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

Okay. Good morning, everyone. My name is Darko Mihelic, the Canadian bank analyst here at RBC. Welcome to another fashion, a fireside chat. This time with TD. We have Kelvin Vi Tran, the CFO here to speak with me. But before we begin, I'd like to remind you all that Kelvin's comments today may include forward-looking statements. Actual results could differ materially from forecasts, projections or conclusions in these statements. Listeners can find additional details in the public filings of TD Bank Group. With that out of the way, Kelvin, welcome to our conference, and thanks for joining.

Good Morning, Darko and thanks for inviting me.

So maybe to kick off, I mean, obviously, the news -- big news of recent for TD is the purchase of -- or the planned acquisition of First Horizon. And I think I wanted to start a slightly different angle because obviously, we've been sort of learning about First Horizon, I have a colleague who covered the stock, so it was great to get in touch with him. One of the things, though, that I'd love to sort of dive into a little bit is when I think of TD Bank U.S.A., America's most convenient bank, it's in the name, right? Convenience is the brand promise. I'm not as familiar with the First Horizon, which seems to be a bank that was built up on mergers. So I'm not sure what the brand promise is of First Horizon or what it's specialty or maybe if you could just talk a little bit about First Horizon. Give us an idea of what makes it a little different or similar? Are there any cultural differences? Maybe we can just talk a little bit broadly first about the actual franchise.

Sure. Good morning, everyone. It's great to be here. We're very excited about this deal. As you've said, we've been very busy. This deal would provide us with an enhanced scale and distribution in really high-growth areas. And if you look at their footprint, they are expected to grow 50% faster than the rest of the U.S. market. And we have been fairly public about our goal to continue to invest and grow in the Southeast market in the U.S. and their footprint is just adjacent to us and provides us with a beachhead into a really high-growth area. And as you know, scale is really important in the banking industry. That would enhance our scale because of the focus on technology spend, and so now we could build once and use many. Your question is a very relevant one, whether it's brand or even a question of culture, because some people would just jump in into the metrics right away. But culture is really what makes the combination of the 2 organization successful in the long run. So first, on the brand. First Horizon is a well-run organization with a strong brand, strong customer base and leadership team as well that understands the market. We -- even before the due diligence, we already compete with them in certain markets. And so we know what they're like. They have strong bankers, and we respect them for that. And so we think this is going to be a great, great combination. In terms of culture, we're acquiring an organization that is aligned with our vision and our purpose and our strategy as well. So if you look at their bank, they're locally rooted with a strong balance sheet and also with a disciplined risk culture, that's what we're all about. They have an experienced leadership team that has a growth mindset that we want to grow. And then also, they're a value-based organization, very similar to TD. We're committed to enriching the lives of our customers, colleagues and the community. So if you put that all together, it's a culture that prioritizes the retention of customers and growth thereof as well as talent retention and their development. And so this is a top priority for us. And we're going to work very, very hard at developing a comprehensive plan to make sure that we retain the strength.

So is it safe to say that the customer set is similar to your customer set at TD? Are there any sort of significant differences at all between the customer sets and/or opportunities therein?

Yes. And so when you look at the one TD approach that we're going to bring, like the WOW! factor from all legendary experience we're excited of serving First Horizon's 1 million customers. And we bring with us the significant investments that we've made in digital and our omnichannel approach to serving the customers when and where they want. In terms of their customer base, they are skewed towards a more affluent customer and a business owner as a result of their successful commercial banking business. If you look at their balance sheet, close to 80% of their loans are commercial banking, C&I related. And so they've been able to deepen those relationships with the business owners and their balance sheet reflects that. And then for TD, our footprint from Maine to Florida is fairly broad-based in terms of customer segments, which includes more affluent and business owners as well. So we know what their expectations are. We know what they need. And we look forward to combining the banks and serving those customers with an ever stronger platform in the future. And as to your question about whether the customer differences matter or not. I think it's -- a new customer is one more for the books. So I think it's positive because if you have customers that are similar to your existing customer base. You know how to work with them, ads to revenue without significant ad to cost. And like you said, if it's a new customer segment, we see that as a tremendous opportunity that we can grow the business with that growth mindset that we can then leverage across our entire footprint, not just the one in First Horizon. It's a win-win.

