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

Welcome back. I'm pleased to introduce our next speaker, President and CEO of TD Bank, Bharat Masrani. Bharat, good morning. Good to see you.

Good morning, Meny. Nice to see you as well. I wish we were doing this in person, but I guess this will do for now.

For now, it will do. And hopefully, next year, it will be different.

I thought I'd start off with a hard question for you, if you don't mind. On an adjusted basis, your PTPP growth is at the lower end of the peer group and has been for some time. I'm just wondering how you see that underperformance. What's driving that? And more importantly, I think, how do you see that turning around? And what turns that around?

Yes. Like, I think if you do the pure math, I don't disagree with the math because it is what it is. But I think there is some accounting noise. I think we've talked about it, Meny, before, a strategic card portfolio as to what it does to our expenses. If you adjust for that and if you adjust for FX, I think we grew our PTPP year-over-year 3%, still on the low side. But my view is that trying to do year-over-year comparisons through a pandemic, through lockdowns, now kind of reopening, et cetera, it becomes too messy. I think hard to really look at is what's the momentum as we are getting into a recovery phase post-pandemic. And if I look at linked quarter or sequential quarter and what we adjust for the accounting noise that I just talked about, our PTPP grew more than 10%. And I think that would be the peer-leading PTPP from that perspective. So I think it is important to keep in mind what momentum are we creating here as we get into recovery phase. And I've said it before, I mean, TD is dressed to play in a recovery. Type of businesses we have, when travel comes back, what it does to our businesses and the like. So yes, year-over-year, I'm not going to deny the math that you've done, but I think more important and more instructive here is to look at it from a sequential perspective. And even what are the causes. Why the year-over-year numbers are what they are? I think interest rates has a huge role to play in that. But that effect now is moderating as we are getting to the tail end of -- if you look at NIMs now are far more stable than they were previously. So I feel good moving forward, and I think we have good momentum in building out through this recovery phase.

I wanted to dig into some specific business lines and touch on some of the ideas that you talked about in that answer more broadly. On the Q3 call, I asked a question about lagging P&C loan growth in Canada. And it sounds like there's really 2 answers that were given, 2 explanations: one, an over-indexing in travel cards specifically, and some selective tightening early on in the pandemic that has now been reinstated. So I just want to make sure that, that's correct. If there's any other factor in terms of -- that explains that lagging domestic loan growth as see it.

I mean no doubt, the slowdown in credit cards through the pandemic has had an effect. We -- about 50% of our cards are what we call premium and travel-oriented cards, and that has a dramatic effect through this space. The flip side is we are seeing terrific growth and update on our other cards. We invested some sizable amounts about 3 or 4 years ago to relaunch our Cash Back Card and the TD Total Rewards cards, et cetera. And the timing turned out to be very good for a pandemic type of environment. So we're seeing good growth there. But without a doubt, the card business has been a drag in loan growth. But once again, I think even without that, I think my comments in the quarterly call, I said we're seeing record card spend coming back, at least our numbers are suggesting that. And you can see, again, my point that sequentially is a better way to look at what's happening post the pandemic or at least getting into a recovery phase and towards the end of this pandemic. And in that way, I feel good about that. And so it's not inaccurate what you're saying. With respect to credit standards or did we change our underwriting standards and all that, once again, having been in the risk business myself, we are through-the-cycle lenders. We have consistent policies how we do it. I think it's important from a customer perspective, but is important from an internal behavior perspective. Because trying to throttle up or down on, based on a quarterly economic forecast or whatever, generally, it doesn't end well. But having said that, pandemics, this was a one crisis for the ages, we did put a pause on certain strategies, particularly on the unsecured side, so in unsecured loans or balance transfers on a credit card or dramatic increases in credit limits on a card. So those were the types of what I'd call tactical positives that we had implemented and for the right reasons. I think from a TD perspective, that's the right thing to do. And then, of course, now that the pause has been lifted, given the stage we are in the recovery. But overall, the key message is that we don't change our underwriting standards to suit a particular quarter. And yes, sometimes in frothy markets, we might underperform. But I'd rather have a consistent, predictable approach that is suitable for our customers as well as what it does internally for the bank from a culture and behavior perspective.

In terms of your expectation for your team, is peer-leading loan growth important? Is that the baseline expectation? Or -- I mean you talked about risk and other factors there. But especially if you see it, say, sitting now looking ahead, is peer-leading loan growth, the goal that you've given your Canadian P&C team?

