Thank you for joining us today.
Great to be here, Darko, as usual.
Before we begin, I'm just gonna remind everybody that Bharat's comments today may include forward-looking statements. Actual results could differ materially from forecasts, projections, or conclusions in these statements. Listeners can find additional details in the public filings of TD Bank Group. With that out of the way, the topic of the day has been capital, with the changes in the DSB regime. In your situation, we have the closing of a couple of acquisitions coming up. Maybe we can talk about how that might impact your capital position and whether or not you see the need for raising equity here, or maybe potentially if the DSB is raised later on this summer.
you know, I'm trying to remember exact number, but you know, we closed off our year at, what, 16.2%?
Mm-hmm.
You know, 16.2% Tier 1 capital. You know, I think when we talked about post-acquisitions, we said, you know, we expect to be comfortably above 11%, you know, after closing both the transactions. Feel that we have, you know, enough capital levers. Some of it is well-known, things like, you know, the invoking the DRIP discount. We've also talked about, you know, optimizing RWAs through our investment portfolio. You know, we have structures out there like our Evergreen Credit Card ABS. The Cowen acquisition, we pre-funded it essentially through equity by selling a bit of our Schwab stake. When you look at it, those are some of the examples of capital levers that we have. We feel pretty comfortable as to our capital position. You know, traditionally, the bank's history is prudent capital management.
That's been, you know, part of our brand, part of our whole market, TD. I feel comfortable, you know, where we are on capital. We generate, you know, good excess capital, 15-20 basis points a quarter. If you kind of, you know, do all the math, puts and takes here or there, you know, feel comfortable as to where TD is placed, with respect to capital.
That's irrespective of whether we go to the upper end of the DSB this summer?
You know, DSB is interesting. DSB obviously has an influence on, you know, as one of the inputs as to how we think about it, but not the only input. We talked about being comfortably over 11 before DSB was moved. That's how we thought about, you know, at the time. I think, you know, with the DSB, if things turn out to be worse than what people are forecasting and we get into a major slowdown, then, and OSFI had signaled this, that the way they look at DSB is they would drop it at that point if things turn out to be, you know, from an economic perspective. We'll see how things turn out.
You know, I think overall, we feel comfortable based on our, you know, own situation, how we are forecasting, you know, the next year to play out. I think last quarter end, I talked about, you know, as to where we feel earnings will come out for the current fiscal year. If you add the two acquisitions, you know, the profitability from those. If you look at, you know, interest rate tailwind, because, you know, if you annualize some of the rate increases as to what it does to TD, given the type of businesses we are in. Look at some of the volume growth, particularly in areas such as credit cards, where, you know, we are geared more towards luxury and travel, which has, you know, come back quite smartly post the pandemic. Now, things could change quite dramatically.
If things go sideways in the economy, then of course, you know, it might be more difficult. With all those things working out, we feel comfortable that we could be, you know, well within our earnings target growth of 7%-10%, and there's a chance we might exceed it. If you kind of add all those numbers up and you say, "Well, where the DSB goes?" Well, wherever it goes, it'll go. We think we have a lot of levers to manage around it.
One of the levers that you mentioned, you mentioned the DRIP, your organic capital. You didn't mention the Basel reforms, Basel IV. How is that going to affect the year for TD? Is that a factor we should think about as well?
I said the headline on Basel IV, it's a manageable situation for us. Let's, you know, there's various moving parts on that. An operational risk under Basel III and Basel IV, I don't know, whatever we call it, that's going to be probably a negative item for us because, you know, retail revenues would be viewed similarly to other types of revenues. You know, we have a large retail base, so that'll be a negative. There'll be a positive on the credit risk side because, you know, a lot of the advanced approaches would apply. Probably slightly negative on the market risk side, depending on, you know, the Fundamental Review of the Trading Book as to how exactly when that gets invoked. On the other hand, you know, there might be a positive on our Schwab stake.
Then the, you know, somewhat unknown, and we are doing a lot of modeling on this, is the variability that'll come from First Horizon.
Mm-hmm.
The reason I give you all those headlines is tells you how many moving parts there are as to how that would work out. Overall, you know, we've done a lot of work on this. We think it's a very manageable situation for us.
