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

Well, I guess, it’s good afternoon now, ladies and gentlemen. Thank you very much for joining us. Very happy to have Greg Braca, who's President and CEO of TD Bank America, America's most convenient bank. Sorry, Greg, I think I messed that up a little bit, but it's a bit of a handful. Thank you very much for joining us today. We really appreciate it.

Thanks, John. Good to see you. Sorry, we couldn't be here in person with you, but this is going along very, very well. And the technology is terrific and glad to spend some time.

Fantastic. Greg, just to start off, I was hoping you could talk about what the bank's response to the pandemic has been and whether or not this sets you up for better or worse future growth than you would have anticipated for 2021?

Well, there's a lot in that. But I'd first just go back and say, what a ride it's been for the last 6 months, right? Who would have expected sometime in January or February that we'd be here in mid-September and all that we've done, all that we've lived through collectively as a society, as a business, as an industry and in many respects, all that we've accomplished together. I got to say, and just a quick shout out to not only the 26,000 colleagues in the U.S., but the 90,000 TD colleagues globally of everything that has been taken on. When you think about 90% of our folks are working from home most of them seamlessly, most of them very productively and still continuing to take care of everything that they have to do and their responsibilities to handle our customers and take care of our customers day in and day out. Who would have thought we have could have pulled that off as a business or as an industry just 6 or 7 months ago. So much has happened. I would tell you that we've been able to, as a bank, roll out new capabilities in technology, new ways to talk to our customers digitally, everything from virtual queues as some of our stores, as we call them in the U.S., or branches were closed or had more limited access, early days to personalize the discussions via digital and text and e-mail to all of the things that we've done in the government programs to support our customers from capital to helping them with their loans to deferral programs. So much has gone on. I would tell you that, as I think about going forward, I think much needs to be seen over the next 3 to 4 months as how this shakes out, whether we have a vaccine or not and what the actual end shape of this recovery was when we look back. But I do think some themes will emerge that we will get to the other side of this thing. We will get through this collectively. But the speed with which we operated and the technology that we pulled off real time, I think will last with us. Meaning that we can operate with speed, and we can get to these things, and we can leverage the technology that we've spent a lot of time and energy building over the last several years. And I think that bodes well for us in the coming months and years.

Has there been anything about the pandemic that surprised you either within your operations, government support or customers that you may not have expected if you'd run this as a theoretical exercise before it happened?

I think the list would go on far longer than the time we've allotted about the things that would've surprised us as an economy, as a civilization, as to how we're running our businesses, everyone working from home. But just some of the -- I'll give you some of the headlines, John, just some of the shock and awe that you saw early days with unemployment spiking to nearly 15% in the U.S. alone, and all of the impact that it has had globally around trade and the movement of goods has just been incredible. I don't think any stress test would have foreseen the dramatic shock it would have had the early days. But we've also been so surprised about how things really did come back and unemployment, roughly at 8.5% now has recovered. Many of the leading indicators around retail sales or home construction or existing home sales or autos or durable goods. I mean things have bounced back. So I think that's been an awfully good sign. Many surprises along the way for sure. But what I would tell you is that much of the economy has been tremendously resilient. I know a lot of the headlines go to some of the things that we're seeing and continuing to work through, whether it's retailers or restaurant operators or folks in travel and leisure certainly are bearing the brunt of a lot of the impact. But other industries are hanging in there and continuing to perform quite well in some cases. I do think the way we look at this, though, is the next 3, 4, 5 months are going to be awfully instructive. Do we really get to a vaccine? Do we really get to the other side of this winter? Or is it deeper for longer? And is it going to be a little bit of a slog for a number of quarters? And I think as we manage through these businesses, I think TD is very well positioned from a capital and a strength standpoint to take advantage of regardless of the shape of this recovery and how do we continue to grow our business.

Greg, when you look at your operations in totality, right now what are the biggest risks that you think that you face? What are you keeping an eye on? And it doesn't -- we can obviously say COVID-19 and the impact this is having. But I mean, I've got to believe that there are other things that may attract your attention on a day-to-day basis.

