The Toronto-Dominion Bank (TD) Earnings Call Transcript & Summary

Glad to be back with everyone. My next guest is Mr. Bharat Masrani, President and Chief Executive Officer of the TD Bank Financial Group. Bharat, thanks very much for being here.

Good morning, Meny, and nice to be with you in this difficult circumstance, I guess. But hey, we are managing. It's a good thing.

We're managing and definitely adapting to the new conference reality. So again, thank you for being here.

I'll jump right into it. And I think the best place to start really is with the U.S. business, is definitely in focus here. I was just talking to your peer at BMO and talking about how U.S. exposure was something that Canadian bank investors couldn't get enough of. And now definitely, the outlook has changed a little bit. Margin pressure is on top of people's minds. Certainly political risk and social unrest, unfortunately, are part of the equation as well. So I'm just hoping to start off just to get your refresh of your U.S. strategy. Where is this business going, especially in the wake of the AMTD transaction? And how do you see the business evolving from a bigger picture point of view, and then we can get into some of the more short-term considerations?

Well, Meny, we are thrilled with our U.S. business. We entered the retail banking business in 2005, 2006 or so. And today, we have nearly 1,200 locations from Maine to Florida. We are one of the largest banks in our footprint. We have a terrific brand in TD Bank, America's Most Convenient Bank. And we have a positioning that is unique, the WOW! culture and what TD is all about, and we serve more than 9 million Americans on the retail side. So very proud of our franchise in the U.S. It's a very important franchise, and it's a growing franchise. If you see what we've been able to do by increasing the number of customers that deal with us, we are one of the best banks in the country that's able to attract customers on an ongoing basis. We have very large checking bank down there. And that provides us with an anchor product, which helps us to deepen those relationships. So I'm very happy with the franchise. I think over the long term, it gives us terrific growth prospects. We are a young franchise there. We can deepen those relationships with more offerings to those customers. And we are in markets that are the top markets in the U.S., in New York, Boston, Philadelphia, Washington, D.C. and Miami, and not counting the South Carolina as well, where we are very large. So overall, I'm thrilled with the franchise. I think the items you've noted, over the short term, when going through the pandemic, the issue that New York had was extraordinary in nature. It shut down the whole economy. It shut down the whole city, and that had an impact on us. We saw that happen in Florida as well. But I think if you get past and say this crisis at some point will end. And when it ends, what growth prospects does that market offer? And we think that it offers us terrific growth prospect. So happy with that. Of course, with the way the rates are, rate sensitivity is an issue. But as long as we keep on growing, I'd be very happy, and that's what we've shown that we can do even through this period. I think from a metrics perspective, I'm quite happy with how we are performing. I think it's important in an environment that we have, that we are well provided, that our PCLs are getting ahead of the problem. And that's what we've been doing over the past couple of quarters in the U.S. and frankly in all of TD. So I -- my view is that we're very happy with the U.S. business. I'm so happy that it is a big part of the -- of TD because I think over the long term, it provides us with a unique growth opportunity.

In terms of those growth opportunities, is the -- would the focus still be on building out the branch network? Is a deposit-rich, branch-focused distribution model still the way to go in the U.S. in 2020? Or does that have to be rethought? How much is hype and how much is actual change on the ground?

I think -- I mean, listen, ours is an omni. We will do what our customers want us to do. Our stores or branches in Canada play an important role in that, as does digital, as does the phone channel and ATMs. They play an equally important role. So our view is that the omnichannel strategy that TD has been embarking on is the right strategy. I think through this crisis, it has even reinforced in our mind that, that is the right way to go. In our -- most of our network in the U.S. remained open through the pandemic, particularly, where we have drive-thru facilities, folks can drive through and about 85% of our locations have that. So for the most part, we've been open, and we've seen good activity out of our store network down there. So I think that's the way to go, deposit rich. Yes, deposit rich, but a further detail for us is the checking rich is to attract those core checking relationships that allow us to deepen those relationships with other offerings that the bank has. And as traditionally, everybody's talking about over many years that the checking relationship becomes the core franchise relationship, and that's what we are good at. So I'm very happy with that as well. And yes, rates will, at some point, reverse themselves. And our focus is more on volume growth because we can offset some of these rate headwinds by just putting on more volumes, and that's what we've been doing.

