Up on stage. Just want to introduce Ray Chun, Chief Executive Officer of TD Bank. Welcome, Ray.
Thanks, Mike. Thanks for having me.
Great to see you again. Maybe we could sort of start with the quarter. Obviously, it was a very well-received quarter. Big step up in earnings. ROE now at 16%, so things are obviously moving in the right direction. Maybe just some high-level thoughts on what you were most excited about on the quarter.
Yeah. No, thanks. Great to be here, everyone. I think you saw in Q3, but it's sort of a continuation of what we said at Investor Day, which is fast approaching one-year anniversary. When we look at our strategy of deeper relationships, build a simpler, faster bank, and then discipline in how we execute on capital, restructuring our costs, and governance and controls, I would say that strategy we're executing across the board. Oh. Let me-
Sorry.
When I look at the commitments that we made at Investor Day, and then how are we doing relative to that, on an ROE perspective, I think, like you said, we are at 16%. Our target for this year was 13%, so we have gotten to the medium-term outlook and I couldn't be more proud of the team on that side. I would break that down into a couple areas. I think restructuring costs has been a really big focus for TD Bank. We said we would get to CAD 2 billion-CAD 2.5 billion of restructuring costs. I do emphasize that with everybody, that when we say we are restructuring our costs, we are trying to fundamentally reset the run costs of TD Bank, not slash our project spending or marketing spending or put some sort of a hiring freeze in places.
Can you take the unit cost of your biggest processes and fundamentally reset that cost down to 20%, 30%, some 50% or 60%? You are seeing that play through. Our goal was CAD 900 million this year. We hit that restructuring cost in Q3. We actually think that there is significant upside to the CAD 2 million, CAD 2.5 million as we go forward. From a business momentum, and you are seeing it across the board, we are having record earnings across literally every part of our organization. On the wholesale business, we have doubled the revenue on a quarterly basis since we did the TD Cowen acquisition, and still have significant upside. The reason I say that, everyone, is that when I took over as CEO, the earnings contribution from the wholesale bank for TD was about 9%.
At the end of Q3, we are at about 15%, is the earnings contribution from the wholesale bank. There probably isn't a G-SIB in the world that doesn't have probably around 25% of their earnings, Mike, coming from the wholesale business. So I do have a lot more upside, I would see, in our wholesale bank relative to potentially other G-SIBs, and we are seeing that play through. Then across the Canadian footprint, we have been number one in resi, credit cards, and deposit year-on-year growth for the last four quarters. So good momentum in the Canadian bank. Then as we announced in the U.S., the AML remediation program, which absolutely still is our number one priority as an organization, is on schedule.
We are now balancing bringing back the growth elements in TD United States, and you saw our announcement around launching 100 new stores or branches, they call them stores in the U.S., we call them branches here, by the end of 2020. So I will pause there, say lots of momentum on the things that we committed to doing at Investor Day, and I couldn't be more pleased.
Okay, thanks for that. Then maybe just asking about a couple questions on credit.
Yeah.
Obviously, that was something that investors were very pleased about. Lower than expected on the quarter, and it sounded like there is a bit more confidence on sort of landing at that lower end of your guided range, at least from the commentary on the call. Any thoughts on the credit outlook? Obviously, there is a lot of uncertainty now-
Sure.
... and sort of maybe dovetail that into your current reserves of CAD 500 million.
Yep
I believe is still the number for the tariff-related risks. How do you sort of see that in terms of where it sits today and where it needs to be?
No, and we did give the guidance for the balance of this year as lower end of our 40-50 basis points on our PCLs. We're certainly not seeing anything outside of what we would have expected, and so the resiliency in both Canada and the U.S., Mike, continues to be there. I would say, and I think Ajai captured it well. I think we monitor quite extensively. We run a lot of stress scenarios around this uncertainty. S o we have taken, as all of you know, CAD 500 million of reserve specific for the tariff-related uncertainty, and we've modeled all the different variations of what could happen. S o we'll continue to be prudent on that piece. But we're also starting from a very healthy reserve. We've always been prudent on how we reserve from a PCL perspective.