Yes. So just given where we are, I mean, we shouldn't round the corner and notwithstanding some of the upside that we've been seeing in the economic indicators over the last few months, we're in a recession. And when you're in a recession, while it's been very much front and center for us to talk about nontraditional risks over the last several years, and those are still front and center, whether it's cyber or fraud or technology risk or privacy issues, things like that. Clearly, right now, something that's reemerged front and center that has been sort of muted for the last several years, for many years, has been good old fashioned credit risk and how do banks and financial institutions think about those things. And it's something that we are spending quite a bit of time on. And I know you know TD and others do, we'll take a very conservative view on this about how do we think about that? How do we build reserves? How do we make sure we continue to not only be strong while we're in the middle of this, but how do we make sure we're even stronger coming out on the other end. So good old-fashioned credit risk would be something top of mind these days.

Absolutely, absolutely. So Greg, when we take a look at what's been happening in the industry, and there's a lot of dislocation happening, what opportunities do you think that the strength and the stability that TD has provides you for either market share gains or, I guess, other things that may propel growth over the next 3 to 5 years? Are there opportunities out there that you're focusing on?

Yes. So in addition to leveraging all of the investments that we've spent hundreds of millions of dollars on and building new platforms and new digital capabilities and really rebuilding a lot of the infrastructure of the U.S. bank over the last several years to get more efficient, to have more automation, to have deeper insights from a data analytics on our customers, how do we leverage those things now, especially. Especially when customers are looking for us to deal with them in a lot of different aspects, not just physically in the stores or from relationship managers, but digitally through our phone center and channels and making sure that we're front and center regardless of how they want to interface with us. But I do think there are other leverage points that will come out of this, just like we saw at the last downturn of '08 and '09. When we, TD, really took advantage and were really able to have outsized growth for a number of years because others were weak. Now we know the industry is in a far different position this time around than last time. Far more well capitalized, far better liquidity requirements and constraints that all of the banks are dealing with. But we do think there will be opportunities for us to take advantage when others may be pulling back, and we'll see how this plays out both organically and inorganically as well.

Fantastic. The -- TD has done a great job when you talk about credit risk, giving us what the -- what your outlook is for the economy, both as base case adverse scenario, everything else like that that falls into the credit rating. But from your standpoint, Greg, what is your outlook for the U.S. economy over the next 12 to 18 months? How do you see this all unfolding in terms of what your personal base case is?

Yes. So as you know, we like to run a lot of scenarios at TD, and we spend a lot of time on modeling. And again, I mentioned earlier, good old-fashioned credit risk is front and center again these days. And while all of our models, we spend a lot of time thinking about, they are rearward looking, but we're also spending a lot of time thinking about what is the way forward here. So we really do spend a lot of time with our Chief Economist and our Economics Department thinking about scenarios. As well as what does a bottoms-up approach look like from the businesses that are on the Street real time, whether it's commercial businesses or credit card or auto portfolios or things like that. And we spend a lot of time with the business, making sure we have a bottoms-up view as well. And we do spend time putting those things together. I would say our base case is probably something that more looks like a U-shaped recovery than the dramatic V-shaped we've talked about. And until we get to either a vaccine or herd immunity or this thing does begin to really peter out, I think that's a prudent way to look at it from a base case. But we are also looking at other more stress scenarios like W-shaped recoveries where you're seeing a little bit of a bounceback now. What happens in the fall and the winter when we get into flu season if COVID-19 really spikes back up again and you have to go to more severe lockdowns and you have another bout of that and then you get to a bit of a recovery in the summer again. So you would expect TD, we're going to take a very, very conservative view on these things. We're looking at all of these scenarios both from a model standpoint, from an economic standpoint as well as what we're seeing from industries and our customers in the ground up real time.

Greg, one of the things that an upcoming event that really is going to be impactful is, of course, the U.S. election. How -- as a leader of the operations, do you plan for something that appears at least at this stage in the game to be almost in a binary outcome?