That is a good segue to -- the next question I want to ask was just in terms of the franchise's margin sensitivity. And I guess it applies to both Canada and the U.S., but maybe if we focus on the U.S. And really, the question is, rates are a short-term phenomenon, but unfortunately, have been a long-term phenomenon since the financial crisis. So at what point do you have to maybe think about taking down the rate sensitivity of the business? And I guess a more pointed question. Theoretically, if you were to deploy capital in the U.S., would a priority be to find more fee income effectively in the U.S. rather than net interest income?

Well, you pointed out that rates have been under pressure through the financial crisis and even after that. And I think we, at TD, showed that we can continue to grow, notwithstanding that headwind. And we've proven that, and I have no doubt that we will prove that again. I think the part that sometimes gets missed when we talk about NIM is yes, of course, with the mix we have, there will be pressure on the NIM, but it doesn't mean that we cannot grow our NII. Because as we get more checking relationships in, it might be dilutive to our NIM, but it's NII accretive because we are still making money off it, not as much as we would like to. So I think that's an important concept to keep in mind as to how we manage our balance sheet. I think your point on M&A. I think that's what you're getting into. As said, we have very strong capital levels. We have a great franchise. We have proven bank with respect to M&A in the past. And my view is that as a result of the pandemic, there will be opportunities. And if those opportunities make strategic sense for TD, they make financial sense for us, then, of course, we'll look at it very seriously. And our interest is growing our franchise in the Southeast of the U.S. We think that's a very attractive market. Should something emerge there, we will look at it very seriously. And on the asset side, we've been very clear that if a good asset generator were to become available, we'll also look at it seriously. And I think this crisis finally might reveal some that might become available before this is all behind us.

I wanted to talk more about expenses in Canadian Retail and cards. But first, since that we were kind of moving towards M&A and capital, in general, I wanted to ask a few questions about that. You have the highest capital ratio of the group. So how are you thinking about capital now? In terms of the statement, do you believe you have too much capital? And given the outlook and the uncertainty tied to the pandemic, how do you view your excess capital position right now?

I think going through any crisis, any downturn, any recession, I think for TD, at least, I can say, it's very important to have strong capital levels because we're not clairvoyant. We can't predict the future perfectly. We know it's -- this pandemic is a lot different than any other crisis we may have encountered. So I think having strong capital levels is important. It gives the bank a lot of flexibility. Traditionally, TD is at strong capital levels, even in normal times. This pandemic, I think it's even more important that those numbers -- those capital levels be even higher. And then we talked about the M&A. It does provide flexibility issue the compelling opportunity presents itself. So I like the positioning we have, that we have a very strong capital levels. Given all the uncertainty around us that provides lots of flexibility for the bank. And it's a good thing to have and as well as making sure that we are more than adequately reserved. Because we just want to make sure that as we managed through this downturn that the bank is adequately reserved and we have strong capital levels, which are 2 items that are critically important in a period like what we are experiencing.

I wanted to ask in terms of capital, where buybacks fit in? Obviously, buybacks are not allowed. But I guess really 2 questions here. One, do you have any sightline into when you will have the opportunity to -- at least the potential to do buybacks again? And then in a more theoretical scenario, why not -- or if OSFI allowed buybacks tomorrow, would that be something that you would do given the capital levels that you have? Or is your outlook sufficiently conservative that, that would not be on the menu at this stage right now?

I mean we've not been shy to buy back our shares when it is appropriate. I think I've said this many times. We have a capital deployment framework that has worked with TD very well. Our first priority is to make sure we support all our agreed-upon strategies for RWA growth. If we're able to deploy capital to grow certain businesses, and we have many of those, I want to make sure we have more than sufficient capital for that. We want to make sure that any capabilities that we may have -- may need, that if we need to deploy capital to acquire it or build it, that we have more than sufficient capital. And then, of course, we make sure that from a resiliency perspective, from a -- if there are any opportunities from an acquisition perspective that we have flexibility. And if all those are exhausted, then we are not shy to buy back our shares, and we've shown that over the past few years. I think your question bit of a hypothetical question, Meny, hard to say exactly how this crisis plays out. I think it's probably premature to start talking about buybacks at this stage. I think we need to get into some form of normalcy here and make sure that we've got good momentum as a country, as a continent before we say, "All right, we are back to the good old days." So I think there's a bit of time. But at some point, we will get to that point as well. And if we do, then the framework that I just outlined will apply to TD. And if it means buybacks make sense based on that framework, then we will certainly look at it very seriously.

