The Toronto-Dominion Bank (TD) CEO Bharat Masrani on Q2 2022 Results - Earnings Call Transcript
The Toronto-Dominion Bank (NYSE:TD) Q2 2022 Results Conference Call May 26, 2022 1:30 PM ET Leo Salom - President and CEO, TD Bank, America's Most Convenient Bank Good afternoon, everyone, and welcome to the TD Bank Group Q2 2022 Earnings Conference Call. I would now like to turn the meeting over to Ms. Also present today to answer your questions are Michael Rhodes, Group Head, Canadian Personal Banking; Paul Douglas, Group Head, Canadian Business Banking; Raymond Chun, Group Head, Wealth Management and Insurance; Leo Salom, President and CEO, TD Bank America's Most Convenient Bank; and Riaz Ahmed, Group Head, Hotel Banking. At this time, I would like to caution our listeners that this presentation contains 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. I would also like to remind listeners that the bank uses non-GAAP financial measures such as adjusted results, to assess each of its businesses and to measure overall bank performance. Additional information on items of note, the bank's use of non-GAAP and other financial measures, the bank's reported results and factors and assumptions related to forward-looking information are all available in our Q2 2022 report to shareholders. Thank you, Brook, and thank you, everyone, for joining us today. We delivered approximately 200 basis points of operating leverage across the enterprise, as we continue to see strong returns from our investments. Our proven business model enables us to continue to deliver for our shareholders, while building the better bank for our customers, colleagues and communities in the digital age. Through this platform, customers will be able to take advantage of an integrated partnership with Starbucks Canada, helping them unlock even more value on everyday purchases. It was also a very strong quarter for the business bank, with double-digit growth in loans. In our wealth business, net asset growth and higher fee-based revenue helped offset a moderation in direct investing trading volumes from the all-time peak we saw last year. The competitive advantage of our insurance business was also evident in the quarter as we strengthened our number one position in both the direct-to-consumer and affinity spaces. To support commercial customers, we launched a pilot program with a leading fintech to automate cash management by embedding TD banking products and services directly into their enterprise resource planning and accounting software. We added a general purpose of Mastercard to our offerings in Target's digital and store channels, further growing our strategic card partnership beyond the store-only red card. And we launched TD Home Access Mortgage, a new product designed to increase homeownership opportunities in Black and Hispanic communities across several markets within our footprint. With the contribution from our investment in Schwab of US$177 million, segment earnings were US$946 million this quarter. We've held listening sessions and met with over 100 community groups across TD and First Horizon's footprint. In our Wholesale Banking business, we delivered solid performance this quarter in a challenging market and geopolitical environment, with earnings of $359 million, driven largely by higher trading revenues. And the business continues to be recognized for the investments we've made to strengthen our global platform and enhance the capabilities we offer our clients. Reflecting our leadership in sustainable finance, TD Securities was selected as co-structuring adviser and a joint lead manager on the government of Canada's inaugural $5 billion green bond issuance, the largest Canadian green bond issued to date. Overall, as I reflect on the quarter, I'm pleased with the way we navigated the rapidly evolving environment. With our disciplined risk management approach and sustainable business model, TD is well positioned to face the challenges and seize the opportunities that lie ahead. To continue to exceed the rapidly changing expectations of our customers, we've launched an initiative we call the Next Evolution of Work, or NEW, for short. With NEW, we are building upon our strengths by modernizing our operating model and technology capabilities. Key parts of the organizations have shifted to the NEW model so far, and we are seeing positive results, including faster time to market and greater efficiencies in how we are building and deploying technology. We have world-leading AI capabilities at TD, and their applications extend far beyond banking. And TD Bank America's Most Convenient Bank was recognized by DiversityInc as a top company for diversity for the 10th consecutive year and by Forbes as one of the best employers for diversity for the fourth consecutive year. TD colleagues will contribute to that future, and we continue to invest in them as they are our most valuable asset. After two years of effort, through challenging circumstances, it is the right thing to do, to deliver for all of our stakeholders.