Well, it is a binary outcome, right? We've got 2 candidates and less than 60 days. And hopefully, we get a smooth transition, as we've always done as a country and we move on. I think for us at TD, yes, it's interesting to look at those scenarios, depending on where you come down on what you'd like to see as an outcome. But TD, we've been awfully good at operating regardless of which side of the aisle happens to be in power at the moment. So prior to 4 years ago, we had 8 years of the Democrats running it, and TD saw a tremendous growth and before that, we also saw terrific growth as we were building the bank in the U.S. So for us, we're going to plan for managing our business. And front and center is how do we deal with our customers, how do we make sure our people are safe and sound, while they're managing through COVID and working from home, how do we as quickly as possible get them back if the markets in states and the best experts and our medical director says that we can get folks back to work. How do we manage through this recession for our customers and making sure that we can continue to grow the business through this downturn when others may be taking a more cautious view. So I mean, that's really how we really think about it. Those are the things we're primarily focused with and we'll deal with and manage in regardless of which outcome occurs early November.

Fantastic. Well, Greg, that's basically my overview questions. Before I start diving into details, I do want to mention to our audience that if you have any specific questions for Greg, please e-mail them to me, john.aiken@barclays.com, and we'll do our best to fit them in. Greg, one of the facets that investors have really appreciated about TD is the U.S. retail banking platform that you guys have managed to build out. Can you give us our broad strokes, what your outlook is for growth? And where you think that's actually going to come from?

Yes. So great question. It's funny that after 15 years now, 16 years since we've built the bank in the U.S., we're now, depending on how you measure it, the seventh or eighth largest bank in the country. And it's just amazing what we've been able to do in such a short period of time. And I know our colleagues feel just really, really proud of everything that we've built and we continue to build real time. When we look out going forward, it really does -- really come down to sticking to a lot of the discipline. How do we serve the needs of our customers in all of our local markets from Maine to Florida. But just as importantly, how are we serving niche markets that really do cover the breadth of the country in some of our commercial businesses, our auto business and some of our card partnership businesses that really do extend beyond just the eastern footprint that many have come to know us for. Retail will still be a core of who we are with all of the other businesses we're building. And deposit gathering and adding good old-fashioned checking accounts never goes out of style regardless of what cycle we're in or whether we're in a boom economy or in a recessionary economy. And what you would have seen for our third quarter numbers that we just released a few weeks ago, is in the U.S. business, I mean, you saw just tremendous deposit gathering ability of this franchise. Even if you back out the sweeps deposit from our arrangement with Ameritrade, core deposits of the bank were up 24% year-over-year. And on the size business that we've built now and the balance sheet, this is not a small organization, and to grow deposits by 24% and having nonsweep deposits go over $200 billion as an organization in the U.S. is just incredible. So it's that kind of growth. You saw very strong loan growth, particularly around our commercial portfolios over the last quarter. So it goes to again, the things that I talked about. Just because we're in a recession, how do we continue to support our good customers? How do we continue to support the businesses that we know how to do that we believe in? And even in this last quarter, you saw good loan growth, 11% up year-over-year.

Yes, Greg, I want to touch on the deposit growth that you mentioned. That's absolutely fantastic. And I think that it gets lost on investors, the point that you made that you already have a sizable book and yet you're able to grow it at such astounding numbers. A lot of this, though, has to do with some of your clients retaining their own liquidity just to make sure that they've got a safety belt. How sticky do you think this deposit growth is? I mean, I assume that you expect to keep some of it, but are we talking about retaining 80%, 50%, 20% of that growth? Is there some sort of metrics or visibility you can provide for us?

I think on that front, you are right. I mean, well, we're very proud of the growth. First of all, we're proud of the fact that our customers have the confidence in us that they're putting that money with us. And whether it's government stimulus on the consumer side or it's PPP money or other commercial programs on the commercial side, they're putting that right back in with TD. So that's terrific. But we have no illusions that some of this is temporary in nature, and we would expect to see a runoff of it. In fact, what would be good for the economy is, as you see some of this money going back to work, I think, might be a generally good sign that people feel a little bit more confident that things are opening up. So things like not just that -- the questions we could ask like spend on cards and other sort of transactional businesses would be leading indicators, but I think coming out of this thing, what would be a leading indicator is when you see some of those balances begin to get spent down. So this is something we would absolutely expect to see happen, and we're going to watch this closely in the coming months and quarters.