In the end, it doesn't sound like much has changed, sort of business as usual over at TD. Managing capital going forward now with a wide DSB range, does it necessarily say to us that from an acquisition point of view, future acquisitions are facing a higher hurdle rate, now with the higher capital requirement? Does it change your appetite for what you would look at? You know, given that you're getting Cowen, would you, for example, say, you know, "We don't need to acquire any more in capital markets because of the capital constraint," or so on and so forth? Just trying to dig into whether or not this sort of change in regime, so to speak, on the capital front changes anything for your capital deployment going forward.
I think, you know, of course, you know, regime matters, but it is importantly for us, is, I think I've been saying this for a few years, is we think of capital deployment in a, in a particular way which has been consistent, I don't think changes, you know. It starts with, do we have enough capital to support our organic strategies, you know, critically important to us. The answer is yes. You know, do we have any capability gaps that we may have to use capital either to invest or to buy because we want to fill that gap, capability gap out? Do we have enough capital from an opportunistic perspective should there a compelling opportunity come up?
You know, I think Aeroplan is a good example in our sort of history here, where that was a bit of a surprise, and it came up, and we were there because, you know, we had the, not only the capability but the capital to take advantage of that. It's turned out to be a terrific situation for TD given where we've come up, come along in that business. You know, we go through that framework and say at the end, you know, if we have and do we have any major acquisition aspiration in the market because we might have, you know, to grow certain sectors or not. If all those turn out to be there's no opportunity, would we buy back our shares? That's how we've been thinking about it. Has that changed in a dramatic fashion?
Of course, and I don't want to underestimate, you know, the capital regime. Of course, you know, the, the economy and the state of the environment has a lot of influence in each of those components. So yes, you know, the capital environment has an influence, but generally, we've been talking about how we manage the bank through any cycle, and capital discipline, capital prudency has been a core part of how we think of the bank. So that has not changed. Now regarding future acquisitions, both the acquisitions that we announced, and, you know, I said it when we announced them, they met our four criteria we look at. Number one, was it strategically compelling? Both in First Horizon and Cowen, I can say yes. Was it financially attractive? Both these transactions were financially attractive. Were they within our risk appetite?
I think time has shown that, yes, they were within our risk appetite, have continued to be in our risk appetite. Number four, critically important to us, are they culturally aligned? Darko, even with all the clouds regarding the economy and capital regime, if another situation were to come up that hit all those four criteria, you know, of course, we would look at it seriously. Say, "Does this make sense?" Because, you know, those don't happen very frequently that you meet all your criteria. I'm not saying we unlikely we do anything, you know, until we close these transactions and feel comfortable, but never is a long time.
Okay, fair enough. Thank you. You mentioned it, so we're all curious. Closing, is there any updates you can give us on Cowen or First Horizon or on your expectations on closing or any other update you can provide given the environment that we're in?
See, on First Horizon, you know, there were certain aspects that needed to be done. The shareholder vote, the First Horizon shareholders had to vote on the transaction. That did take place, and folks who decided to vote, 99% of them decided to vote in favor. That was great. There was a public meeting, you know, organized by the regulators, and that went pretty well. I think, you know, there was a lot of support among the community groups with TD's application as to, you know, how TD is viewed in the markets in which we operate in the United States. That was very good. You know, another aspect in the U.S., that has become pretty common is agreeing on a community benefit agreement.
That we are, you know, negotiating with the various, you know, groups that are stakeholders in that part of our arrangements. That's going, you know, pretty well. We haven't signed one yet, but it's going pretty well, and I expect us to get there on that. The final one is the regulatory approvals by the major agencies in the United States. Now that is an unknown. You know, the U.S. is, it's, the latest deals seem to take longer than what it used to. You know, one deal that was approved took, I don't know, 14 or 15 months or something like that.