Now there was a lot of attention on expense synergies, but I want to shift the focus a little bit to potentially revenue synergies. So when I think of a large bank like TD buying First Horizon, I think of different product sets, different capabilities, and you mentioned yourself the WOW! factor. But can you get a little granular, like what is it that -- and are there potential revenue synergies? Like could you bring new products to the -- could you increase lending limits for commercial lenders at First Horizon. Can you give us an idea of anything that might exist there? And what would you be most excited about?

Yes. We see a lot of opportunities. And as you've mentioned, we see revenue opportunities, but we have not included that in our investor deck because we want to be conservative. So the way we see it is that the business mix is highly complementary. We add scale to the commercial banking business and then also provides the TD to bring our strength of the retail franchise to the First Horizon footprint. So let's talk about retail first. The biggest opportunity is applying the TD business model for growth to First Horizon's very attractive high-growth market. And the competitive advantage for TD is what we talked about earlier, a WOW! factor, a legendary service. And our focus on growing core checking accounts. And so if you look at in the past, we've demonstrated the ability to grow in markets where we started out as an acquisition and then grow organically over time to gain significant market share. And then as we anchor this core checking product with our customer, we can then deepen those relationships to provide other products, such as mortgages, cards, we've been very successful with our recent launch of the double-up, our credit cards, and so we could offer that to First Horizon's customers including WOW! as well. And so those are the opportunities that we see in retail banking. For Commercial Bank, they have a strong commercial bank, and that would add to the scale of our existing platform in the U.S., which would make an ever stronger opportunity for growth in the future. A few of the products that I could mention is for TD, we're very strong in SBA. So we're #1 SBA lender from Maine to Florida for the past 5 years, and will bring that expertise and successful track record to First Horizon's market. We're also in commercial lending, we're also a leader in specific verticals and like specialized industries like health care and within our existing footprint. And we see also that would be an important opportunity in First Horizon's footprint. And then what you mentioned earlier is the strength of TD's balance sheet, right? Our balance sheet is very big. And so that would allow First Horizon's bankers to participate in a larger percentage of whether you're talking about syndicated loans or mandates. And as well, we haven't talked about it, but they also have a fixed income trading business. That's doing quite well. And so we could leverage that business and they could use the TD larger balance sheet, including a full product suite within TD Securities as well that we could launch to their customers. And then for First Horizon, they have strong middle market business, an asset-based lending business that they complement our existing offering at TD. And also their mortgage warehousing business is important, and we would help bring scale to that. So we see a lot of opportunities, and that would also include their expertise in verticals like the restaurant franchise business and health care practice solutions that we're less focused on. And so that could be a new opportunity for us. So I can see both sides, not just bringing TD to First Horizon, but vice versa as well.

And presumably, these things take time. We can't just expect them immediately. And I guess the question, Kelvin, would in future meetings, would you be willing to sort of start to talk about the possibility of these revenue synergies, or is it just too early? I realize it's probably early now, but is it something that you guys would be willing to talk about at some point?

Yes. At some point, I mean, we're working through our plan for integration. And then at the appropriate time, we'll talk more about it, for sure.

And one of the things that you just sort of did were hearing April 1, some changes to some NSF fees at TD Bank USA. Is that -- is there anything to think about there with respect to First Horizon? Is that a significant issue at First Horizon? Or -- and do you have to sort of blend the 2 platforms and excuse my ignorance, I don't know what's how First Horizon is actually operating. So is there anything there that would cause any friction or no?

