The Toronto-Dominion Bank

Good afternoon, everyone. Welcome to the TD Bank Group Q4 2023 Earnings Conference Call. I would like to turn the meeting over to Ms. Brooke Hales. Please go ahead, Ms. Hales.

Thank you, operator. Good afternoon and welcome to TD Bank Group's fourth quarter 2023 investor presentation. Many of us are joining today's meeting from lands across North America. North America is known as Turtle Island by many Indigenous communities. I am currently situated in Toronto. As such, I would like to begin today's meeting by acknowledging that I am on the traditional territory of many nations, including the Mississaugas of the Credit, the Anishinaabe, the Chippewa, the Haudenosaunee, and the Wendat peoples, and is now home to many diverse nations, Métis, and Inuit peoples. We also acknowledge that Toronto is covered by Treaty 13, signed with the Mississaugas of the Credit, and the Williams Treaties, signed with multiple Mississaugas and Chippewa bands. We will begin today's presentation with remarks from Barrett Mizrani, the bank's CEO, after which Kelvin Tran, the bank's CFO, will present our fourth quarter operating results. Ajay Bambuale, Chief Risk Officer, will then offer comments on credit quality, after which we will invite questions from pre-qualified analysts and investors on the phone. Also present today to answer your questions are Michael Rhodes, Group Head, Canadian Personal Banking, Barbara Hooper, Group Head, Canadian Business Banking, Raymond Chun, Group Head, Wealth Management and Insurance, Leo Salaam, President and CEO, TD Bank, America's Most Convenient Bank, and Riaz Ahmed, Group Head, Wholesale Banking. Please turn to slide two. At this time, I would like to caution our listeners that this presentation contains forward-looking statements, that there are risks that actual results could differ materially from what is discussed, and that certain material factors or assumptions were applied in making these 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. Forward-looking statements may not be appropriate for other purposes. 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. The bank believes that adjusted results provide readers with a better understanding of how management views the bank's performance. Barrett will be referring to adjusted results in his remarks. 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 2023 Annual Report. With that, let me turn the presentation over to Barrett.

Thank you, Brooke, and thank you everyone for joining us today. Before I begin, I want to say how saddened we are about recent events in the world and close to home. TD has contributed $1 million to support urgent humanitarian aid in Israel and Gaza, as well as to local organizations in North America that combat the rise of racism and hate. At TD, we stand against anti-Semitism and Islamophobia. For the past several days, it has been encouraging to see the release of some hostages and pause in the fighting. As this situation evolves and with the war in Ukraine now well into the second year, we hope and pray for peace. I also want to acknowledge our colleagues, customers, and neighbors impacted by the Lewiston shooting in Maine last month. TD contributed $200,000 to help those affected. We are the largest bank in the state We know that Mainers are resilient, and the bank will continue to support the community to overcome those painful events. Let's now turn to our fourth quarter earnings. Q4 was a mixed quarter for TD. While expenses were elevated and we saw weaker results in our wholesale banking segment, fundamentals remained strong across our retail businesses. Earnings were $3.5 billion, and EPS was $1.83. Revenue grew 8% year-over-year, reflecting margin expansion and loan volume growth, the contribution from TD Cowan, and the strength of our diversified business model. PCLs were higher as credit continued to normalize as expected. This quarter, expenses increased driven by variable compensation and the inclusion of TD Cowan. More generally, we recognize that the bank's cost base is higher than it should be. We're undertaking a broad-based restructuring program to deliver efficiencies and drive profitability across the enterprise. As Kelvin will describe in more detail, the program includes real estate optimization, asset impairments as we accelerate transitions to new platforms, and a 3% reduction in FTE through attrition and targeted actions to create capacity to invest for future growth and limit the impact on our people. While we are focused on expenses, we are pursuing meaningful revenue opportunities across our businesses. We outlined our strategies to accelerate growth in our Canadian retail businesses at our recent investor day, and the acquisition of TD Carbon provides additional capabilities for TD to grow its investment bank. In U.S. retail, our brand, footprint, and deep customer relationships provide a robust foundation for continued growth. As you'll hear from my colleagues, we are already executing on these opportunities across the bank. The bank's CET1 ratio was 14.4%, reflecting organic capital generation and the impact of almost 38 million common shares bought back during the quarter. With heightened uncertainty in the economy and the markets, TD is in a position of strength. We have the capacity to return capital to shareholders while continuing to invest to drive growth across our businesses. We remain confident in the earnings power of our franchise, and today I declared a $0.06 dividend increase, bringing our dividend to $1.02 per share. And last month, we introduced TD Invent, the bank's enterprise approach to innovation. This will build on our track record of innovations including the recently redesigned TD mobile app, which first launched in the U.S. and then in Canada this quarter. TD's digital strength continues to receive recognition, with Global Finance recently naming the bank the best consumer digital bank in North America for the third year in a row. We are also leveraging advanced technologies, including AI, and have been granted 55 patents relating to AI inventions since 2018. This quarter, our in-house AI team, Layer 6, won the annual ACM REXIS Challenge for the third time. Let me now turn to each of our businesses and review some highlights from Q4. In our Canadian personal and commercial banking segment, earnings were $1.7 billion, down 1% year-over-year, and PTPP was $2.7 billion, up 7% year-over-year. In a challenging environment, we saw strong momentum across our businesses with loans and deposits up 2% and 1% quarter-over-quarter, respectively, and NIM expansion of four basis points. In the personal bank, everyday banking delivered a record quarter for new-to-Canada accounts as TD continued to make progress towards our medium-term target of 50% growth in new-to-Canada acquisition outlined at our recent investor day. In credit cards, we delivered strong volumes in Q4 and record spend for the year. And Rewards Canada readers recognized TD with more awards in 2023 than all other card issuers combined, with the bank taking first place in four of seven categories. In real estate secured lending, the bank continued to deliver market share gains. And to help Canadians invest tax-free for a down payment on their first home, this quarter TD launched first home savings accounts. The business bank grew loans by 9% year-over-year. In small business banking, we are focused on helping clients refinance their SEBA loans in advance of the upcoming partial forgiveness deadline. And the bank continued to execute on its 1TD strategies, more than doubling the number of senior private bankers co-located in our commercial banking centers over the last two quarters. Turning to the U.S., U.S. retail bank earnings were $800 million U.S., down 17% year-over-year, and PTPP was $1.1 billion U.S., down 13% year-over-year. Expenses increased 6% year-over-year, reflecting higher legal and regulatory costs and continued investments in our franchise, and credit continued to normalize. However, we saw operating momentum with net interest income up 1% quarter-over-quarter, reflecting volume growth across loans and deposits, excluding sweeps, and a 7 basis point increase in NIM. With the contribution from our investment in Schwab of $146 million, segment earnings were $946 million. TD Bank, America's most convenient bank, is adding customers and deepening relationships. delivering peer-leading personal and business loan growth of 12% and 9% year-over-year, respectively. In commercial banking, middle market and specialty lending grew 22% and 12% year-over-year, respectively. In our U.S. bank card business, new accounts were up 45% year-over-year as our product suite continued to resonate with customers. And for the seventh year in a row, the bank ranked number one is small business administration lending in its Maine to Florida footprint and ranked number two in SBA loans nationally. TD continued to demonstrate resilience in deposits in a competitive environment with balances excluding sweeps up 1% quarter over quarter. The wealth management and insurance segment earned $501 million this quarter, down 3% year over year. Revenue growth of 9%, reflecting the strength of our diversified business model, was offset by increased claims due to inflation, auto thefts, and more severe weather-related events. In private investment advice, TD gained market share year-over-year and ranked number one among Canadian banks in net new asset growth as the bank makes progress towards our investor day targets. In TD Direct Investing, We launched TD Active Trader this quarter, the bank's completely redesigned platform for sophisticated active traders, offering leading capabilities unmatched in the marketplace. And TD Direct Investing was recently named the best Canadian brokerage by Benzinga, a leading financial media company. Finally, in insurance, we continue to increase market share amongst Canadian personal lines insurers year over year. It was a challenging quarter for the wholesale banking segment. Net income was $178 million, down 35% year-over-year, as higher revenues from equity commissions and underwriting and advisory fees were more than offset by investments to grow TD Cowan and our U.S. business. This quarter, we expanded our credit trading team and financial institutions group in the U.S., We also achieved a significant milestone in the integration of TD Securities and TD Cavan with the combination of our U.S. institutional equities and convertible businesses to deliver even better outcomes for our clients and strengthen our brand in U.S. equity markets. We are pleased with our integration to date and continue to pursue strategies to ensure our combined businesses and cost structure allows us to serve our clients optimally and drive profitability. For fiscal 2024, it will be challenging to meet our medium-term adjusted EPS growth and ROE objectives as the bank navigates a complex macroeconomic environment, expected further normalization in PCLs, and elevated expenses, including investments, to enhance the bank's risk and control infrastructure and accelerate growth. Despite these headwinds, the bank continues to deliver on its purpose to enrich the lives of our customers, communities, and colleagues. This quarter, we released the TD and Indigenous Communities in Canada 2023 report, which highlights the bank's collaborations with First Nation, Métis, and Inuit people and communities. We also opened a new branch in the province of Alberta on the lands of the Tsutina Nation, staffed entirely by indigenous peoples. In addition, the bank continued to focus on energy transition. Earlier this month, TD announced an agreement with 1.5 to purchase carbon dioxide removal credits from the direct air capture plant, subject to it becoming operational. This transaction will help drive innovative technology-based solutions to advance decarbonization goals for TD, and our clients. I want to end by thanking all our TD Bankers around the globe who live our purpose every day. Thank you for your many contributions in 2023 and I look forward to what we will achieve together in 2024. With that, I'll turn things over to Kelvin.