Another deal that was announced approximately two and a half, thre months ago before our deal got announced, we are into about nine or 10 months into our, I think end of February is when we announced First Horizon. The deal that was announced couple of months, two and, two or three months before ours has not yet been approved. Given all that, you know, we, last quarter I said that, you know, instead of original expectation of closing within the first fiscal quarter of this year, it'll be the first fiscal half, which seems to be appropriate given all the other stuff that's been going on. That's our expectation on when that gets done. On Cowen, again, the shareholder approval, Cowen shareholders approved it overwhelming. You know, again, it was 99% of people who voted.
A couple of approvals are already in hand, you know, and so that we are expecting, I think it's the first calendar quarter of this year, to close and then that's our expectation on both these transactions.
Okay. Thank you. That's helpful. Maybe switching gears a little bit, talking about, Canada's situation with housing price declines, large increases in mortgage payments for a cohort. You have a large mortgage book in Canada, so maybe you can walk us through how you view the vulnerability, in the sense, you know, how much of your book, faces increased trigger payments, how many of them, will be facing a significantly higher payment this year and next? You know, are we worried about like how big of a part of that, of your mortgage book, is facing what I would consider a difficult situation of 30% or higher increase in mortgage payment?
Yeah, I know there's lots of discussion on this. I think, you know, a few people before me talked about this as well. It's, it's a common theme, to be expected, you know, given the environment we are in. We've not seen rates go up at this pace and so much, you know, over the recent past. Obviously, you know, it's the right topic to be focused on. I think it's important to keep it in perspective. I mean, look back many, many years, you know, as to what's been the experience on Canadian mortgages, you know, through very difficult periods. You look back, at least from a TD perspective, if you look at our historical situation on Canadian mortgages, you know, I'm not even talking of losses, I'm talking of impaired loans.
You know, it's been in the low single digit basis points, perspective. Historically, if I'm looking at multiple years here. You say, why is that? You know, why does this asset class behave, you know, so, well, you know, through circumstances? It starts with a basic problem that we have in Canada. You know, this year, I think everybody saw that, you know, nearly half a million new immigrants entered Canada. In Canada, you know, we build homes, new homes to the tune of 200,000-250,000 a year. Every year, there's a chronic supply problem that gets worse, you know?
Even if magically we flick a switch and all of a sudden, you know, supply of new homes goes up to half a million, think of the backlog that has to be cleared. You know, you start with the premise as to what are the fundamentals of this business? Then from a TD perspective, you know, we are a, a huge scale player, but a vanilla player. You know. We're not an alternative mortgage player. You know, we don't play on the margins. We are not a subprime, you know, mortgage provider, and that's what we do. Thirdly, you know, less than 1% of TD's mortgages are uninsured, have a credit score of less than 650, and where loan-to-value is over 75%.
Let's talk, you know, that, I mean, from a basic quality perspective as to the quality of the book. You say from a macro perspective. Our estimate is, you know, through this rate cycle and probably have more to come, that approximately, you know, there'd be an increase in mortgage payments of CAD 200-CAD 600 per month. You know, like if you look at from a modeling perspective. Against that, you have these excess savings that have been built up, you know, through the pandemic to the tune of, you know, 30% of excess deposits still, you know, compared to pre-pandemic levels. You're looking at a long period before all those things get exhausted.
When you say, "Oh my god, there might be a big problem." Even when you get there, you have to think about that, you know, somebody has lost their job and loan-to-value is over 100% before you start seeing major problems. You say, all right, what scenario can you see where loan-to-value is over 100% for a bank like TD that is not in the subprime, you know, mortgage business or alternative mortgage business, where somebody has lost a job and excess deposits, you know, have been run off and they don't have other levers to pull back on expenses. There are a lot of scenarios at play. I'm just trying to give you a perspective as to how I'm thinking about this business.
Of course, can there be a bump? Of course, you know, we are in that business and we manage that. That's why, you know, every quarter you ask [Ajai], and he say, "Oh, yeah, of course, Darko, I'm building this," and as he should. Historically, you know, this is how this asset class has behaved. Do I see a dramatic shift in the behavior? I don't. Do I see a bump? Of course I do. You know, we would not, I shouldn't be paid what I'm paid if we can't manage through bumps, you know? That's how we are looking at it. It's a great business to be in. It's a great, you know, asset class.