I guess, Greg, one of the negatives of the deposit build, though, is the impact that we've seen on your margins. And TD has been facing some compression in your operations for some time, granted deposit growth low interest rate environment. Can you give us some sort of sense as to what your expectations are on a go-forward basis for margins? Are we going to continue to see significant compression, modest compression, flat? What are you looking for?

Yes. So I think it's a very timely question. But maybe just go back for the audience here and just remind everybody that in addition to the 150 basis points of rate cuts that we had in March, we had a 50 basis point on top of 100 basis point rate cut. Not just us, but the industry was also absorbing the effects of 3 rate cuts that had started at the end of July last year. So all in, you're dealing with 225 basis points of rate cuts on the short end. And then I should remind everybody that you've seen, obviously, also the dramatic compression on the long end that will play out over time. You couple that, so that would be the rate scenario. Then you go to the mix of the business, the way we talk about it, which also has an impact on margin. And notwithstanding all of the good things that we did on the loan growth side, it would have probably been imprudent, if you would have said your loan growth kept up with your deposit growth, given such strong deposit growth that we had over the last couple of quarters. So the deposit growth and especially where we are with the rate cycle, that, coupled with just the volume and the volume of the cuts that you've seen over the last year, a very strong impact on margins, and we reported just quarter-over-quarter, down 43 basis points. When we normalize the months because our peers would have -- in the U.S. would have issued their earnings in June, pretty much in line with peers. A lot of pressure on margins. I think when you look out, obviously, we've suspended giving guidance around these things. Let's see where the world is going and how this shakes out. But you're still going to have the impact of actually the 225 basis points coming into the year-over-year impact when you're looking at it from a year-over-year perspective until you absorb that back in the springtime. On the mix end of the business, you'll continue to see pressure if deposits continue to outweigh loan growth, and we'll watch that over the coming, obviously, months and quarter to see how that shakes out as well.

Greg, one of the things that TD did strategically coming out of the -- or during and coming out of the global financial crisis was looking for acquisitions for asset pools that didn't come with deposit financing. And this came in, led in terms of your specialty card portfolios and other things. Is this something you may look at when you get a better sense of where the economy is coming from? Or is this just we're going to keep the deposits in very low-risk securities and take the margin hit for now?

Yes. So I'll go back to the deposit -- I'm going to go back to the deposit question again, notwithstanding the NIM story and what deposit growth does to that end of it, it's still NII accretive. So the way we think about it is we're not paying up for these deposits, and you'll see a lot of the growth in our noninterest-bearing or very low interest-bearing accounts and regardless, we think this is good structurally. And if we continue to take share and add new customers, we think regardless of where we are in the rate cycle, growing your deposit base business, especially noninterest deposits is very, very good for us on a long-term basis. So we're going to continue to focus on that. To your question on acquisitions, yes, obviously, we had a very different franchise coming out of the last downturn. And we were putting the organization together in its early days as we took Banknorth and Commerce Bank and a few smaller acquisitions such as South Financial and others down through the south to really build out the footprint that was the core of the nucleus of what you see here today. But as we think about this going forward, given our capital position and strength, if there are opportunities that come out of this, terrific. We -- you can assume that we'll take a look at them. And if they're strategic and they meet our risk appetite and they check all of those boxes, obviously, we'll take a harder look if there's opportunities that come out of this thing. But front and center, when I think about our business and our balance sheet, and I know globally is how we think about this is our first priority is to continue to make sure that we're well capitalized to continue to serve our existing businesses, get through this downturn and make sure that we can continue to grow organically. So for us in the U.S., it's the organic growth strategy is front and center. That's our #1 priority. And then obviously, if opportunities come out of this, we'll certainly be thinking about inorganic opportunities if the price is right and the risk appetite, and it's the right strategy.