I think going into 2027, but also as sort of this uncertainty plays through, we are very well-positioned from a reserving perspective.
Any pockets of risk that you'd flag? Obviously, unsecured retail in Canada has been something that's been gravitating to slight deterioration. Nothing meaningful, but anything on TD's book that you can comment on?
Yeah. We watch different cohorts in the organization very closely. T o your point, on the unsecured side, the cohort that I watch very closely is clients with credit scores under 650. It's still a very small percentage of our book, but that gives you a bit of an indication. We're definitely seeing some deterioration in that cohort of the less than 650, but within the range that we would have expected, everyone. So again, even in that more sensitive cohort, you're not seeing, I would say, unusual behavior. T his is where I'm saying the resiliency of the Canadian consumer continues to play through at this point. So from a weakness, I wouldn't point anything out to the group here other than to say, I think the range of 40-50 basis points is still the range as we think forward.
I would suspect, in some cases, I think you have hit the high cycle on some of the credit pieces, as Ajai said. You may be There will be some volatility, I suspect, as we move through. I think with confidence, the 40-50 basis point range that we put out there is still the right range.
Okay. Thanks for that. Maybe on your segments, starting with U.S. Retail.
Yeah.
Before we get into the nuts and bolts, maybe just a quick update on the remediation. I think some investors are looking at the potential pivot to opening stores now being a bit of a I am not going to call it an inflection point, but you seem to be in a much better place on that whole remediation process versus where you might have been a year ago. Is that fair?
No. Listen, I have said it for the whole two years that I have been CEO, it is the number one priority for our organization. Until we get to end of job, it will remain our number one priority. I could not be more pleased with the work that has been done in the United States, the investments that we have made, the talent that we have brought in, not just at the most senior levels, but two, three layers down. A lot of the management actions that we have had to do, we will have delivered by the end of this calendar year. Then it gets really down to validation and testing, which then provides, I think, some capacity for the management team. We have been very careful and thoughtful to make sure that we do not lose the focus on the AML remediation.
But as we've gotten through and hit certain milestones, we now have the ability to balance the growth element in the U.S. W e've cleared the asset cap room, as all of you know. We have about $53 billion worth of asset cap room in the U.S., and if you throw in the non-HQLA, you're probably in the $100 billion range. What we've done is we've gone out and looked at the footprint that we're in and said, "Where are the biggest growth opportunities in the footprints?" And we've identified the 100 branches that we want to open in the U.S. But we'll continue to balance, making sure that the remediation work stays a priority. But we now have capacity and cycles within the management team to look for and drive some growth. I think it's finding that right balance that's important, Mike.
Okay. W hat about just more broadly in the U.S., what about the wealth business? Are you looking to sort of scale that up? And what are your sort of long-term ambitions there? Maybe just remind investors.
Yeah, and I would just say that we have under-invested at TD over the last decade is on frontline distribution. W e called that out at Investor Day. I know it's a U.S. question, but maybe I'll just stretch it a bit more broad. If you look at Canada, we're going to be adding bankers. T hat's half small business bankers, half commercial bankers. We're adding 1,200 wealth advisors. We're adding 1,000 specialized sales force into branch banking, 500 for mortgage specialization, 500 for investment specialization. I n the U.S., we're adding 500 wealth advisors. Just to put that in perspective, we probably have about 220, 230. So we're moving that north of 700 by 2029, and we're going to add another 200 commercial bankers. S o that's probably the area.
If I look at all of that, I would say to everybody, that's like doing an acquisition. That's how much sales force productivity lift I do think the teams are going to see. I n the Canadian bank, we have already added those 500 mortgage specialists into the field and 500 investment specialists. Their productivity to date is 3x the generalists that are in our branches. S o definitely moving to a specialization model is proving out.
All of these hires, this cost addition is all incorporated into the two. You are still looking to that CAD 2 billion - CAD 2.5 billion.
Right
With maybe a potential upside in terms of that structural reduction over the course of the next couple of years?