Yes. Yes. So I think it's a great question. We've been getting a lot of that at MCB in the U.S. And so the first thing I want to say is when we look at the product offering like the overdraft fees, we look at what the customer wants, right, to provide value for those fees, and we continuously do research in the market in terms of what's competitive. And so when we announce those fee changes, we think it's an important feature that they want to help support the customer to give more control over their financials. And then over the long run, that would enhance the customer experience and also improves client retention. So I think those are good things. For First Horizon, their policy and feature are different from one's at TD. And so we do expect to harmonize their policy and fee structure to the TD fees. And we've taken that impact into account into our models.

I see, okay. Great. And with this acquisition, does it change anything with respect to your relationship with Schwab? And would there be joint initiatives or maybe you can just touch on if anything really changes with respect to TD and Schwab?

Yes. The short answer is no, Darko. It doesn't change anything to Schwab because of this acquisition. Schwab continues to be a strategic investment for TD. We have other relationship with Schwab such as the sweep deposit that you know, it is meaningful. And Schwab is a premier player in the wealth space, and we've been very comfortable with that investment and been performing really well. First Horizon does have a wealth business that we talked about earlier, and they're highly complementary to TD, but not of the same size and scale as, obviously, a Schwab investment. But we look forward to working with those very important clients to provide advice. And we have very similar product platform as well and going from [indiscernible] investment management to brokerage offerings. And so with the combination of First Horizon and TD as well, we're actually doubling our size of our wealth business. And this is, I would say, is still an early journey for us in the U.S. And you don't have to worry I'm pressing Leo to make sure that he step up the foot on the gas there. We expect a lot of potential opportunities, especially in the high-growth market. And then here, you also see our complementary products. So in the U.S., we have global adviser or a hybrid adviser from a digital standpoint that we can bring to First Horizon, including expanding certain offerings such as bridge loans or capital partners loans. And then they also bring in some expertise on certain structured products that we currently don't offer to our clients. So again, that's another opportunity for synergy, but it does not impact our relationship with Schwab.

Okay. One of the things that we saw with one of your peers was that they had also announced an acquisition, and they did a hedge. First time I kind of saw it. I mean I've seen previous acquisitions where we weren't really made aware of hedges, but this one resulted in a pretty big gain. I'm just curious, is there something similar that you guys are doing with respect to your planned acquisition?

Yes, yes. So the way when we look at acquisition hedges, there are really 2 items that you can talk about, like the more traditional is the foreign currency translation hedge because we're buying a U.S. bank. And our practice has been to hedge foreign currency risk for to stabilize our CET1 ratio. And we will continue to do that, including for this transaction. I think what you're referring to is the interest rate hedge. And so typically, you don't hedge the target's interest rate sensitivity because they have their own asset liability management, and they also hedge their own balance sheet. And so what we do when we look at this is, are we comfortable with their interest rate sensitivity and their approach and we are. But obviously, we will continue to monitor the situation. And if appropriate and relevant, we would put some overlay hedges at that point in time.

Okay. Great. We've seen over the years, a little bit of a move of TD to sort of invest a little bit more in its U.S. investment banking capabilities or TD Securities. And now that you're acquiring First Horizon, I mean, the size of your U.S. business is growing. Does this maybe spur more additional investment? And maybe you could talk a little bit about some of the First Horizon coming to TD as well in that front. But should we be expecting a more aggressive push from TD to invest more capital into TD Securities in the U.S.?

Yes, yes. So it's a great question. TD Securities is a growth business. We do want to invest in TD Securities, continue to invest and especially in our U.S. dollar strategy. And so here, we're talking about not just the front office individuals, but on the technology front as well. And so if you look at over the last few years, we continue to invest in senior strategic hires and experienced bankers that would bring with them experience relationships, important relationships or experience in certain verticals, industries or a product set. And all of these are really important building blocks, I would say, in continuing to build our builder dealer in the U.S. And that would include acquisitions that we've made over the last few years. If you recall, we made an acquisition on automated trading with Headlands, and then also with Albert Fried related to our prime services business in the U.S. So we see huge opportunities there. I know I touched upon the fixed income trading business for First Horizon a little bit earlier, and let me expand on that. They have over like 4,000 clients in the U.S., mostly they're deposit-taking institutions, mostly with the balance sheet size of less than $100 billion. And so they've carved a really nice niche market there where they help their clients manage their portfolio and trade in fixed income products. And these are products that we're comfortable with and that we understand. And so this would allow us -- just enhance the distribution scale in the U.S. And so we're very excited about that. And so it's not just on the fixed income side but also on the, as you know, in the retail side as well, they would have FX needs and foreign currency needs and so forth. And then for First Horizon, they also bring their new capabilities to TD like the SBA pool loans that they could bring to us. And so these -- both of these expertise and teams and technology bringing together would be very powerful. And because we see those opportunities, we'll continue to invest, including using the strength of our TD balance sheet.

