The Toronto-Dominion Bank Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Current Environment: Macroeconomic and policy uncertainty persists, with housing slowdown in Canada and job market softening; new federal government in Canada aims to create economic growth.
• Strategic Review: Completed sale of ~$9B correspondent loans; plan to wind down US point-of-sale financing business; restructuring to reduce structural costs and invest in digital/AI, including opening an AI research center in NYC and deploying GenAI virtual assistants.
• Q2 Performance: Earnings $3.6B, EPS $1.97; strong execution across segments; recognized by J.D. Power for customer satisfaction in TD Auto Finance and US Retail in Florida; invested in digital and AI capabilities.
• AML Remediation: Progress on transaction monitoring, AI use for risk mitigation, and streamlined investigative practices; making progress on data staging and risk reduction measures.
• Balance Sheet Restructuring: Made progress on asset limitation compliance, with total assets $399B at quarter-end; plan to wind down ~$3B point-of-sale financing business; investment portfolio repositioning expected to generate NII benefit in 2025 at upper end of $300M-$500M range.

Segment Performance

• Canadian Personal and Commercial Banking: Average loan volumes rose 4% year-over-year (3% in Personal, 6% in Business), average deposits rose 5% year-over-year (4% in personal, 8% in business), net interest margin 2.82% (up 1 bp QoQ), driven by higher loan margins.
• US Retail: Core loans grew 2% year-over-year; bankcard, home equity, middle market, and small business balances grew 11%, 9%, 8%, and 6% respectively; net interest margin 3.04% (up 18 bps QoQ), reflecting balance sheet restructuring and liquidity normalization.
• Wealth Management and Insurance: Revenue up 13% year-over-year; Insurance gross written premium up 10% year-over-year; TD Asset Management added $5.3B in net institutional assets; TD Direct Investing saw 83% increase in partial shares adoption by Gen Z and millennials; TD Insurance had 46% of new sales completed digitally.
• Wholesale Banking: Record revenue of $2.1 billion; Trading benefited from market volatility.

Guidance

• NIM: Expect NIM to be relatively stable in Q3, with substantial expansion expected in Q3 from balance sheet restructuring.
• Restructuring: Incurred $163M pretax restructuring charges in Q2, expects total charges of $600-700M pretax over next several quarters, with annual run rate savings of $550-650M.
• Share Buyback: Intend to deploy $8B from Schwab share sale for normal course issuer bid (NCIB).
• Investment Portfolio: Investment portfolio repositioning expected to generate NII benefit in 2025 at upper end of $300M-$500M range.

Risks

• Macroeconomic Uncertainty: Policy and trade uncertainty creating economic distortions and volatility in capital markets.
• Credit Risk: Exposure to industries sensitive to tariffs, potential impact on credit performance if macroeconomic conditions deteriorate.
• AML Remediation: Ongoing work needed to complete AML remediation, with potential financial impact from non-compliance.

Question and Answer

• Q: Matthew Lee asked about the US portfolio repositioning and NIM expansion.

A: Leo Salom responded that NII is being recaptured from investment bond repositioning and expects substantial NIM expansion in Q3 from balance sheet restructuring.

• Q: John Aiken asked about restructuring charge breakdown.

A: Kelvin Tran stated the impact is broad-based across the bank, involving workforce optimization, real estate, and business wind-downs.

• Q: Gabriel Dechaine asked about excess capital and buyback potential.

A: Raymond Chun discussed plans to deploy capital from Schwab share sale and assess buyback opportunity after strategic review.

• Q: Doug Young asked about business exits and Canadian noninterest income.

A: Sona Mehta explained factors affecting Canadian noninterest income, including fewer days in the quarter and small timing items, while noting strong exit momentum to Q2.

• Q: Paul Holden asked about impaired PCLs and cost restructuring.

A: Ajai Bambawale discussed impaired PCLs trends across segments, and Kelvin Tran noted that cost restructuring savings are redeployed into business investments.

• Q: Sohrab Movahedi asked about US Retail earnings contribution and credit risk.

A: Leo Salom expressed optimism about US Retail's second half performance, and Ajai Bambawale discussed credit risk exposure to industries sensitive to tariffs.

• Q: Mike Rizvanovic asked about AML spend and Canadian Mortgage business.

A: Leo Salom provided insights on AML spend guidance, and Sona Mehta discussed Canadian Mortgage business dynamics, highlighting strong performance in proprietary channels despite macro headwinds.

• Q: Lemar Persaud asked about LCR and credit watch list.

A: Kelvin Tran discussed LCR normalization to 125%-135% range, and Ajai Bambawale noted positive movements in the credit watch list.

• Q: Darko Mihelic asked about reserve building and migration risk.

A: Ajai Bambawale explained reserve building factors considering macroeconomic scenarios and migration risk, while Kelvin Tran added insights on immigration policy impacting population growth.