Thank you, Barrett. Good afternoon, everyone. Please turn to slide 10. For 2023, The bank reported earnings of $10.8 billion and EPS of $5.60, down 38% and 41% respectively. Adjusted earnings were $15.1 billion and adjusted EPS was $7.99, down 2% and 4% respectively. Reported revenue increased 3%, reflecting the impact of the terminated first horizon acquisition related capital hedging strategy and gain in the prior period on sale of Schwab shares and margin growth in the personal and commercial banking businesses. Adjusted revenue increased 12%. Reported expenses increased 25%, reflecting higher employee related expenses, including TD Cowen, the Stanford litigation settlement, and higher acquisition in integration-related chargers, including chargers related to the terminated First Horizon acquisition. Adjusted expenses increased 13%. Reported total bank PTPP was down 19.1% year-over-year. Consistent with prior quarters, slide 28 shows how we calculated adjusted total bank PTPP and operating leverage, removing the impact of the U.S. strategic card portfolio along with the impact of foreign currency translation and the insurance fair value charge. Adjusted total bank PTPP was up 7.2% after the modification. Please turn to slide 11. TD's restructuring program has been enabled by the bank's consistent investments in technology and digital capabilities. This quarter, We undertook certain measures to reduce the bank's cost base and achieve greater efficiency, resulting in the restructuring charge of $363 million pre-tax. We expect to incur additional restructuring charges of a similar magnitude in the first half of calendar 2024. The restructuring program is expected to generate approximately $400 million pre-tax in savings in fiscal 2024, and an annual run rate savings of approximately 600 million pre-tax. Cost savings will be driven by 3% FTE reduction, real estate optimization, and asset impairments as we accelerate transitions to new platforms. Our goal of delivering positive operating leverage over the medium term remains unchanged. In the current environment, we expect run rate expenses, inclusive of the savings generated by the restructuring program, and investments to accelerate future growth to increase by approximately 2% per year. For fiscal 2024, we expect higher expense growth reflecting investments in our risk and control infrastructure and the impact of TD Calend. As a result, for fiscal 2024, we expect adjusted expense growth in the mid single digits. Please turn to slide 12. For Q4, the bank reported earnings of $2.9 billion and EPS of $1.49, down 57% and 59% respectively. Adjusted earnings were $3.5 billion and adjusted EPS was $1.83, down 14% and 16% respectively. Reported revenue decreased 16% reflecting the gain from the impact of the terminated first horizon acquisition-related capital hedging strategy and the gain on sale of swap shares in the prior period, partially offset by margin growth in the personal and commercial banking businesses. Adjusted revenue increased 8%. Reported expenses increased 20% and include restructuring charges and acquisition and integrated related charges related to the account and acquisitions. Adjusted expenses increased 13%, reflecting higher employee-related expenses and variable compensation. Reported total bank PTPP was down 41.9% year-over-year. Adjusted total bank PTPP was up 1.8% after removing the impact of the U.S. strategic card portfolio, along with the impact of foreign currency translation and the insurance fair value charge. Please turn to slide 13. The median personal and commercial banking net income for the quarter was $1.7 billion, down 1% year-over-year. Revenue increased 7% year-over-year, reflecting volume growth and higher margins. Average loan volumes rose 6%, reflecting 6% growth in personal volumes and 9% growth in business volumes. Average deposits rose 2%, reflecting 5% growth in personal deposits partially offset by a 3% decline in business deposits. Net interest margin was 2.78%, up four basis points quarter over quarter. This quarter, we saw higher deposit margins reflecting tractor maturities, partially offset by loan margin compression from a highly competitive market. As we look forward to Q1, While many factors can impact margins, including tractors, on and off rates, and balance sheet mix, we expect net interest margin to remain relatively stable. Non-interest expenses increased 6% year-over-year, reflecting higher technology spend supporting business growth. Please turn to slide 14. U.S. Retail Statement reported an adjusted net income for the quarter was $946 million U.S., down 19% and 21% year-over-year. U.S. Retail Bank reported an adjusted net income was $800 million U.S., down 14% and 17% respectively, reflecting higher non-interest expenses, higher PCL, and lower revenues. Reported net income in the fourth quarter last year included acquisition and integration-related charges for the terminated First Horizon transaction. Revenue decreased 3% year-over-year, reflecting lower deposit volumes, loan margins, and overdraft fees, partially offset by higher deposit margins, loan volumes, and fee income from increased customer activity. Average loan volumes increased 10% year-over-year. Personal loans increased 12%, reflecting good originations and slower payment rates across portfolios. Business loans increased 9%, reflecting good originations from new customer growth, higher commercial line utilization, and slower payment rates. Average deposit volumes, excluding sweep deposits, were down 4% year-over-year. Personal deposits were down 4%. Business deposits declined 5%. and sweep deposits decreased 25%. Net interest margin was 3.07%, up seven basis points, quarter over quarter, I mean, as higher investment returns from mature tractors and positive balance sheet mix with lower borrowings were partially offset by migration to term deposits and high yield savings as well as modestly lower loan margins. As we look forward to Q1, while many factors can impact margins, including competitive deposit market dynamics in the U.S., tractor on and off rates, and balance sheet mix, we expect net interest margin to be relatively stable in the near term, influenced by similar drivers as those we saw this quarter. Reported expenses increased 3%, reflecting higher legal expenses, regulatory expenses, and investments. employee-related expenses, and FDIC assessment fees partially offset by acquisition and integration-related charges for the terminated First Horizon transaction in the fourth quarter last year. Adjusted expenses increased 6 percent. Please turn to slide 15. Wealth management and insurance net income for the quarter was $501 million down 3% year-over-year, reflecting higher insurance claims and related expenses, partially offset by higher non-interest income. Revenue increased 9% year-over-year. Non-interest income increased 10%, reflecting higher insurance premiums, an increase in the fair value investments supporting claim liability, which resulted in a similar increase in insurance claims and higher fee-based revenue, partially offset by lower transaction revenue in the wealth management business. Net interest income decreased 4% year-over-year, primarily reflecting lower deposit volume. Insurance claims increased 39% year-over-year, reflecting increased claim severity, more severe weather-related events, and the impact of changes in the discount rate, which resulted in a similar increase in the fair value of investments supporting claims liabilities reported in non-interest income. Non-interest expenses were down 1% year over year, reflecting continued efforts to drive productivity savings. Assets under management increased 2% year over year, reflecting market appreciation partially offset by mutual fund redemptions and assets under administration increased 3% year-over-year, reflecting market appreciation and net asset growth. Please turn to slide 16. Wholesale banking reported net income includes acquisition and integration-related charges for TD Cowen. Reported and adjusted net income for the quarter were $17 million and $178 million, respectively, reflecting higher non-interest expenses offset by higher revenues. Revenue, including TD Cowen, was $1.5 billion, up 28% year-over-year, primarily reflecting higher equity commissions, advisory and equity underwriting fees, and loan underwriting commitment marked down in the prior year. Reported expenses increased 80% and include acquisition and integration-related charges for TD Cowen. Adjusted expenses increased 59% reflecting investments to grow TD Cowen and our U.S. business. Please turn to slide 17. The corporate segment reported a net loss of $591 million in the quarter compared with net income of $2.661 million in the fourth quarter last year. $2,661 million in the fourth quarter last year. The year-over-year decrease primarily reflects gains in the prior year from the impact of the terminated First Horizon acquisition-related capital hedging strategy and the sell of Schwab shares and restructuring charges in the current quarter. Other items decrease $83 million, primarily reflecting the favorable tax impact of earnings mixed and the recognition of unused tax losses in the prior year, partially offset by higher revenue from Treasury and balance sheet management activities this quarter. Adjusted net loss for the quarter was $133 million, compared with an adjusted net loss of $10 million in the fourth quarter last year. We have said in the past that our run rate expectation for adjusted net losses in the corporate segment is approximately 100%. to $125 million per quarter. For fiscal 2024, although it may bounce around, we expect adjusted net losses to increase to $200 to $250 million per quarter driven by investments in our risk and control infrastructure. These investments, which may expand beyond fiscal 2024, will be reflected in the corporate segment as they are expected to yield benefits enterprise-wide, run rate expenses will be reflected in the business segments. Please turn to slide 18. The common equity tier one ratio ended the quarter at 14.4%, down 81 basis points sequentially. Internal capital generation added 27 basis points to CET1 this quarter. This was more than offset by an increase in RWA, excluding the impact of FX, which decreased CET1 by 33 basis points. We repurchased almost 38 million common shares under our previous 30 million share buyback program and current 90 million share buyback program combined this quarter, which reduced CET1 by 62 basis points, 57 basis points from the share buyback itself, and five basis points from the impact of lower capital base has on the portion of our Schwab investment that exceeds the regulatory threshold for non-significant investments. Our restructuring program decreased CET1 by five basis points this quarter. The second phase of the Basel III reforms will become effective in Q1 24. We currently expect a negative impact of approximately 15 basis points to CET1, so that's 1.5, driven by the implementation of the fundamental review of the trading book and the adoption of the standardized approach for market risk and counterparty credit risk. RWA, including the impact of FX, increased 4.8% quarter-by-quarter, reflecting higher credit risk due to volume growth in credit conditions, including some credit migration. The leverage ratio was 4.4 percent this quarter, and the LCR ratio was 130 percent, both well above published regulatory minimums. And with that, Ajay, over to you.