But I guess maybe just to follow up on this a little bit. I think -- like whenever we -- I have discussions with a lot of clients, one of the things that comes up is TD's investment banking earnings for lack of a better word, relative to the size of the bank is relatively small compared to your Canadian peers. And with First Horizon, it's going to get even smaller. Are you targeting to sort of even keep it level with the previous, or is TD considering maybe now with a bigger balance sheet in the U.S. significantly growing it and making it a bigger component of your earnings. Any thoughts on that?

Yes, I would say all options are on the table. We like this business. And as you've mentioned, it's not the fact that TD Securities is small is that the rest of the bank is growing really, really fast. And that TD Securities needs to continue to grow, keep pace. And if we want them to be more than 10%, they need to grow at a faster rate than the bank, and that's not easy to do. And also, we need to be measured because in that business, as you're trying to grow too fast, it may not -- it might be inappropriate way to do so. But it is a business that we want to grow. We continue to invest like I've said, in front office and technology, and we're expecting great results from Rheas. Next time you tell him. You talk to him, you can say that I said so.

Will do. So let's just switch our attention to the Canadian business because we did see a little bit of acceleration in mortgages, but still a little bit less than pure growth year-over-year. Michael Rhodes suggested we wanted to do better in mortgages across all channels. And TD does -- is active in a number of channels. Might this require more investments or higher short-term expenses? Or maybe you could just elaborate a little bit on -- and sort of what TD's plans are with respect to mortgages in Canada. And we ask it's a fairly wide diverse audience here, there is some concern that housing prices in Canada are getting a little ahead of themselves, maybe you can weave that a little bit into your answer, too, please.

Yes. Yes, sure. So we've seen good growth in the rental business, but as Michael pointed out on the call -- on the earnings call, we have opportunity to -- and we expect to do better -- if you step back, we're very strong in the branch network, right? And so that's a historical strength for us. And we've been disproportionately be negatively impacted because of the pandemic. And so we expect and we have confidence that from the bank branch network, that would -- we would see a rebound as the pandemic and the economy recovers and traffic increases in the branches. We have been investing, and we'll continue to invest in the MMS, the mobile mortgage specialists workforce. And that is important to us. We've been investing, and we'll continue to add to that workforce. And the investment is not just people, but also on training tools that we provide them so that to minimize turnaround times. And we've seen good results in terms of productivity gains there. And we also continue to invest in product. Like you said, we look at different channels, the branch, MMS and then also the broker channel. And earlier this year, we launched the FlexLine product to the broker channel. It's like a HELOC product. And so far, we've seen really good uptick there. And so we're positive that it would bring some growth to our rental business. And then finally, on the retention is also important. And in the past, retention, a lot of that is actually done through the branch. And so now we've dedicated a team of people to work on retention of our existing clients and on their refinancing, and we'll continue to staff up there. And so these are the investments that we've made and will continue to make. In terms of the RESL book, we feel confident that the Canadian housing market would remain resilient. But as you know, we have underwriting standards that go -- that are robust and we look through the cycle. And so we're very comfortable with the quality of our book. And that's why it's important to have a consistent growth to be measured and continue to invest to take that market share.

And to be clear, like when we think -- when we, on the investor side here that you're investing in something, we think expenses. Is this going to be a material mover of expenses for the Canadian business?