That is the exciting part, I think, everybody, is what we are saying is that if you can take the structural cost of running the bank down, you can invest in a flywheel capability. We are already making the investments. The great thing is, if you have seen our expense numbers, our efficiency ratios over the last year, is that we are not starving the future to meet our numbers today. I think that is really, really important, that we continue to invest in not only the frontline distribution, but in AI capabilities, in the data infrastructure that you are going to need, platform modernization. All that investment is not increasing our project pool. I would say to everybody, we have taken our expenses down to where we said, that 3%-4%. We have had positive operating leverage, which we have committed to delivering, and we have been able to invest.
We have the highest project spend in the history of TD Bank this year. We have the highest marketing spend in the history of TD Bank because we are relaunching our entire brand, and we have been able to manage all of that while controlling our costs and reducing our costs and our efficiency from 59.5% down to 55%, which was our medium-term objective when we came out of the Investor Day. This whole discipline on cost restructuring, we are not at end of job. There are still significant more opportunities that we will continue to press, but we will use some of that to invest back, and some of it will certainly go drop to the bottom line.
Okay. Appreciate that. Maybe switching over to Canadian Personal and Commercial Banking on the retail side-
Yeah
to begin with. I think Sona gave a good amount of color on-
Sure
not sacrificing margins for volume.
Yeah.
That is something that is very topical these days. How do you sort of see that sort of race to primacy or the competitiveness of getting that primacy client? It does not seem to be an easy thing to do, and obviously, you have to do it in a very targeted way. What is TD's strategy on that primacy?
That is probably one of the most important questions, I think, for any retail bank is do you have primacy with the clients, because that leads to a lot of other goodness. I will leave you with a few things. Number one, our primacy percentage is 700 basis points higher than the peer average in Canada. That is number one. Number two, if you look at the deposit mix for TD Bank, this is a fundamental advantage that we have, that our non-term deposit mix is about 70% of our deposits. The industry average is about 53%. That gives us, certainly from a funding perspective, and from a deposit perspective, much an advantage relative to our competitors, which then plays out in the NIM over time. Right? I keep those two data points in mind.
In Canada, what you have seen from a resi perspective is that we have done both. We have been able to be number one in year-on-year mortgage growth for four consecutive quarters and have NIM expansion, in our Canadian Personal Banking and in our resi. That is because of a few reasons. The on-off on the renewals on mortgages is a tailwind. Our detractors are a tailwind. I suspect that we will continue, as we said on the Q3 call, you can expect that into Q4, and it will be tailwinds as we head into fiscal 2027. But we are very conscious of making sure that we are putting on profitable. Whether it is in profitable business, and I emphasize that, whether it is in resi or whether it is in deposits.
Sona and their team are showing that you can actually gain acquisition while still managing the margin to be accretive, and I think it is really important that you balance that.
Okay. Maybe talk about the relatively new to Canada client that you are targeting. I think you have been clear in the past about how a big part of TD's strategy is having more branch concentration in the GTA because a lot of new Canadians do gravitate to the GTA.
Sure.
I know you've given some stats in the past-
Yeah
about market share on new Canadians. Maybe just an update there. I think it's something that a lot of people-
Sure
are wondering about in terms of how is TD going to continue to win in that part of the market?
I'm going to come back to that in just one second. Just on the mortgage piece, a fundamental shift that Sona has done under her leadership is the mix that you're seeing in our mortgage portfolio. So the mix between broker to proprietary to direct. Right? What you're seeing at TD Bank is we used to have a higher broker mix, which is lower margin. Right? This year, we have record proprietary, that's the MMS mortgage sales force, plus our branch mortgage sales due to those 500 mortgage specialists that we put in. So you're seeing for the first time our proprietary mortgages, even though the resi market is down in Canada on a year-on-year basis, our proprietary mortgage is actually on a record. Right? So terrific momentum. It's a mix issue, and also the mix between mortgages and HELOCs.