Ajay V. Thank you, Kelvin, and good afternoon, everyone. Please turn to slide 19. Gross impaired loan formations were 18 basis points, stable quarter-over-quarter, as increases in the U.S. commercial and Canadian and U.S. consumer lending portfolios were partially offset by reductions in Canadian commercial and wholesale banking. Please turn to slide 20. Gross impaired loans increased 319 million quarter over quarter to 3.3 billion or 36 basis points driven by the impact of foreign exchange, and the U.S. retail and Canadian personal and commercial banking segments. Please turn to slide 21. Recall that our presentation reports PCL ratios, both gross and net of the partner share of the U.S. strategic card PCLs. We remind you that U.S. card PCLs recorded in the corporate segment are fully absorbed by our partners and do not impact the bank's net income. The bank's provision for credit losses increased four basis points, quarter to 39 basis points. The increase is largely recorded in the Canadian and U.S. consumer lending portfolios and wholesale banking. For 2023, the bank's full year PCL rate was 34 basis points, up 20 basis points from the prior year as credit performance continues to normalize. Please turn to slide 22. The bank's impaired PCL was 719 million, an increase of 56 million quarter over quarter, largely related to further normalization of credit performance in the Canadian and U.S. consumer lending portfolios. Performing PCL was 159 million with a quarter over quarter increase of 56 million driven by wholesale banking and the Canadian commercial lending portfolios. Please turn to slide 23. The allowance for credit losses increased by 415 million quarter over quarter. to 8.2 billion or 89 basis points due to a 214 million impact of foreign exchange. Current credit conditions including some credit migration across the lending portfolios and volume growth. The bank's allowance coverage remains elevated to account for ongoing uncertainty relating to the economic trajectory and credit performance. Now let me briefly summarize the year. Despite ongoing normalization of credit performance and heightened economic risks, including prolonged elevated interest rates, geopolitical tensions, and the potential for recession, the bank has exhibited strong credit performance throughout 2023. Looking forward, While results may vary by quarter and are subject to changes to the economic trajectory, I expect PCLs in fiscal 2024 to be in a normalized range of 40 to 50 basis points. To conclude, TD remains well positioned given we are adequately provisioned, we have a strong capital position, and we have a business that is broadly diversified across products and geographies. With that operator, we are now ready to begin the Q&A session.

Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star 1 on your device's keypad. To cancel the question, please press star 2. Please press star 1. At this time, if you have a question, There will be a brief pause while participants register. Thank you for your patience. And the first question is from Gabriel Deschain from National Bank Financial. Please go ahead.

Hi, good afternoon. Can I clarify some of these expense comments you've been making? I heard something about 2% increase and I didn't quite follow what that was tied to. But what was clearer to me, and thank you for quantifying that, but the additional investments will be increasing your loss in corporate from previous guidance of $100,000 to $125,000 to $200,000 to $250,000 per quarter, I believe. And that could actually persist into 2025? Correct. Correct? Yeah, Kelvin, that's correct.

When I said the 2%, that's kind of in terms of normal run rate that we expect after restructuring savings, but the total bank expected expense growth would be in the mid-single digits.

Okay, so after restructuring, if nothing else is going on, you would expect 2% expense growth in 2024, but then these additional costs, you're in the mid-single digits.

Correct. That and Cowen. Remember, we still have four months of TD Cowen.

Yeah, yeah, yeah. Okay. I understand quickly. You just have to explain slowly sometimes. One thing I want to ask about is, I asked one of your competitors today about the NSF fees because the government is taking a look at these fees in Canada, and your bank has been through that experience in the U.S., uh, is the, I'll call it my word dependence or reliance on overdraft fees in your Canadian bank as material as it was in your US bank. Um, yeah, there you go.

Um, let me take this, uh, question and, uh, this is Michael. Um, the, um, With respect to what the impact would be, you might be surprised to say lots we don't know now. So it will be premature for us to comment about the potential impact at this time. And then in terms of relative dependence, I'm looking at Kelvin or Leo on that. I'm not sure I've got a point of view on the relative dependence.

My word, not yours, but in the U.S. it was around 5% or 6% of your uh other income or total revenues in the us at some point and i'm wondering if it's uh anything close it'll be lower um it'll be lower but you know honestly at this point i know you probably want to figure out a number to put in in your forward view it's very hard for us to to give you any guidance on that right now okay yeah i've got a blank in my note that i just wanted to fill out but i'll just reword it uh and then uh On the AML issue, I know you don't want to talk too much about or at all about what's going on between you and the regulator or whatever, and I understand that completely, but when I look at the disclosure on reasonable probable loss at Q3, so for outstanding litigation or regulatory matters, Last quarter was $0 to $1.26 billion, and this quarter, $0 to $1.44. Bit of an increase. I'm wondering, is that at all reflected in that RPL figure? Is this issue, sorry?

Gabe, this is Barrett. I don't think we disclosed specific cases. I don't think that'd be reasonable. If I'm mistaken, then we'll clarify that after this call with you, but my understanding is we don't disclose specific cases.

Okay. And last one, sorry, it's a few questions. It's my birthday, so I feel entitled. Go for it, Gabe. Go for it. Yeah, yeah. The FDIC assessment that your peers have quantified, I don't recall if you have.

Gabriel, hi. First of all, did I hear that it's your birthday?

Yeah, yeah. I'm so lucky to have three banks reporting and going out with my wife's friends tonight, so it's great.