Final point is that in our case, you know, we've taken lots of questions from a lot of our analysts, including you, Darko, that, you know, I think it was six months ago, eight months ago, "How come you're not growing as much as the others?" Well, we are consistent underwriters through a cycle. You know, that's how we kind of managed this business. That's been the historical record for us in that business. Feel comfortable with the quality of our mortgage book, how the asset classes behaved historically, how we see the future playing out, you know, the support that there is there, you know, against this asset with excess savings, et cetera. Feel comfortable as to where we are.
The mortgage asset class, we've covered that. The next sort of segue where this takes me is when I look at what you guys use for your forward-looking indicators, it doesn't look that bad. You know, your unemployment rate base case scenario goes up a little bit in 2023. What I'm hearing is mortgage payments have risen. They might dip into their excess deposits. It sounds like there could be a drag on the economy. Okay, we won't have any defaults in mortgages, but we'll have a drag on the economy. How do I think about your forward-looking indicators not necessarily showing a recession, not necessarily showing any sort of bumps or bruises?
How do I think then about your reserves that are on balance sheet, relative to what I view as a relatively okay forward-looking indicators, and many people in this crowd think there's a recession coming. Can you help me?
Well, I'm not suggesting there's, you know, a 100% chance there's no recession. You know, when rates go up so much, is there a slowdown to be expected? Yeah. On the other hand, you know, the job market has been remarkably strong and continues to be strong. I think, you know, one aspect that, you know, I'm sure history will write a lot of books on this, is impact on the economy post-pandemic. You know, with such an event and the level of fiscal stimulus, you know, that took place, the level of monetary easing that took place, as to how long does it take for that to play out? I think time will tell. Am I saying for sure that, you know, this is gonna be just a benign environment?
No, absolutely not. That's why, you know, everybody's looking at, you know, what happens. The part to watch is, you know, employment. If you wanna look at losses, if you wanna look at, you know, what happens, is that's the, that's the indicator as to what's gonna go on. Now, each of these asset classes has nuances, like I talked about supply of housing, et cetera. Even if we don't get into a recession, much slower growth is gonna feel like a recession. I'm sure there are a lot of sectors right now, I talk to a lot of clients, are feeling they're already in a recession.
Mm-hmm.
I don't want to undermine, you know, the environment here. Is it gonna be a deep recession like what we had post the global financial crisis, you know, for a while? Around the world, I'm talking. Perhaps Canada did not feel it as much. What folks were feeling in March of 2020 because it's the pandemic when there's a forced lockdown. You know, it'd be more of an interest rate-caused recession. If you wanna look at what modeling is out there, would there be a slowdown? Of course, there's gonna be a slowdown, and all of us are prepared for that and managing through it. Frankly, our modeling is showing that's how we will manage the bank through it.
Are we seeing a depression here with, you know, some of the questions you're asking me say, "Oh my god, the world is coming to an end." We don't see that.
One of the tailwinds you've had at your bank has been net interest margin expansion, fairly strong NII growth. In fact, when I look at consensus estimates, you know, you've looks like you've got very high growth expectations for this year in a year where PCLs are normalizing. In other words, rising. So in that environment, are we getting carried away with net interest income growth for TD? What's your view on that? Is that gonna be the big swing factor that on EPS this year? Are NIMs peaking? How should I think about your net interest income growth? I'm gonna say excluding the acquisitions.
you know, firstly, just to, you know. Folks might feel that we positioned the bank to be interest rate sensitive, that is the core objective of the strategy. I think the important thing to note is we are interest rate sensitive as an outcome of the strategy we run at the bank. You know, we are a huge, what I'd call, non-interest rate sensitive deposit gatherer. What does that mean? You know, huge checking bank, huge transactions, you know, accounts bank. The outcome of that is makes us, on the deposit side, more interest rate sensitive because, you know, those are non-rate sensitive deposits. When rates go up, you know, beta on that is zero, and therefore, your margins expand. That's the outcome of the strategy that we run. I think it's important to clarify that, you know.