We're also right-sizing that mix, and certainly we're getting a better balance between HELOC and mortgage. That gives you another pickup in the margin. So keep that in mind as you think of the resi portfolio. When you think about acquisition new to Canada, which is your question, Mike, I think about acquisition in three buckets, specifically in Canada, new to Canada, switchers, and students. You have to actually try to win in all three. What you see in Q3 for TD Bank is we had the highest switcher acquisition numbers that we've ever had on record, and we've had the highest student acquisition numbers that we've had. So we've revamped those two programs. While immigration has come down, it's still a significant factor. We absolutely win from a new to Canada perspective, but those numbers are down a little bit.
I do think in the next few years, those numbers, we will start to see that sort of tick back upwards, as we revisit our policies as a country. But that's what gives me confidence, is that you have to win on all three of those categories. You've got to win on new to Canada, you got to win on the switchers, and you have to win on students. We're seeing terrific momentum on that. That translates into credit card sales, mutual fund sales. If you look at our credit card acquisition, again, number one in year-on-year growth in credit card acquisition for the last four quarters. So we're continuing to see that momentum play through, throughout the entire organization. But it all starts with, can you win the acquisition battle? Can you get primacy of the Canadian consumer?
That's where we actually have a very big competitive advantage.
Okay. I want to go back to deposits in Canada and your core deposit franchise. You did allude to a couple of interesting numbers and stats. How does TD continue to maintain that advantage? Because you're clearly in an advantageous spot right now, but things can always change. What's the secret sauce to keeping TD at the top on that core deposit base?
Well, listen, we bank one in every three Canadian. The last numbers I saw is something in the neighborhood of about 35%-40% of all new to Canada do select TD as their first account. What we've been focused on, as part of our strategy, is number one is deepen the relationships of the clients that we have. It's not just in the retail, it's whether it's our TD Securities clients or our commercial banking clients, significant opportunities to deepen those relationship. The biggest way to deepen those relationship is actually make it simpler and easier and faster to do business with TD. I can tell you, and I've told some of you before, that if you think of the new to Canada customer, we open about 500,000 new to Canada accounts, and we consider new to Canada over a 2-year period.
I would tell all of us in this room that if we move to any country, you do one of two things. You'd open up a bank account, you go get a credit card. We made it incredibly hard for our clients to get a credit card because we didn't do zero score credit bureaus well. That process took so long, it frustrated our colleagues, it frustrated our clients, that only 30% of our new-to-Canada clients were getting a credit card with TD, then 70% went elsewhere. Yet, 100% wanted them. I could tell you it's not a risk issue, because I've had the risk team review the portfolio of new-to-Canada credit cards relative to the non-new-to-Canada portfolio. It is a marginal difference in delinquencies. So, has nothing to do with the risk perspective.
It was all about the process was so complicated. The team has changed that process, and now as you open your checking account, it will soft ping the bureau. As long as you do not have anything derogatory on your credit bureau, and I keep saying, I don't know how someone ruins their credit bureau in two days of being in Canada. I hope not. That we will then pre-approve you for a credit card on the spot as you open your checking account. That leads to something like 250,000-300,000 new credit cards. More importantly, I've always said that when clients open their bank account with us, I think in most clients' minds, Mike, they're doing us a favor. They're depositing money. They're giving us their funds. The first time a client really tries to figure out, does my bank trust me?
Is my bank helping me? Is when they apply for a credit card. For new-to-Canada, we weren't creating sort of that wow moment on a regular basis, and now it's the complete opposite. That'll then earn us the right to have the savings discussion. That'll earn us the right to have the mortgage discussion. It's really important that you get those two pieces right. Can you get them in the door? Then the products and services that they need, can you deliver it to them in a simple, easy, frictionless way? That's exactly what we're working on right now.
Okay. Maybe switching over to wholesale banking. Obviously, the business has done a lot better last few quarters.
Sure.
The market's been very constructive in terms of the backdrop there. Your ROE has been significantly improved. I have to, it's almost like a boilerplate question I'm asking, because clients are asking, investors are asking, in terms of the sustainability of wholesale, how do you sort of see that? I'm guessing the revenue diversification is going to help sort of stabilize it, maybe. Maybe there's less of a downside scenario if markets do turn. How do you sort of see that dynamic in terms of your wholesale business?