So a very happy birthday. I imagine you'd probably be in – you would like to be doing something else right now. But listen, let me just answer the question quickly. On the FDIC assessment, we're estimating that the impact will be approximately $300 million. Our intent is to reflect that in the first quarter of next year and take it as a lump sum item. And that's our approach at this point. That number, you would have seen The total FDIC cost of recovery that the FDIC announced was $16.3 billion. It was a little bit from their original estimate, so that's how we get to our number of $300 million.

And that's U.S. pre-tax?

Yes, it is.

Thank you, and enjoy the rest of the week.

Happy birthday again.

Thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead.

Hi, good afternoon and happy birthday Gabriel. Just on the set one ratio, the reduction, part of the reduction it looks like came from credit quality and I assume that's migration but my rough calculation gives me about an 18 basis point reduction in the set one ratio. Can you talk a bit about that and I guess that's kind of embedded in the risk weighted asset credit risk-weighted asset growth impact? Just hoping to get a little bit more color there.

Yeah, it's RJ, so I'm happy to provide the color. So if you look at our total RWA, it increased $26 billion, and you're right. There's $7 billion of that. Twenty-six is from asset quality, and that relates to migration. Some of it is coming from Canadian consumer in resale and in auto. and there's some coming from U.S. retail, from commercial, auto, and cards, and mostly the probability of defaults. What you should also know is that every quarter when we look at the book and we do a lot of bottom-up analysis, sometimes we force my great credit to stage two. So, for example, in Canada, if there's a client that has reached trigger point, we would move, even though they're paying, we would move them to stage two and basically have a higher allowance rate for them. Similarly, the trigger rate population that we believe that will reach trigger point in the next 12 months will be fairly conservative, move them to stage two and build higher reserves. So some of that is driving the asset quality number of seven billion.

And maybe just like looking forward, you know, as you kind of look at your PCL expectations and, you know, the evolution of the economic environment, any way to kind of get a sense of what we should be expecting impact-wise on set one ratio from migration? It just seemed big this quarter. That's why I'm just trying to understand.

I can't comment specifically on set one, but you would have seen from my PCL guidance that we expect to see continued normalization of our credit portfolios. The 40 to 50 beeps range we've given you is a normalized range for TD Bank. So to the extent that that occurs, as we expect, then I would expect RWAs also to rise.

Okay. And then in the U.S. Bank, I mean, there was a decent drop in non-interest income. Can you talk a bit about what drove that? Is this kind of a normalized run rate, Ian? And then, Coven, I think you talked about various one-time items that flow through expenses. I think these are the items of note that you back out at the top of house in terms of deriving cash EPS, just hoping to make sure that that's the case.

So, Doug, let me take the first part of that. With regards to the fee income, there were really two factors that played into the drop in the fee income. One is Just the drop in value in certain investments, specifically our low-income housing tax credit portfolio, that tends to move around quite a bit. It's not as predictable, and so we did see a bit of a write-down in value on that portfolio in the quarter. The second one is a drop in overdraft fees, but it's related to a remediation effort around a specific type of overdraft fee that's referred to in the industry as authorized positive settle negative. And we took a reserve for client remediation in the quarter. It is a one-time charge. And so as you think about a normalized fee income number for us, I'd encourage you to look back to the second and third quarter of this year as a more indicative run rate fee income number.

Okay. And then those two items, I assume, Calvin, weren't backed out.

Correct. Those are part of the adjusted earnings. None of them are in item of note.

Those two items aren't backed out. And then the other items that you mentioned, Kelvin, like the restructuring charge and other investments that seem to flow through in the U.S. I can confirm this offline, but those are in the cash EPS or backed out?

Those are backed out. So the restructuring charges would be considered item of note, and those are backed out of those returns.

Okay, and then if I could just squeeze one last one in maybe for Ria's, a big increase in capital market expenses adjusted. I think Kelvin talked a bit about some items here. Can you maybe just shed some light on what's going on through the expense line there?

Yeah, Doug, I think, look, no doubt that we'd have to characterize this as a tough quarter for TD Securities for the bottom line, but I think it's worth unpacking it a little bit for you. I think you're zeroing on expenses, but I think you should start with the revenue growth story. And if you look at the growth in the global markets and the corporate investment banking revenue from $2.9 billion last year in global markets to $3.3 billion this year, $1.8 billion CIB last year to $2.8 billion this year. You know, we've had a 25% lift in our revenue power, and to the point that we made at the time of the acquisition of TD Cowen, we're getting more U.S. M&A revenue. We're getting more U.S. CCM revenue. We're getting more U.S. institutional equities revenue. So our market share rankings in U.S. investment-grade bond, in U.S. high-yield bonds, in U.S. equity underwriting are all increasing smartly. and in an environment which is still moderated by market challenges, and we've just started optimizing our client coverage and extending our capabilities towards a wider set of verticals and to a wider set of clients. I think that when you look at the expenses that have been added this year, you remember that we were growing organically in 2021 and 22, and then added 1,600 colleagues from TD Cowan and a couple of hundred of people who are working on the various integrations. So as we just continue to... build out our corporate coverage models, integrate, continue the integration. We announced that we had integrated the equity platform, so that was a big milestone. Our efficiency ratio has risen from 62% last year to 74% this year, and if you look at the quarterly trends in the efficiency ratio, you'll see that it bounces around. But look, I think that as we integrate over the three-year period that we said we would to get these synergies we were looking for, I think that we will normalize our way to about a 66% efficiency ratio. And the potential that we're building in this franchise and the capabilities we're adding, I think we will be humming nicely.

Appreciate the call. Thank you.

Thank you. The next question is from Ibrahim Poonawalla from Bank of America. Please go ahead.

Good afternoon. Maybe just going back to Kelvin's comments around the risk and control expenses. So just based on what you said about the corporate segment, that's about half a billion next year, potentially another half a billion in 2025. That continues. Give us a sense of like when we think about TD Bharat and like you've talked about just the consistent management, et cetera. So where did the lapse occur given just the amount of time and dollars that are required now to remediate that? Any perspective that you can share in terms of why it happened, what actions you've taken in terms of changing your approach towards risk management, tech spend on the risk side would be helpful.

Nice to hear from you, Ibrahim, and hopefully it's not your birthday as well today.

Gabe would have nothing but three bank reports, so everyone take note for next year as well.