This is not that let's position the bank because, you know, Bharat has a view as to what rates are gonna be at 4:00 A.M. in the morning, lightning bolt, and here we are. You know, that's not the way it is. This is, you know, how the strategy is designed, and that's how the bank is configured. You know, as rates go up, we benefit because of this strategy that we are running. You know, rates have gone up, and you've seen what's done that NII and NIM, et cetera, in the bank. As rates increase even more and, you know, who knows? You know, nobody's 100%, you know, clairvoyant or we know exactly what will work out. As long as rates go up, of course, our margin will benefit from it.
We also have a tailwind annualizing some of the rate increases from last year. You know, that's a benefit here. You pointed out, you know, what are the offsets against it? Well, the offsets are there might be a slowdown in the economy, so volumes might suffer. Mortgages are already slowing down, you know. That is to be expected and to some extent welcome given where we are in the cycle. That may be offsetting part over there. You know, that's how we look at it. You know, I look, I don't want to talk about consensus, you know. That's what you folks do for a living. We feel, and I was quite clear with the guidance, you know, on earnings growth, you know.
Given where rates are, annualization of those rates, the acquisitions, so ignore acquisitions, but I, you know...
Sure, throw 'em in.
Assuming that they happen. You know, we're looking at earnings growth, you know, of more than our medium-term target. This is forward-looking, so there is no guarantee it's gonna happen. Could things, you know, turn out to be different? You know, timing of acquisitions could be different. The economy turn out to be much, you know, difficult than what we are forecasting. The geopolitical situation might turn out to be uglier than what it already is. A lot of moving parts here. Overall, given the strategy we run, we feel there is, you know, that core part of our business model, you know, more consistency and predictability on our earnings, and that's the reason I said what I did, you know, in December.
Sounds good. I'm gonna take a look here at the questions that are. Actually, the question is, what if rates fall? I mean, I guess that's a back-half question.
It's a great question, you know, because I thought you would ask me that, saying, you know, do we see another side of TD here? That's interesting, because it's not as if, you know, our margins go through the floor when rates were zero. It wasn't too long ago, and, you know, we.
Right
... were doing quite well then too. It's not as if we don't have experience as to how to manage the bank, you know, in a low rate environment. Been doing that for the past 12 years, you know. Why is that? Simplistically, you know, the asset sensitivity on rates is, again, I'm simplifying and I want to qualify that, is you would think that, you know, all the banks are similar in that side. You know, how much fixed rate loans we have versus, you know, others or whatever. The main difference comes on the deposit side as to what happens on non-rate sensitive deposit growth versus rate sensitive deposit growth.
Non-rate sensitive deposit growth, you know, as you know, and Darko, we've talked about it, you know, in our earnings call and one-on-one meetings and all that we tractor those deposits. When rates fall, you know, by the time they work through our P&L, there's time. It's not an instant thing, you know, that you drop away. Whereas rates go up, it helps you very quickly because, you know, you're not only the old tractors are repriced higher, but your new deposits are priced at a higher level because you're tracking at a higher level. On your rate sensitive deposits, you know, your beta works immediately, right? You know, if rates drop, your deposit rates drop, you know, immediately. So that's the way to look at it from a.
When rates drop as to how it would impact TD. You know, the pressure on our deposit margins would work through over a few years. Whereas on the rate sensitive, which is not a small part of our business, that's an immediate impact, but that's no different than any other bank. It's a, it's a long way to describe, you know, how actually the TD's, you know, deposit book works. 'Cause sometimes it's not well understood, and it's important to clarify that. I feel, you know, that we've shown in a low rate environment that we are able to manage the bank, you know, with consistency and within expectations.
Okay. We're running down on a little bit on time. I'm gonna ask another question from the audience, but before we do, I think I have an opportunity here because you're up here and you've got a large credit card book. You know, you talked about Aeroplan, but it's much bigger than that. One of the things that I wanted to ask with you being here is there some work on lowering the interchange fee here in Canada? Not only is there I mean, there's supposed to be an industry-led solution, the government suggesting, "Hey, if we don't like that solution, we'll come up with our own solution." Is there any update you can give us on this process?
Can you give us your perspective on a bad outcome, let's say, if interchange fees are dropped significantly? How do you react? What does TD do?