Yeah, I couldn't be more pleased with the performance of our wholesale business. First and foremost, as all of you know, three years ago when we did the TD Cowen acquisition, I think lots of questions on could you make this acquisition work? It's not easy to take a boutique investment firm and put it together with a big G-SIB, and could the cultures come together? Would you retain the talent from the TD Cowen perspective? It could not have gone any better. I tell you from a talent retention perspective, but just the fit from a culture. A lot of that is because the reason we bought TD Cowen is that the capabilities and the talent that TD Cowen had, Mike, is exactly what we needed. There wasn't a sort of pick who's going to stay, who's going to go. We actually needed it all.
From the research capabilities, to the prime brokerage capabilities, to verticals like healthcare, biotech, things that we just didn't play in that are the growth parts of the wholesale business. So, we've been able to bring in that entire business into the TD infrastructure. Where we found synergies is in our sort of operations back office. So, that's number one. I would tell you that the mix of where we're doing business has changed. The U.S. is obviously the largest market. Historically, we would have had more earnings coming out of the Canadian wholesale bank. But now we've got about 50% of our earnings in the investment bank coming from the U.S., 30% from Canada, and 20% from the rest of the world, Europe, Asia, and what have you. I see that mix continuing to sort of play into the U.S. piece of it.
I said it in my opening remarks, if you go back three years ago when we did the TD Cowen acquisition, we've now shown every quarter, we've doubled the revenue for this business on a quarterly basis. We did have a record Q3. The markets are constructive, so I do think at some point some of that comes back a little bit. We've diversified now our earnings, and it's been really important. One of the things that we said at Investor Day is that we needed to make sure that at TD, there would be a focus on driving fee income. That's exactly what you've seen with TD Securities, our wealth management business, our TD Insurance business, our credit card business. Those are the businesses that we wanted to supercharge, coming out of the Investor Day.
You're seeing that exactly play out with the discipline on our cost restructuring. If you go back to our Investor Day, I think the ROE that the TD Securities was producing back then, I'm going to get this number, was around 9%, in that range. Q3 ROE was 16.7%. Tim and team have done a terrific job in not just driving revenue, but they've made tough choices on expenses. They've made tough choices on restructuring their business. They've gone down to each individual client level in both our wholesale business and in the commercial bank. When we say we're going to get serious around ROE, we know the ROE at every client level, and then what's the projection over the next two years. We're trying to build deeper relationships, more fulsome relationships with every one of those clients.
Where we deploy our balance sheet, we want to make sure it's a true partnership and a relationship.
Okay. Sounds like the U.S. opportunity is still there-
Huge
in terms of growing organically, potentially tuck-in deals, I'm guessing, as well. What about your longer-term ambitions? Do you ideally want to have more of the bank's earnings coming from wholesale? It's a question that I get often. Just given how good the business has really been the last couple of years, and it seems to be in a much more steady state, sort of diversified business than it was in years past. Would you ideally want to move the needle on that?
Oh, absolutely. I do think where we want to be is probably somewhere in that 20% - 25% of the bank's earnings coming from the wholesale business. It's at 15% today. That's not changing our risk appetite. That's not changing our risk curve. It's actually playing right within those, as I say in a golf terminology, right down the middle of the fairway, folks, is what we want to play. But we have the client base. What we haven't had historically is the capabilities that we've needed, like prime services, transaction banking. We're making a significant investment at TD Bank on transaction banking, and you'll see that to play through. Prime services in the U.S., we've had it in Canada, but not in the U.S., and you're seeing that play through.
I think it's fair to say you should expect to see the wholesale bank contribute what any G-SIB bank would have in that 20% - 25%. In these constructive markets, I would tell you most G-SIBs are probably 30% - 35% of their earnings are coming from the wholesale bank. My goal is somewhere in the 20%, 25%. I think from an upside perspective, still significant opportunity for us.