I can imagine. We look at opportunities to improve. That's what we do. Sometimes we learn it ourselves. Sometimes we learn from our regulators. We see that the level of innovation with respect to technology is moving at, you know, quite a speed. And when we recognize that we need to, you know, invest, we do. And, you know, we make investments to enhance our programs, you know, that fit our organization and manage our risk. And this includes investments, you know, to – and we've talked about it before in our USAML program, and that will include, you know, people, training – you know, data, technology, et cetera, because, you know, there are sort of evolving areas, and we've got to make sure that we're keeping up with what is expected of a very large bank in the domestic business in the United States. And so we're doing that, and, you know, I expect that we will, get there and we will get there in a manner that you would expect out of TD. And so I think that's the best way I can describe it, Abraham.

And maybe the other side, Bharat, two other sort of follow-ups there. One, maybe for Leo, I think in the past, I think in the immediate aftermath of the deal termination with First Horizon, you talked about like opening several stores across the Southeast, which sounded like a good plan in terms of when you think about household growth. Give us an update, is that still in the works or is that on a pause till you solve for this over the next year or so on?

Well, I'll start by simply saying this year we did focus on building out distribution, but broadly, a distribution with a broader definition. So, in fact, this quarter we upgraded our TD Mobile application infrastructure to the next generation solution. and it was successfully rolled out to 4.8 million clients, and we're thrilled with the reception that we've gotten from our clients. Physical distribution will always be important. This year, to your point, we did open up 18 stores. I would say six of those in LMI communities, and so there will always be a view on both physical and sort of virtual, but I would just point, I know that the underlying question there is around organic growth momentum, and I would just ask you to look at the underlying stats that we post in the fourth quarter. We had personal loan growth of 12% with good representation across all the major loan categories. As you and I spoke in one of our analyst discussions, growing our consumer lending portfolio was a distinct priority of ours, and I'm encouraged that we've been able to do that while preserving quality, while increasing selective loan pricing. And likewise, on the commercial side, quite pleased that we were able to post a 9% growth in what is a much more challenged environment. And once again, I would say we were able to do that by increased focus and investment in our mid-market business, which is an area that we've said we have aspirations to continue to grow and leverage our existing specialty businesses as a foundation to do so. So I think we've got good fundamental momentum. We'll continue to leverage our core. And when I say our core, historically we've been an exceptionally strong retail and small business deposit institution. And that was on display again this quarter. We actually grew on a quarter-on-quarter basis. And so that will be an area of focus. And continuing to acquire clients and scaling our operation is going to be a priority. I think we mentioned last quarter we eclipsed the 10 million client mark. which is a big milestone for the franchise and speaks to our ability to not only deepen relationships, but also continue to acquire and grow our franchise organically. So a bit of a long-winded way of saying I feel quite comfortable with the franchise, but as Barrett said, we're also committed in strengthening our core risk and control environment. It's a major priority. We're interested in not only growth, but doing it in a sustainable and responsible manner you know, certainly consistent with what TD has done historically.

Got it. So do you expect to open more stores this year, or is that we're done for now?

Well, we did open up six stores in the quarter.

Right. No, but looking into 24, I'm just wondering, your expense growth guide, how many new stores is it baking in?

We haven't released the number, but we do intend to make investments in both physical as well as, you know, virtual distribution.

Got it. Thank you.

Thank you, everybody.

Thank you. The next question is from Manny Rahman from Scotiabank. Please go ahead.

Hi, good afternoon. I just wanted to clarify, going back to the restructuring program, 600 million pre-tax when fully realized annual cost savings, how much of that is actually going to be able to fall to the bottom line in 24 and 25, given the the reinvestment requirements that you have. So just want to clarify, make sure I'm thinking about that correctly.

Yeah. So, so we've given you the net amount. And so the bulk of that would be into the business and mostly into risk and control.

Okay. So the bulk of that into, into risk and control in 24 and 25, potentially 25, um, The other question I had was just in terms of your EPS growth guidance. You're guiding to below medium-term target. I'm just curious what that forecast, what is it baking in in terms of buybacks? Is it assuming that the buyback activity continues at the current pace?

Yeah, so first, you know, just to – As a reminder, our medium-term target is EPS growth of 7% to 10%. And given the markets continue to be challenging and also, as Aljay said, the normalization of PCL, that's going to make it hard and challenging to meet that range. And that would include share buyback as well. But as you have noticed, we bought back a lot of shares to date, and that would give us more flexibility on the pacing of the share buyback in the future, but always subject to market conditions.

So I'm asking about the buyback just in the context of the decline in the CT1 ratio this quarter, and just wondering if you're viewing the buyback a little bit more cautiously going forward. Also, there's some headwinds that you highlight in terms of regulatory changes, the FDIC levy, potentially maybe a legal charge in the U.S. I'm just wondering how you're viewing the buyback going forward, factoring all that in.

Manny, this is Barrett. As Calvin said, we've bought back a lot. It gives us great flexibility in how we pace our buybacks. Buybacks, as you probably know and you know for sure, would depend on market conditions, how we're thinking about that, what kind of programs we put in place. And the bank, the level of capital we have, we like our position and every quarter we add to that. So you know, I feel very comfortable as to where the bank's, you know, capital position is and buybacks are largely influenced by market conditions. It's hard to predict exactly, you know, what those markets would be and then we'd adjust, you know, that you would expect us to do based on those conditions.

Got it. Thank you very much. Thank you.

Thank you. The next question is from Paul Holden from CIBC. Please go ahead.

Thanks. Good afternoon. Wondering if anyone on the call would like to provide guidance on Gabe's age.

What's the consensus?

Sorry, I just had to roll with the birthday joke. Okay, so first serious question is just looking at the PCL trends across the books of business, I'm just trying to figure out why US retail is increasing faster than Canadian retail, because I just look at the economic trajectories of those two economies, and it looks like Canada is weaker than US. I'm just wondering if this is simply a matter of loan mix, and maybe that is the simple answer. And then also, maybe you can give me a sort of expectation going into 2024, again, given the different trajectories of the two economies.