Not this one. And as you know, we've been investing already. So it's not like we haven't been investing and suddenly you see a spike in expenses. So we've been investing and working on enhancing productivity and so that will come through over time.

Okay. Great. Now I want to pin you down on something you said in the conference call for earnings. You talked about -- so I want to get on to expenses here. And I think you broke down expenses into sort of 3 buckets. There's the table stakes, the stuff that you sort of need to run the bank, I think, is how you called it, then there were strategic expenses. And this is a longer-term kind of thing where you sort of have to invest and you don't really want to scrimp on, and then there's discretionary. So and this is where if you see the economy is recovering, you see you might dial those up. So let's talk a little bit about that, Kelvin, because we could be seeing some pretty decent revenue opportunities here. So -- and we know that you're quite sensitive to interest rates as a bank, typically TD is considered to be very rate sensitive. So -- how should we think about that? Should we think about you dialing up expenses here ahead of or during a rising rate environment. We finally got one Canada to take advantage of revenue opportunities? And can you give us like a magnitude thing? Is this something where we could see something significant from TD this year to dial up to spend, to grab more revenue opportunities? How should we think about that? Because I found that comment to be very interesting, something that I sort of grabbed on to as soon as you said it.

Yes, yes. So maybe I shouldn't talk too much during the conference call. So the way we think about expenses, yes, you think about it as cost but for us, it is about an investment to drive future growth, right? And the reason why we are rate sensitive is because we have a strong customer deposit base. And that -- the margins has been hurt because of the pandemic of the rate decline. And as it normalizes, then our margins normalize, too. And so I would say we look at expenses as an investment when we see rate hike that would give us an opportunity to spend more there. There's -- you still expect that the -- I would say, the benefit of the rate hike has a positive net drop to the bottom line. Because we're going to be measured in terms of our increase in spending, but that's important. As [indiscernible] you want us to invest to drive future growth because as interest rates normalize, then sometime in the future, it would hit a certain level, then you would want us to see these investments that we've made a year ago to be paying off. And so I think it's important that we continue to invest. And like we said, we're looking at targeting positive operating leverage and growing our pretax, pre-provision earnings.

And I guess, so just the concern or the thought process is, do you see expenses rise concomitant with the increase? Or do you see them sort of a bit of a lag and then expansion of the -- so in other words, could operating leverage be thinner and then wider later on? Or are you kind of always targeting like a level amount of operating leverage?

Yes. So it's a great question. The issue is we don't manage quarter-to-quarter. I know we do report quarter-over-quarter. And so what you try -- and the thing with the investment is that you don't want to dial-up, dial-down, dial-up, dial-down, right? Like it's just not an efficient way to run a business. And also, it creates a lot of confusion for the organization. And so when we talk about positive operating leverage, we're looking at the medium term, it would be measured. And then the expense or the operating leverage is going to bump around a little bit, but you want to do what's right for the shareholder to create long term value.

Okay. Great. Well, we're bumping up against the end of our time together. Our discussion has been fun. But I do want to just ask a quick question because we noticed that you put out some goals with respect to emissions. And I just wanted to understand a bit better, if you can maybe just chat briefly on it because it sounds like there's a move here to really cut lending to high emissions sort of areas. Maybe you can just clarify that for me a little bit, just so I have a better understanding of your ESG sort of announcement that recently hit the tape.

Yes. We're very proud of that release of the report, as you've said, we believe these [indiscernible] on our Scope 3 emissions, and that basically means that their admission to companies to which the bank provides capital to. And I look at it as helping our clients through their transition to a lower carbon-intensive environment. And so we're focusing on high emitting sectors such as energy and power generation. And it's going to be an evolving process, but it's a significant first step in our journey and helping them through this transition. I'm very, very proud of that. It's the right thing to do, but also we believe it provides huge opportunity as clients think about how they invest in clean energy.

Okay. Well, great. We are up to at the end of our time. Kelvin, thank you very much for participating this year. It's been a great conversation.

Thank you.

With that, we will close the session. Thank you all for attending.

Thank you.