was up 14% year-over-year, revenue's down 8%. What drove that discrepancy? Is there something unusual in there, additional staffing costs? Is this a new run rate to think about?
No, I think you can, Doug, it's Bob. The majority of the increase year-over-year was in the variable comp line. As you would recall, second quarter of 2020 was a very challenging quarter, so that we took the vast majority of the PCL accrual that impacted comp accrual. Year-over-year, it looks high, but ex that, expenses are well controlled. I wouldn't say this is a new run rate, no.
Okay. Then just lastly, we've heard this from other banks too, and I think from yourselves as well. There's a view that with credit card balances obviously being down, maybe they stabilize and maybe they come back, and that would be positive for many reasons, including NIM. What's the risk that credit card balances don't come back? There's been the new adoption of things like buy now, pay later, which is starting to ramp up quite quickly. Just curious your thoughts on that. Thank you.
It's Teri.
Go ahead, Teri.
Doug, it's Teri. Thank you. In Canada, my sense is that's not what we would anticipate happening. We've actually, in the last period, we saw sort of a flattening of loan balances sort of month-over-month through the quarter, which we haven't actually seen. We have been seeing a decline previous to that. I feel like we've got pent-up demand around travel, recreation, and entertainment, as I mentioned earlier. Those are higher ticket items. Our expectation is that we would start to see, it's more a timing issue from our perspective than a whether or not at this point.
Yeah, I'll leave it there. Thank you.
Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead. Your line is now open.
Good afternoon. Riaz, this might be most appropriate for you. In the past, the banks pointed to the five-year Bank of Canada bond yield as a reasonable benchmark to use when gauging what could happen to the bank's margin in domestic retail. I guess the first part of my question is, would you still recommend that as something we could track to give us some indication of where the margin might head over time?
Yeah, I think, Mario, in Canada, we use a five-year swap rate, not the Bank of Canada yield, but the swap rate. In the U.S., it's a seven-year swap rate. Both of those still remain within the framework of how we manage our overall factors.
Okay. Let me just run something by you. Hypothetically, if we were to see the five-year swap rate move materially higher, and again, this is very much hypothetical, but essentially back to where it was before this all happened. If you buy the notion that inflation could put some upward pressure on rates, is there any sort of structural reason why TD's margins in the domestic retail, in the U.S. retail segments, any structural reasons why we wouldn't get back to the levels we saw pre-crisis? By that I mean materially higher than where we are today. The domestic retail margin pre-pandemic was like 284 basis points in the U.S. as year, well, or was a lot higher than where it is today. Are there structural reasons like changes in business mix or maybe extending latter duration of lives?
Is there some reason why we won't get back there?
No, Mario, there are no structural reasons, which would cause that to not materialize. As you know, in our net interest sensitivity measures, we do give you additional sensitivity that says if you.
See 100 basis points widening a margin, the impact on NII would be plus CAD 2.1 billion. Yes, there are actually kinds of occasional trends about business mix changes, or you might see certain liquidity requirements at certain times, or you may see that we've gathered so many more deposits over the course of the last four or five quarters that may make that jump around a little bit, but the fundamental sensitivity of the bank to interest rate upside remains very sound, and we remain very optimistic that those margins are coming back as rates rise.
Thank you.
Thank you. The last question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead. Your line is now open.
Hey, thank you very much for taking my question. I just wanted to come back to Teri, ask a little bit about the competitive dynamics that you may be seeing from non-traditional sources, specifically Wealthsimple. The work that we do shows that you may be losing customers to them maybe three times more than the next biggest Canadian bank competitor. Are you in a position to comment on how much transfers you're seeing in versus out of your bank to Wealthsimple?
Certainly not. I wouldn't be in the position to comment on that specifically. I think I'd come back to the fact that we're seeing wealth account openings, asset levels, and trade volumes at record levels this quarter. I think the comprehensive approach that we take to wealth, inclusive of the direct capabilities that allow customers to build portfolios or make decisions on a self-service basis, but also the availability of advisors, even in our direct investing business, and the comprehensive education and training that we make available for customers really stands us out relative to the competition in this space. I think we feel fully dressed to compete against all competitors, both traditional and non-traditional.
You're not seeing any need to spend any more money to retain your discount brokerage customers?
We would, over time, continue to look at any competitive threats and what would be the appropriate way to respond. I think what we believe is that wealth isn't simple. There is a comprehensive sort of need. Customers actually have exhibited this in our direct investing business. Pre-pandemic, we might have seen more of the account opening activity actually be through a referral from a branch personal banking colleague. Through the pandemic, obviously, digital account openings have risen. What we also have seen is that those digital accounts actually have more activity and higher balances when we subsequently reach out specifically to customers with an advisor. This multi-channel opportunity for our customers, the training and education that is second to none, the video library that is available to our customers, I think positions us to compete incredibly effectively. Price isn't the only answer here.
Okay. Thank you very much.
Thank you. There are no more questions in the queue at this time. I would now like to turn the call to Mr. Bharat Masrani for closing remarks.
Thank you, operator. Thank you, everyone, for joining us. While it is premature to declare victory against the pandemic, given what we are seeing around the world, we are encouraged with the progress we've seen in North America in various parts of our footprint. As the economy recovers and we get to the other side of this, we feel very good with our diversified business model, the value proposition we provide, and of course, the famous legendary experiences that the bank is well known for. We feel that as the economy normalizes, TD's strengths will come to fore and looking forward to good growth levels as we see that happening. I also want to take the opportunity to once again thank my 90,000 colleagues around the world.
They've been the pillar, the anchor for the bank to manage through a very difficult period here, and they continue to deliver for our shareholders, for our customers, for our communities, as well as for each other. Thank you for that. Folks, I look forward to meeting some of you in person, hopefully sooner than later, but at a minimum, we'll be talking 90 days from now. Thank you very much.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
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