Well, Meny, in most products in Canada, I think we're talking about Canada, we are the #1 or #2. So not only is that an expectation, but also happens to be the reality. That's where we are. We are the #1 or #2. And where we are #2, we have plans to become #1. I think FlexLine is a good example. There was a time 3 or 4, 5 years ago, where we were lagging in certain credit card categories, and we say, hey, we're going to become #1, and we did. So we have solid strategies to get there, but we don't want to get to #1 at any cost. I mean again, this is a consistent theme that you've heard from me for many, many years. We want to make sure that we do what makes sense from a long-term risk perspective. We want to make sure that it's a value proposition that makes sense and generates returns that you and our shareholders would expect from TD. And there's a predictable nature to it. And that's the way I look at it, and that's what we are doing. So there will be swings at 1 quarter. The number might sound not that great. But overall, if you look at the trend, that's what you will expect out of TD, and that's what you're seeing.

Just following up on the credit card business. It's a very important business for you, both sides of the border. In Canada, do you believe you have the right mix of travel, nontravel? Is there any sort of imbalance that the pandemic has highlighted for you? What's your perspective on the offering that you have?

Well, listen, being a big player in the travel and luxury space -- I think that's probably a better definition and not just travel. It's a huge business for us. But we are not a small player in other categories. I think I mentioned just earlier on that we make good investments. Actually, those were good decisions by Teri and her team a few years ago, that we need to invest in these other cards. And if you look at what we have done there, it's terrific. Not only do we have our own card with Total Rewards and Cash Back, but our partnership deals. We got the, of course, the Air Canada and Aeroplan as travel comes back, where you can see tremendous -- and you're already seeing good activity sort of starting to emerge in that. If you look at our partnership cards, our partnership cards, we have Amazon, we have relationship with Starbucks. We have relation now with LCBO through Aeroplan. So that -- and Shell is the other one and Instacart. So if you look at all those other categories, we have a full service or a full suite of credit card offers. But without a doubt, our premium travel category is large. And as we see this recovery taking hold, which we are seeing, I think we are well positioned in the card business going forward.

I wanted to continue talking about Canadian P&C. When I look at your noninterest income yield for that business, you're near the bottom end of the peer group at 84 basis points as of Q3. That compares to 89 basis points pre-pandemic Q1 fiscal '20. And you were closer to 95 basis points on a pretty regular basis, if I go back fiscal 2018, fiscal 2019. It seems like cards are certainly impacting that. But is there anything else worth highlighting?

I think you're also -- implicit in your question is how does this compare to our peers? And I think when you look at the P&C business, to say this is TD's P&C business versus somebody else's P&C business, you're not comparing apples-to-apples there. Because some banks have the direct investing business as part of their P&C business. We don't. We have it in our wealth division. So I think a better comparison is what we call Canadian Retail, because One TD is what we are. We are a fully integrated bank. It makes sense for us. That's how we run our bank. It's One TD. When you come to TD, you expect everything from TD and not just that you are just this client or that client within the TD sort of offerings. So when you look at Canadian Retail and you look at the same analysis you go through, we look very good because that's how it should be. And then -- and so I feel good about it. But having said that, like through this pandemic, again -- this would be a consistent theme that you will hear from me. I think trying to compare year-over-year numbers and all that becomes more difficult. Again, without a doubt, we had an interest rate impact. We are more interest rate sensitive than perhaps other institutions. But what that means is that, yes, the card business has had an impact, particularly on noninterest revenue. And secondly, related to our deposit business, the service fees were much lower through the pandemic, and now they're starting to normalize and -- because of the #1 share we have in checking. So there are service fees related to that. So you see that impact as well play out. And then lastly, I think the way you define it is that when you look at average earning assets, there, the mix has changed. Card balances went down whereas lower-yielding, very good business, but lower yielding on an apples-to-apples basis, mortgage and commercial business has gone up. So your average earning assets have gone up, generating lower yields than what you had pre-pandemic. So those are the kind of explanations on the numbers you've just outlined. But overall, again, I will say that if you look at what's happening over the past couple of quarters, you look at sequentially what is going on, and -- I'm very happy with how these numbers turn out not only on an absolute basis, but how they look relative to our peer group. I think quarter-over-quarter, we are up 13 basis points in the same analysis you've said, 13 or 16. I don't know. It's one of those numbers, I'm sure. Your people will make the calculation. But the trend is very positive and we feel good about that.

You talked about TD's direct investing business, definitely very topical. So I thought we'd just touch on that. National Bank and Wealthsimple, going to $0 commissions. And the question is, will TD match that offer? What's the competitive response? How do you see this all playing out in the market?