So I think you've got to look at those trends over a longer period of time. So if I have the numbers in front of me, if I look at the full year, PCLs are up both in Canadian PNC and in US PNC. And if you look at impaired and performing, actually impaired and performing are both up. Okay. But performing is greater in Canada and it's for the full year. So what you may be seeing is maybe fluctuation between quarters. And the reason for that is the Canadian consumer is more vulnerable in our view than the U.S. consumer, both from a leverage standpoint and also an exposure to interest rates. This quarter, I think there were some puts and takes and There was some divergence between impaired and performing between the two segments, but I do feel the quality in both segments is good and we are adequately reserved in both segments. So I would just tell you to look at it over a long period of time.

Okay. That vulnerability comment makes sense. Thank you for that. And then a question, I guess, for Riaz on the wholesale banking business. When I look at the quarter, I understand That's not the standard you're operating to, but I see an ROE of 5%. I guess last quarter was from around 10%, 11%. What do you think is required to get this business to be ROE neutral at the all-bank level or maybe perhaps ROE accretive over time? Is that the fair way to think about it? Is this always going to be an ROE dilutive business?

No, I don't think so, Paul. Global trends for wholesale banks would say that ROEs tend to be in the 11% to 12% range through a cycle. And full year 2022, that's kind of exactly where we were in the mid-11 range for ROE. I do think that as we gain the revenue synergies that we were talking about and get a more normalized expense ratio, That basically solves the issue. If you just do some normalizing math and just say, you know, if we think, you know, billion five, billion six of revenue per quarter, which is sort of the run rate of the full TD Cowen quarters in Q3 and Q4. And, you know, we're going to get a lift in that revenue as the markets become more favorable. As they have been in the last few weeks, we're seeing nice momentum, a little bit of an opening again. And we get our coverage models and our integration correct. I feel very confident that we're well on our way. So I think if we focus on what we said we would, which is expand our client base, deepen it. We've got a whole bunch of work to do with Leo and the middle market investment banking side. to drive revenue growth, I feel very optimistic about the potential for the wholesale franchise.

Okay. Last one for me, since expenses is very topical and you provided some guidance around expense growth, and maybe it's for Calvin, how do you think about the efficiency ratio for this bank over time? What do you think is the appropriate level? Because clearly in the short term, we're going to be somewhere above that target efficiency ratio. Remind us of what your targets are, your medium-term targets, and maybe based on your growth trajectory for this year and then 2% going forward, how long it may take to get to the efficiency targets.

Yeah, so the efficiency target is really dependent on the mix of business that we have, depending on which year, which business is growing faster than the other. Our focus is on delivering positive operating leverage in the medium term, and we know that if we do that, our efficiency ratio will just continue to improve over time. So that's the measure that we focus on.

I understand. And sorry, did you include this in early commentary, the efficiency – sorry – the operating leverage for 2024, is that expected to be positive?

No, our operating leverage target is medium term. We don't do that from year to year.

Okay, had to try. Okay, thank you.

Thank you. The next question is from Mike Rosanovich from KBW Research. Please go ahead.

Hey, good afternoon. I wanted to go back to Kelvin on the expenses And what I'm wondering is that second restructuring that you're expecting next year, does that have a similar dynamic in a sense that all of those savings will basically be offset by additional investments? Or are you going to see that latter part fall to the bottom line?

No, they have the same dynamics because when we look at the expenses, savings, we look at the full program would generate about $600 million pre-tax and for 2024 would be 400 pre-tax. And as you know, that would be lower than the amount of increase in expenses that we expect in risk and control in the corporate segment.

Okay, so then at some point down the line, maybe not until 2026, you would see your corporate loss come down to more normal levels. Is that how we should think about it? I know it's far out, but is that a rough proxy?

It is far out, but that's what we're targeting.

Okay, perfect. And then just to follow up on that, so I guess what I'm sort of wondering about is you have all this excess capital, And I would have imagined that any sort of additional costs that you have to bear now would be, you'd be able to sort of offset with some of that excess capital. So I'm wondering why can't some of these costs be capitalized? It seems like they're all just going to be related to people and hiring new people to get you through whatever process you're working on. Is that the case?

No, the accounting would not allow you to do that. The capital and expense on the P&L are just two different concepts. So you cannot reserve expenses and offset that to capital. So when you add people, for example, it would just be going through your P&L line as an expense item.

Okay. Thanks for calling.

Thank you. The next question is from Nigel D'Souza from Veritas Investment Research. Please go ahead.

Good afternoon. Thank you for taking my questions. Just a couple of follow-ups for you on your mortgage portfolio. First, to clarify a point that was made earlier, I think I heard that there was some credit migration related to mortgages that have hit the trigger rate that may be vulnerable or may be expected to hit the trigger point. And I just want to clarify that's referring to you're negatively amortizing portfolio and those balances potentially of customers hitting a trigger point where the effective loan-to-value hits an 80% threshold for the uninsured. Is that what you're referring to? Yes, that is exactly what I was referring to. So does that include an expectation of home prices to decline? I know your economics team has put out a forecast, I believe, for home price declines. I'm just wondering how that's factoring in

Well, I think we're assuming if the rates remain the same, you know, and clients will reach an 80% threshold over the next 12 months, we'll book them at a higher rate of reserve. So it is a conservative calculation.

Right. So I guess what the question I'm asking is that 80% being hit by the balance is increasing through negative amortization or decreasing? a decline in oil prices or a combination of both occur? It could be a combination. And then last question on that portfolio. I noticed that the percentage of your book that's negatively amortizing declined from 18% to 14%. And correct me if those numbers are inaccurate, but if that's correct, could you provide some color on what drove that decline in negatively amortizing balances?

Yeah, I think the way I would describe it is we're seeing positive payment actions by clients that are reaching trigger rates, and we reach out to those clients well in advance of them reaching trigger rate, and they're responding positively by either making lump sum payments or moving to a fixed rate or increasing the P&I. So again, from a credit perspective, I would attribute it to to positive payment behavior. All right, that's it for me. Thank you.

Thank you. The next question is from Souram Ovahedi from BMO Capital Markets. Please go ahead.

Okay, thank you. I appreciate you taking the call. I know we've gone over time here. Just a couple of quickies. Kelvin, what was the average price for the shares you bought back in the quarter?

Well, we'll get back to you. We have those disclosed, yeah.

Okay. And then presumably, Barrett, you said it's dependent on market conditions as to the pace. I assume if the share price ends up drifting lower than that average share price, then you would pick up the pace. Is that the right way to think about it?