You know, when we think of the credit card business is a business model attached to it, right? You know, the convenience, the credit availability, the fraud management around it, you know, all those aspects create a value proposition for the holder of a credit card. The rewards, you know, critically important as to, you know, how, what value you're providing to your customer. Attached to that value proposition is a series of costs and revenues, you know. Of course, you know, if any component changes here, the value proposition has to change. We'll see how it plays out. You know, this. Unfortunately, you know, credit cards have been in the headlines for many years. It's not a new phenomenon.
A lot of stakeholders, you know, that have a desire for certain costs to go down, but not the benefits to go down. But I think, you know, banks generally have managed well on how to adjust their value proposition. You know, we had a change in interchange a few years ago, you know, about three years ago or something like that. People thought, "Oh, my God, you know, the whole situation might change quite dramatically." It didn't. You know, the value proposition adjusted to the new reality. My hope is that, you know, we do come up with a sensible solution here. I think some of the objectives laid out make sense, you know, for the small businesses.
We also wanna make sure that our small businesses, you know, are addressed in a particular manner and relative to some of the.
Mm-hmm.
You know, retailers that might be out there. We'll see how all these things play out. Overall, it's a business, you know. Business has costs and revenues attached to it. If one of those components change, you know, something has to change, 'cause that's how the business is run and managed. I'd expect that to continue.
Fair enough. I guess the concern would be that it would be a rapid drop in the interchange, and would therefore there would be a big change in the business model, rather than the previous interchange drops were for minor. You know, I don't know if you can comment on anything, like what they're talking about in terms of the degree of the drop?
You know, hard to talk about, you know, specific discussions with various stakeholders here. Let's not forget, this is not just TD or the big banks. You know, you got the networks, you know.
Sure.
That that are in the middle of it. You've got, you know, various other stakeholders, you know, various merchants, different sizes of those merchants, that that are at play here. Now you've got the, you know, the government having a say in it. It's a multiparty situation that is ongoing. Time will tell exactly where we end up. I have confidence that we come up with a sensible solution here. You know, with the, you know, definitive view that if you pull one side, something else is gonna get impacted. This is not like a, you know, that only one thing, one side happens. If it happens like a speed at which something happens, something else is gonna happen at speed as well to offset it, you know. That's how this works.
It is a business, you know, and businesses work on ensuring that the cost to revenue ratios remain, you know, within sensible ranges.
I guess I might be able to kiss my points goodbye. Hopefully I don't have to pay for fraud.
Do you have a TD card? Let's see what card you're carrying.
I actually carry a number of cards. We won't reveal which ones.
That's a good answer.
Maybe with that, we can finish off the session, Bharat, with, you know, handing it over to you and just, maybe you can provide us with your key messages for investors and shareholders for 2023.
Notwithstanding, firstly, great to be here, Darko. Thanks for asking me. Notwithstanding, you know, the unpredictability of the environment, the, you know, the volatility, high rates, high inflation, risk of a recession, I feel pretty good about TD, you know, going forward. If you look at, you know, our balance sheet, the size of our business, the scale, the market share we have, the market positioning we have in various markets, you know, feel great. Notwithstanding our size in Canada, we see huge opportunities for growth, you know, in our wealth business, in our credit card business. You know, with the acquisition of Cowen, it helps our Canadian business as well, to a great deal on the, on the capital markets side. The U.S., what can I say? We are a very young franchise. The First Horizon acquisition, highly complementary.
They bring huge capabilities, First Horizon, on middle market banking, on commercial banking. TD prolific on what I'd call, you know, very traditional products on the retail side, and we bring these banks together as to what we can do. We could become the sixth largest domestic bank in the U.S. without looking at the rest of TD. Feel great about that as to how we are positioned. We've shown that we can manage the bank, you know, very effectively and very profitably, in various scenarios. Our, our, you know, conservative risk culture, capital management bodes well given the uncertainty in this environment. Feel very excited. Again, thank you, folks, you know, for your confidence in TD.
Okay. With that, we'll wrap up this session. Thank you very much, Bharat.
Thanks, Darko. Thanks very much.
Cheers. Have a good day.