Meny, we've been in this business, I think we were the first bank in Canada to get into it in the mid-80s, I think. And we've seen price compression come and go. We've seen a lot of different sort of business models emerge out of it, and we've been able to manage it very well. So is this a shocker? Absolutely not. Ours is a very large business, fully segmented, very integrated to the rest of the TD offerings. In fact, 80% of our Direct Investing clients have other TD products and TD relationships as well. So it tells you how integrated we are. Secondly, the offerings we have, from various sophisticated options trading to offerings for active traders, for an offering for long-term investors, they are offerings, there are specialized products available in each of these segments. And is it -- I mean, you should -- this should not come as a shock. But based on certain types of traders, we have special arrangements based on their needs and their offerings and what value they need. And so when we look at, oh, our trading commissions are X, well, the reality is, depending on which segment you're looking at, it could be less than that. So I think it's important to keep that in mind. So we feel very comfortable with our position, the offerings we have integrated with retail, the products that we offer, the services. If you look at thinkorswim platform, there's nothing like that in the options trading business. And if a client needs that, that's where they're going to go. And finally, I mean, there's a lot of sort of write-ups on this. But the overall commissions in this business represents about 1% of total revenues like TD. So we've got to keep this in perspective as to what it does to the bank. Then to think that, "Oh, my God, this is a major, major -- I'm not undermining anything." Every part of our business, I love every part of our business and the business model around it. But our job is to adapt to the environment we find ourselves in rather than hoping, wishing and praying that we go back to the good old days. That does not happen. And we have shown consistently that we will adapt and we will adapt faster than others. And I have no doubt that we will do so. And another point I'd make. We just introduced TD GoalAssist. That's a new offering there. That competes very well. If a client is just requiring vanilla type of trading and services and not the other value-added services that I just talked about. So important point is an event that has occurred. I don't want to underestimate as to what it means. But we feel very comfortable with the business model we have and the value proposition we provide to our customers.

We talked a lot about Canada this morning, but I definitely want to talk about the U.S. Retail business, which is a very important business for you. And just a broad question, really just from a strategy point of view. What is the strategy for the U.S. Retail business, right now as you see it, especially coming out of the pandemic into still early days of a recovery?

Well, we are terrifically positioned in the U.S. As you know, we've got about nearly 1,200 locations, Maine to Florida. We are a large player on the eastern seaboard. The scale we have, we've got 10 million customers in our bank business. I'm not counting what we have on the TD Securities side or other businesses, but purely a TD Bank, America's most convenient bank. So we are a large-scale player with a terrific value proposition being America's most convenient bank. And again, really well positioned for the recovery phase. And I know there has been some talk about how come your loan growth. In fact, the loan growth is negative in the U.S. in the last quarter reporting. But I think we need to look at it from 2 perspectives. Number one, the level of activity we are seeing in our business is terrific. The number of clients, the number of new customers we're attracting. I think Greg on the call talked about how many -- what has happened to our core checking business, and that is a transaction account that comes to the bank. And so overall, I feel very comfortable as to what this is doing. But there is this unique thing about the level of liquidity in the U.S. market. The PPP loans, just less than $1 trillion worth of PPP loans got done in a short period of time. And a lot of those loans are forgivable loans and like what we have in Canada. If you look at the level of liquidity, the level of capital markets activity, the level of stimulus that is in the economy. And of course, the activity is there, but it's not followed by loan growth as quickly as you would have expected in a historic cycle because of this unique circumstance. So all this will moderate as usual, they moderate. But overall, we are well positioned for growth. We are a growth company right across TD. But particularly our U.S. business, given the age, it's still a very young business. And we're building out our wealth offering there. We've got a terrific relationship with Schwab that is -- it just plays to our strengths again. So when you look at our U.S. business and if you look at the numbers from a growth perspective and once all this extraordinary activity that happened on the fiscal and monetary side clears off, we feel very happy as to where we are headed. We are growing there and expect us to grow even more smartly as this recovery takes hold.

I wanted to shift the talk to M&A. Any time you talk about your U.S. strategy, it's hard not to think of M&A. And I think you've talked about it pretty directly as well. And I guess the first fundamental question is, should the Street View M&A as a potential catalyst for your shares? Is that something you would agree with?