Well, I don't want to, you know, create a formula for you, Saurabh. You know, we... We look at, you know, how the market is behaving, look at, you know, what those conditions are, look at the flexibility we have. A lot of, you know, factors go into how we think about this. But, you know, we've been buying back. Kelvin, you know, gave you the numbers. And, you know, our intent, our current intent is to continue doing that, but as to the pace and how we do it would depend on market conditions.

Okay. Thank you. And I appreciate the... investments that are getting done in risk and control and I think the quantification of the expenses and the duration over which probably that has to happen. Is there going to be, do you have an estimate as to what sort of an impact that may have on your operational risk RWA's and over how quickly we'll see that sort of any impact if any you're anticipating?

The increase in spending for risk and control does not have an impact on operational risk.

So you're not anticipating any increase in your operational risk RWA outside of this spending?

The operational risk capital would depend, could be impacted by other items like fines and stuff like that, but the increase in spending does not have an impact on operational risk capital.

Thank you for squeezing me.

Thank you. The next question is from Lamar Prashad from Cormark Securities. Please go ahead.

Thanks. Most of my questions have been asked and answered, but I've got a couple of quick ones here. Just wondering if you guys know the size of the restructuring charges that are to come in 2024, why not just put them through today?

So I'll give you some examples. So when you look at real estate optimization, there are specific accounting rules on what conditions you need to meet in order to be able to fix those charges, and those would come over time. And so we expect some of that would be in Q1 or Q2, for example.

Okay, so it's not related to the impact that it would have on capital today, for example. It's strictly due to accounting rules.

That and, you know, the pace of the program that we're initiating.

Okay. And then could you guys talk about or help me understand which business lines are going to be most impacted by the 3% reduction in FTE?

It's pretty broad-based.

Okay. So just assuming it goes across all business lines would be a fair characterization of it?

Correct.

Okay. Just the last one here in terms of the rapid-fire questions. I think last quarter you guys were guiding to flat margins in the U.S., but you had seven basis points this quarter, and then you guys are sticking with flat margin guidance again moving forward. What drove the surprise on U.S. margins this quarter, and why not offer a little bit more of a constructive outlook?

Lamar, thanks for the question, and I'll try to be constructive. I wouldn't say it was a surprise. A couple of factors actually materialized in the quarter. First and probably foremost is that we had larger maturities and the tractor-on rates generated a significant positive lift force. That was one significant factor. The other is that while we had made borrowing reductions last quarter, and you would have seen that in the spot reductions, the average value actually came through this quarter. So the combination of higher tractor-on maturities and the impact associated with that and lower borrowings in the quarter actually gave us a bigger lift than what we had anticipated. And then to a lesser extent, and I want to be careful on this one, deposit migration, which was a factor in some of the pressure we saw last quarter, eased just a bit, and I would expect that to continue over the subsequent quarter. So I think it's really the combination of those factors that yielded a slightly better margin profile. I would still say that given market conditions in the U.S., given the uncertainty that still exists in terms of overall funding and liquidity positions, we feel quite comfortable with the guidance that margins are going to be relatively stable over the next quarter.

Appreciate the time, guys.

Thank you. And we do have one last question. Darko Mihalic from RBC Capital Markets. Please go ahead.

Hey, thank you for squeezing me in. Appreciate that. Just a couple of quickies. First, maybe this is for Kelvin. The U.S. business, looking at it in U.S. dollars, what's a reasonable tax rate, do you think, for 2024 to think about with respect to that business?

I'll take that. So on an average basis right now, it's sitting just under at 20%, but at the margin, I would expect that number to be slightly higher. Slightly higher. Okay.

Second question, Leo, sticking with you. I may be looking at this incorrectly, but was there a benefit to your NII from the Schwab payment, or was that put into corporate?

No, it's a very good question, Darko. There was a benefit and a cost. So let me just break those two out. There was a breakage, one-time breakage fee that was paid by Schwab as they bought down flexibility in terms of the fixed rate obligations, which was a condition that we put into the agreement with them, and they exercised that in the quarter. So that would have given us a slight benefit in the quarter, it was more than offset by the decline in overall suite balances and lower investment earnings and management fee earnings from the actual agreement itself. So net Schwab in the quarter for us from an NII perspective was a drag.

It was a drag, and essentially moving forward now, unless there's other charges or something, we should really assume that. I mean, what was it? Is there anything you can provide to us in terms of – I mean, I think I can calculate the fee that they paid you, but I can't calculate all the negatives. Is there a number you can put around the NII hit?

We've traditionally not provided that number, but if you're trying to get at would we expect potentially balances to decline and there could be some revenue headwinds, yes, and that's something that we factored into our long-term plans.

Okay. Okay, thank you. And last question for me, and I promise I'll stop here, but again, a question on net interest margin. And maybe this is for Kelvin, but anyone can type in, I guess. When I stare at the sensitivity that you guys provide, and now I'm looking at it through the lens of falling rates, because I think that's where we're all heading, and it looks like your sensitivity has declined over the last six, seven quarters now. with respect overall at the all-bank level, with respect to the sensitivity to falling rates. Is this something intentional that TD is doing? Is there some sort of balance sheet changes occurring at the bank to reduce NII sensitivity? Or is this just simply normal course and the balance sheet structurally has just moved in such a way that you have less sensitivity to falling rates going forward?

Yeah, so I'd say it's Kelvin here. Largely speaking, it's a combination of a bunch of factors, like as deposit composition makes changes from lower beta to higher beta deposit, then you actually see less sensitivity. And then also, as we look at tractoring maturities we may refine at the margin in locking forward tractors, and that may have an impact as well.

Okay, thank you. So to confirm, nothing's really changed. It's just sort of a structural change with respect to the balance sheet. That's helpful. Thank you, Calvin.

Thank you. There are no further questions registered at this time. I'd like to turn the call back over to you, Mr. Medrani. Thank you.

Thanks very much, Operator, and thanks, everyone, for joining us today. I would like to take this opportunity to thank my colleagues around the world for the wonderful work they do for all of our stakeholders, including our shareholders. And given the time of the year, I'd like to wish them happy holidays and to you all on the phone as well, happy holidays and all the best, and see you next year. Thank you.

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.