The Toronto-Dominion Bank Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Acknowledged traditional territories of Indigenous communities in Toronto.
• Discussed AML matters: $2.6 billion provision announced, with expectation of global resolution by year-end; remediation program underway with hires, technology investments, and new procedures.
• Q3 earnings: $3.6 billion earnings, $2.05 EPS (adjusted); revenue grew 8% y/y driven by fee income and deposit margins.
• Expenses: High single-digit growth expected in 2024 due to investments in risk and control infrastructure, strong markets-related businesses, and litigation.
• Capital: CET1 ratio 12.8%; sold 14.5 million Schwab shares to strengthen capital, with CET1 expected to be impacted by AML provisions but partially offset by share sales in Q4.

Segment Performance

• Canadian Personal and Commercial Banking: Record revenues of $5 billion and record net income, up 13% year-over-year. Average loan volumes rose 6% year-over-year, with 6% growth in personal volumes (real estate secured lending up 6% and cards up 10%) and 7% growth in business volumes. Average deposits rose 5% year-over-year, with 7% growth in personal deposits and 2% growth in business deposits. Net interest margin was 2.81%.
• U.S. Retail Bank: Continued strong operating momentum with sequential earnings growth and peer-leading loan growth. Average loan volumes increased 5% year-over-year, with 8% growth in personal loans and 3% growth in business loans. Average deposit volumes, excluding sweep deposits, were relatively flat. Net interest margin was 3.02%.
• Wealth Management and Insurance: Demonstrated resilience with record revenue, 13% year-over-year growth driven by higher insurance premiums, fee-based revenue, deposit margins, and transaction revenue. Assets under management and administration increased 15% year-over-year.
• Wholesale Banking: Continued growth with revenues up 14% year-over-year on broader, stronger capabilities, including enhanced U.S. share trading execution.

Guidance

• Fiscal 2024 adjusted expense growth expected in high single digits.
• Q4 NIM expectations: Canadian to have downward pressure due to BA CORRA migration and Bank of Canada rate cuts, partially offset by tractor on/off rates; U.S. to have modest NIM expansion due to tractor on/off rates, partially offset by potential Fed rate cuts.
• Corporate losses expected above prior guidance range of $200 million to $250 million in Q4 due to increased investments in risk and control infrastructure.

Risks

• AML investigation risks: Potential fines, non-monetary penalties, and impact on U.S. franchise if asset caps or other compliance requirements are imposed.
• Credit risk: While PCLs were stable, ongoing economic uncertainty and credit migration could impact future provisions.
• Litigation risks: Uncertainty around class actions related to AML investigations, with outcomes hard to predict.

Question and Answer

Q: About capital and selling Schwab stake, why was it done?

A: Bharat Masrani stated it was a prudent move to maintain well-capitalized position given economic volatility.

Q: About expenses and AML investments, what drives expense growth?

A: Kelvin Tran cited higher risk and control costs, strong markets-related business compensation, and litigation as key drivers.

Q: About U.S. Retail segment expenses, how are productivity initiatives managed?

A: Leo Salom discussed productivity programs including organizational health, real estate optimization, and technical architecture simplification to balance investments and expenses.

Q: About corporate losses exceeding guidance, what's the reason?

A: Kelvin Tran explained it's due to increased investments in risk and control infrastructure in the corporate segment.

Q: About AML program FTEs, will they remain?

A: Leo Salom said a portion will be repurposed, but there will be a structural increase for a robust AML program.