And one final question on capital deployment is just the capital markets business, which is smaller on a relative basis than peers. And I think we've -- over the last 2 quarters, in particular, we've got a new appreciation for what capital markets revenues can provide, the counter cyclicality. But do you view your positioning of capital markets sort of as underpenetrated? Is this an area where you would consider deploying additional capital either organically or through some other means?

So we've been building out the business for the past 4 or 5 years. I've talked about -- and Bob Dorrance has talked about building out our U.S. dollar strategy. And that has worked out remarkably well through this pandemic. I'm so happy that we did that. We made that call 4 or 5 years ago and what that has meant for the bank. I think it's important to keep the perspective right here. In our capital markets business relative to all of TD as a percentage is you're saying, "Well, you're smaller than others from that perspective." But as an absolute business. I mean last quarter it generated, what, $442 million. And you compare that on an absolute level to what others have generated and say, "Wow, these folks are serious players in this market." So I have no problem in saying that we are large. We are -- effectively compete with anybody out there with respect to capabilities and scale and the TD brand and the TD capital that we have. So I think we're on a good path there. Of course, I'd like it to be bigger. I've said that over many years as a percentage of TD. But the growth it has had on an absolute level, I'm very happy with and the investments we've made are bearing fruit, which is good to see. So it's a business that will -- that is core to the TD strategy. We have a terrific team, and the businesses we have at TD Securities are the ones that have worked very well for us in good times and bad times.

I wanted to talk about Canadian Retail. On the Q3 call, Teri Currie noted that TD was third in RESL market share in Canada this past quarter and talked about how the bank was more conservative in branch openings. She noted that the drag would fade as more branches were being opened or most branches were being opened by the end of September. I guess the first question here is, did the strength of the housing market through this pandemic take you by surprise a little bit? Is it something that you didn't foresee? And I'm trying to understand the conservatism in the branch closures. Was that just something that was unrelated to the way you view the market? Or was there a little bit of a miss? Let's call it, most people wouldn't have forecast the housing market to be as strong as it has been coming through this pandemic.

So the closing down of a portion of our network and reopening of our network is solely driven by the health and safety consideration for our own people and for our customers. We have locations that might be different. We have dynamics in certain jurisdictions that might be different, and you're seeing that play out. So at the pace at which we've been opening, yes, it's been slower perhaps than others as I noted in the quarterly calls. But over the next -- by the end of September, as Teri said, we should be virtually open right across Canada. Our U.S. network, like I mentioned earlier, more than 90% of our U.S. network is open because of the drive-thru phenomena. We were never close in many of those locations. But even in locations where we have to shut down the lobby hours have now generally been opened up either by appointments or people ability to walk in, et cetera. So I think we'll get back to our normal share as we become more normal in that respect, and I expect that to happen relatively quickly. It was not driven by miscalling of what the market might do or not do. I mean it was solely driven by the health and safety considerations at TD.

Understood. I wanted to talk about cards in more detail. The outlook for unsecured lending broadly and what the strategy is there? And specifically, tying it in as well to a discussion of the Aeroplan deals. Maybe starting there in terms of the travel card space. Travel seems to be one of the spending areas that's taking the longest to come back. And I'm just wondering, you're obviously very close to the real-time data. What are you seeing there? And what's your expectation in terms of a normalization?

I mean every month, things are getting better in card usage, even in the travel category compared to what we had in the end of March and April, so that's a good thing. But without a doubt, travel will take longer to come back to its pre-pandemic levels and understandably so, given the impact that all of us have experienced. But it's a terrific category. I don't think Canadians stop traveling for the rest of their lives. Once this pandemic is behind us, it would be a terrific program and thrilled with the new program that Air Canada announced, which should be launched in November. I think we are all looking forward to it, and it will create a lot of momentum we feel in that category. I think the other important aspect for us has been about 3 years ago, 4 years ago, I think we had talked about this with our investors as well that we were relaunching our offerings in the card space. We were redoing our entry-level card. We were going to have a new Cash Back offering, et cetera. And all that has been terrific because the Cash Back card has been very popular through this pandemic, as you would expect. So we're seeing very good volumes in that respect. I think in other categories -- and I should note it's not unsecured. But in our auto finance business, we are seeing very good volumes as well on both sides of the border. And that, I mean, shouldn't surprise folks because we saw that through the financial crisis that if you lose your car, then it's hard to get to work. And particularly with the pandemic, there appears to be a higher comfort in using personal cars than to use transit in many cities. So I think we're seeing good momentum in that asset class as well.