Absent the retailer's partners net share of the profits from the U. Reported total bank PTPP was up 16% year-over-year before these modifications and adjusted PTPP was up 11% after these modifications, mainly reflecting higher revenues in our personal and commercial banking businesses. Average loan volumes rose 9%, reflecting 8% growth in the personal volumes and 16% growth in business volume. Insurance claims increased 34% year-over-year, reflecting the normalization of claims, partially offset by the favorable impact of a higher discount rate, which resulted in a similar decrease in fair value of investments supporting claims liability reported in noninterest income. Noninterest expenses increased 9% year-over-year, reflecting higher spend supporting business growth, including technology and marketing costs, higher employee-related expenses and variable compensation. Average loan volumes decreased 4% year-over-year, reflecting a 4% increase in personal loans and an 11% decline in business loans or 3%, excluding PPP loans, primarily due to continued pay downs of commercial loans. On Slide 29, we've continued our disclosure on the impact of the PPP program. Total PCL was a recovery of US$15 million, a decline of $32 million sequentially. Expenses increased 2% year-over-year, reflecting higher employee-related expenses and business investments, partially offset by prior year store optimization costs, lower COVID-19 expenses and productivity savings in the current year. PCL for the quarter was a recovery of $9 million compared with a recovery of $5 million in the prior quarter. We are activating the DRIP discount for our upcoming dividend as a prudent response to a number of developments and uncertainties in the operating environment. Conversely, should interest rates continue to rise, we would expect expanding margins for TD's Canadian and U. In all of these developments and uncertainties into account, we believe it is appropriate to take steps to build our capital buffer to support continued business growth. Gross impaired loan formations decreased 4 basis points quarter-over-quarter to 12 basis points, reflecting higher prior quarter formations in U. The bank recorded provisions of $27 million or 1 basis point this quarter, decreasing by $45 million quarter-over-quarter, reflecting lower impaired PCLs and a larger performing allowance release. In summary, the bank continued to exhibit strong credit performance this quarter as evidenced by lower gross impaired loan formations, gross impaired loans and PCLs. With that operator, we are now ready to begin the Q&A session. [Operator Instructions] The first question is from Ebrahim Poonawala from Bank of America. I guess, I just wanted to follow up on capital and better understand, one, maybe for Kelvin. And then finally, as Kelvin said in his comment on this one, this particular transaction, whatever there's additional fair value adjustment would be offset with the accretion that we would earn after we closed the transaction. One of the concerns that I heard as TD uniquely the G-SIB relative to the other bank M&A that's been announced, I would love to hear your thoughts around one conviction level in terms of getting the deal through the regulatory sort of finish line? And is TD different than the other five transactions that are out there because of being a G-SIB? Well, I don't want to comment on what the other transactions there might be, but we feel very comfortable. But as you're aware, the situation is quite fluid right now. So just on personalize, you talked about like a lot of town halls with senior executives. And that has played well in all these meetings we've had. I'd say a couple of things that stood out, and I think more it falls in a category of reaffirming our beliefs going in. I think the distribution that they've built across the Southeast is very compelling. But I think probably the thing that I would harp on the most is just the culture. And really, the time that's been spent most recently is working very closely in our work streams to start to stitch together what the combined organization is going to look like. Sticking to First Horizon, the community meeting is coming up for August. We've got a series of other changes planned for the fourth quarter. So we're quite comfortable with the changes we've made from an overdraft standpoint. Well, I would say from an overdraft standpoint, we implemented April 8.
With regards to some of the other changes, prepayment and some of the gain on sale mortgages, it really depends on market conditions. I would say -- I do want to just comment that as we continue to grow our wealth franchise, as we continue to lean into growing our core checking account base and continue to accelerate the growth in our cards business, we would expect us to be able to generate fee income from those activities to be able to help compensate some of the declines in the overdraft space. I think top of that list is bringing our two commercial banks together, playing a much bigger role in the mid-market space when you combine some of their capabilities, our balance sheet and the TD Securities product base. I mentioned on the previous -- to the previous question, the opportunity in the retail space. So US$350 for every 50 basis points in Fed rate hikes, Is that the right way to think about it? I just had a quick question for you first, just to clarify some of your information on Slide 35, with your loan-to-value disclosure. But to the extent the macroeconomic scenarios drive different PDs, you're at a different stage of your loans. How did it impact your expected kind of loss modeling and provisions for performing loans this quarter by introducing that scenario? That's a great question, and thank you for calling it out. When we did our allowance scenarios, and this is partly because of timing, we did view that there would be some price growth, both in the base and the downside case. A house view, however, there's been recent data and a house view has adapted. One is our customer base and their risk profile is strong. Hopefully, just a quick modeling question to start off with here. Maybe I can just clarify the -- so the accretion post day one would be an add to capital post day one, okay? And then -- but what we talk about is the natural hedge is not just post day one as well rate increases during this period. Sorry to belabor at this point, but I'm going to have to ask a follow-up question on this, First Horizon first fair value adjustment. So one is if there's a plausible scenario where rates increase significantly between now and then, and then a possibility that rates decreased thereafter. So on clothing, what you do is you write down the fair value of the -- so let's say, the loans is at par, and you write it down to $30. Where like -- if you look at delinquencies, charge-offs, formations, gross impaired loans, they're at historical lows. So you put those three factors together, and it resulted into strong in-quarter spot growth of about 3%. We're seeing that growth in the middle market space and in our specialty lending businesses. And those -- I think those businesses are still trying to find their way post-pandemic. Now there's -- to the point that Ajai raised, there's plenty of uncertainty in the marketplace right now. So what has changed from then until now to sort of make you guys think about employing the DRIP? I mean, I can think of one thing, which is maybe the federal budget, but I would have thought that the environment looked pretty gruesome back then and rate increases were already factored into your thought process. So just want to make sure there isn't anything there that I missed. I think you see a lot of uncertainty out there, Darko. For us, this is the prudent approach, and it's the right thing to do, given the uncertain environment we live in. But we feel very comfortable look at TD's net interest rate sensitivity, if that is what you're worried about, look at First Horizon's net interest sensitivity and then, of course, the accretion that comes after closing. And then, as we -- as cost of funds increase, you can see that margin comes down a little bit. So, we're basically just continuing to make sure that we're managing that book prudently and pricing it to make sure that we are supporting the clients that we want to support and earning the returns that we need to earn. And Darko, your point on -- I guess, it's a good way to say, never say never. And like I said, before the end of this year, all of you are going to become experts on purchase accounting, which is great for everybody's benefit. I'd like to take this opportunity to thank our 90,000 bankers around the world.
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