No. I think we have said -- when I was down in the U.S., when we were building out our businesses, that acquisitions was a requirement because we were a subscale player. We were largely in Northern New England. We did not have a growth platform. We did not have the products and, frankly, did not have the brand. And we needed to create a sufficient scale to really accelerate growth. And therefore, acquisition was a core part of how we looked at and how we're going to grow that business. Today, we have the scale. We have the brand. We have the customers. We've got 10 million customers and growing like -- if you look at the number of checking accounts being opened at TD Bank, America's most convenient bank, we might be only on the Eastern seaboard, but we rival for any national player as to the level of activity that we are seeing at our bank. So we are not strategically challenged given where we are. Yes, 10 years ago, there was a different story. Not anymore. Having said that, there's a huge amount of potential there. And if there is a way that M&A might accelerate our growth aspirations, of course, we should look at it seriously. But I've been very clear as well. It would have to make strategic sense. It will help to make financial sense. It will have to make risk sense and as importantly, cultural sense. And so M&A, yes, of course, it's part of our thinking. But you should not think of it -- whenever we've done a deal, I think the markets have been pretty happy as to how we do it. We are very disciplined players in that. I think what you should look at from a TD story is, yes, there's potential for M&A. There's always is. But it's not driven just because there is capital, excess capital. It is -- if it makes sense, then I'm sure our investors would be happy to provide the capital if we didn't have tremendous amount of excess capital available, because that's how we look at it. I think the TD story here is, if you look at our Canadian business quarter-over-quarter, you look at the momentum we are creating, record real estate secured lending volumes. You look at what's happening on the commercial banking side, look at what's happened on the card spend side. And I would add, by the way, I mean, this just came out. I haven't read the whole report. But Global Finance rated TD the best digital -- consumer digital bank in Canada. We are also the most innovative digital bank in Canada, and I think they've got some statistics as to how big a digital footprint we have and the level of engagement we have. I mean those are the drivers of what our Canadian business is. If you look at our wealth and insurance business, of course, they are moderated, but they are running well above pre-pandemic levels. U.S., I just talked about what the story is there. And then finally, wholesale, I mean we talked 4 or 5 years ago that U.S. dollar strategy is critically important to us. And we've been investing in it. We've got people, capabilities, and see what it has done from a trading revenue perspective, the type of mandates we are winning and given where we used to be versus where we are today. That is the TD story, and then that's what we should be talking about. And of course, I don't want to belittle it, again if it fits all the conditions that I've laid out, of course, we look at it seriously. But it is the organic growth and what we're able to achieve. And now we are in a recovery phase, and how TD is really well positioned to take advantage and leverage the recovery phase post this pandemic.

Point taken on that, but maybe I'll bring it back to 2 capital deployment-related questions if you don't mind, while the clock ticks down. Just fintech, I mean, you've been pretty broad in terms of the kind of targets that you said you're interested in, in the U.S. Where does a fintech acquisition, and a sizable one at that, fit in? We know -- if we look at where fintech is having the most impact and likely to continue to have the most impact, it's on the consumer side, payments, in particular, in the U.S. So it's in the heart of your footprint where a lot of change is happening. How do you see that playing out? And really more, what's your appetite from an M&A perspective on the fintech side of the equation?

Looking at fintechs, partnering with fintechs, investing in fintechs and, frankly, acquiring fintechs has been part of the TD tradition here. You look at -- I'll give you 2 examples in our Canadian offerings. TD MySpend, just a terrific, terrific launch, close to 2 million Canadians now using it. That is a partnership with a fintech to provide that platform. Of course, we had to modify it to make it more TD-like, make sure that it's secure and what happens with the data, the experience and the engagement that we create. But the core platform is through a fintech in which TD is a sizable investor. And so another one is TD for Me, which is a geolocation service where you get personalized offers and services based on where you might be. Again, that's a -- the core platform with lots of modifications done by TD is a fintech in which we are a sizable investor. Look at Layer 6, the AI platform, that's an outright acquisition. Because it's a huge capability that was absolutely required and, frankly, it's turned out to be a terrific acquisition for the bank in what it has done for us and how it has helped us grow our bank and, frankly, engage more with our customers. So there has been a history and a tradition of dealing with fintechs. Now what you will not expect from TD is that, are we now in a totally nonbanking part of the world and say, there's this great fintech idea somewhere here. And how about TD, you just make an investment because let's swing for the fences and it might turn out to be terrific. That business, we're not interested. It's got to be connected, where we can bring value to our customers or attract more customers to our franchise. That's how I look at fintechs, but we are absolutely not shy at looking at them as long as they can provide value and -- to our customers and to our franchise.

And just as a follow-up, as we run a little bit over, but have you seen those kinds of examples? I mean M&A is always hard. You might not always get what you want. But have you seen examples of fintech, sizable fintechs that do meet all your criteria? Do they exist out there?

We have. We have. But there's another factor, Meny, and I should have mentioned this as well. And we have and looked at it seriously as well. But there is certain types of -- including in the financial -- connected to the financial services industry, certain types of fintechs don't -- are not conducive to a regulated world. And we should not forget that as to what that means and how that would play. So do we look at it, and sometimes it meets all our criteria? Yes. But you cannot make it work in a regulated environment and, therefore, we will -- not interested to pursue it. So yes, so it's an ongoing review of what is available and what makes sense. And that you would expect that from TD because that's the type of bank we are.

With that, we're out of time. We could talk for a long time more, but we'll have to do it at another opportunity. Bharat, I want to thank you so much for speaking to me this morning and looking forward to seeing you very soon.

Meny, terrific to see you again. I am looking forward as well. Hopefully, we can meet in person. And folks who are listening in today, thank you. Thank you for your confidence in TD. And like I said, we are well positioned as we get out of this recovery, and I look forward to seeing a lot -- many of you over the next few months in person, I might add. Thanks very much. Thanks for having me, Meny.

Bye-bye.

Bye-bye.