Okay, thanks for that. Capital deployment, definitely very topical when it comes to TD, because you do have the high CET1 ratio, the most excess capital. I know the ambition is to get to that roughly 13% CET1 by the end of next year. I think most investors think that it's probably tough to get there because you're sitting at 14.3%. There's so much abundant capital. But what are your high level thoughts on how you sort of move the needle because it's just
Well, I think I said it on the Q3 call that TD is different than any of the other banks, in a positive way. First and foremost, we do start from an incredible position of strength, that we are at CET1 of 14.3% and producing an ROE of 16%. I do not know that a lot of people would have thought that would have been possible. So I have said very clearly that our number one priority for deploying capital at TD Bank is organic. That is the focus, and will continue to be our focus. Then comes the buybacks, and we have the ability to do significant buybacks. Then ultimately, which is not a priority for us, but if ultimately there is a sort of a tuck-in opportunity on any of the fee-based businesses, is really where we would potentially take a look.
But that is not a priority for us. I would say we are in the privileged position that we can actually do it all. That we can invest significantly to drive our organic growth. That we have the capital to do sizable buybacks. Then ultimately, we have enough dry powder that if a tuck-in opportunity was to present itself, that we could deploy there. So terrific. Part of that is, the advantage that we have is, as you know, that we generate organic capital at an incredible pace. In these uncertain times that we are in right now, I certainly like the position that we have. But our goal is to get to, by the end of 2027, CET1 somewhere around 13%.
Would you ever consider a special dividend to do that?
We have always talked about it, but we like the flexibility that NCIBs allow. I do think that probably would not be something that we would pursue, a special dividend. The NCIB route is the route that I think gives us the flexibility. Also, I think there are some advantages also from a tax perspective for shareholders and all of that. There are other multiple reasons why I think NCIB is the better path.
Okay. Maybe just one final quick question just on AI. You've given us a lot of color on the Q3 call and throughout, since the Investor Day, in terms of what you're trying to do. Do you see an opportunity that maybe things go better on AI and there's even more upside? I'm sure you'll tell us when the time is right. But is AI morphing into something a lot bigger?
Yeah. 100% it is, Mike. I think when we did Investor Day, and we put that target of CAD 1 billion out there, what I underestimated and my entire team is, and some of this, again, we're like inning one and two of the AI journey, is that the benefits of agentic. What I'm seeing with agentic AI capabilities is something that I haven't seen with automation, I haven't seen it with digital, is that you can finally truly go end to end and reimagine entire processes. We've picked five big enterprise, what we call big rocks. Contact center is one. End to end retail credit, fraud, AML, KYC, and advisor productivity. Those cut across. In those specific areas, as we drill into, we do think there is sizable upside to the CAD 1 billion.
When I talk about the structural unit cost reduction of running TD Bank, at the core of that is leveraging AI. I told you the examples that we did around our pre-adjudication mortgages, that we've taken a 15-hour process, that on the pre-adjudication for mortgages, for every mortgage, would've taken 15 human hours. It's now down to on average, three minutes. That's 100% end to end agentic. That same agent we are deploying by the end of this quarter for funding and for discharge. Think about mortgage funding, think about mortgage discharge. Mortgage funding on average costs us about CAD 187. It's going down to CAD 47, CAD 46. Discharges are going from CAD 22, CAD 23 down to about CAD 11.
Now, that agentic capability, everybody, that we do for mortgages is transferable now to small business banking, auto finance, can move down to the U.S., has funds really into the commercial bank. So once you build this agentic capability, you can actually move it, and that's where I think I underestimated, we underestimated the benefits. I'll tell you another benefit. We just launched our first agent around collections. Leveraging agents and AI and better data. Around collections, everybody, the key is can you get in contact with the person? The connect rate. When we were using people, the connect rate was about 6%, 7%. Our connect rate using our agents now with the AI behind it and getting to them at the right times, is between 20%-25%. It's not just a cost reduction. There's significant productivity benefits.
We are early days on this journey. But I am seeing things today that I have not seen when we were on the automation journey, the mobile journey, the digital journey. This is transformative. I will keep everybody updated. But it is a win for clients, it is a win for our colleagues, and it is a win for shareholders.
Okay. I think we will have to just-
Yeah
Given the time, have to end it here. But thank you very much, Ray Chun, for your insights.
Yeah.
Super insightful.
Thank you very much, everybody.
All right. Thanks for joining us.
Pleasure. Thank you.