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

Okay. Thanks again for joining us. I'm here with Michael Rhodes, who was just named the Group Head of TD's Personal Banking business. Thanks for joining us, Michael.

Thank you.

I have a bunch of questions here, but one I'd like to start off with, since you're relatively new to the role last fall, right? Can you give us a bit of overview of your background at the bank and what your first impressions are on the personal banking business or from your current seat?

All right. Well, thanks. So two questions there. Let me take the first one. Actually, I'm new in my role, I actually started January 1, so I'm 10 weeks in. So all of you have the experience of 10 weeks of wisdom here. But in any case, I've been in financial services for about 30 years. If you think about my financial service career, it's been around consumer, credit card payments, small business and then some commercial and a bit of wealth. The -- I've worked in the United States, United Kingdom, Ireland, Spain and, of course, now Canada. I've been with TD since 2011. A lot of interesting roles over the time. I've had the opportunity to work in technology and business units and operational functions. I was the CMO of the world's largest independent credit card bank for a while, that was sold to Bank of America. I was then the CFO of one of America's bank subsidiaries in the U.K. And then I joined TD in 2011. I ran the credit card business. My joke was when I joined the credit card business, we were the sixth largest credit card issuer in Canada. And I told everyone there my claim to fame maybe, as I told everyone, we're going to be #1 in 5 years, and we actually got there in 3 years. And so that was a good run. That may be one reason I'm sitting here with you today. But in any case, I went from there and then ran America's most convenient bank, retail bank, and then came back to Toronto to run all the shared services, so technology, digital data. We did a Layer 6 deal and some of the operational functions, call centers for all collections, things like that. And then at one point in my career, we were just mentioning, I looked at diversion at one point. And actually, I left Bank of America in 2008. And I don't recommend anyone doing this, by the way. I decided I want to do something different, I raised some capital and bought a small specialty finance company, I raised $300 million of equity capital and raised a specialty finance company in the U.K., which then was turned around and sold. The shareholders were very happy with that return, let me say that. And so that's a bit about me. I'm thrilled to be in the consumer bank, now the personal bank, as I have a lot of personal banking experience. And I'm quite energized by the role I'm in right now. Early impressions, honestly, we have so much strength to lean upon. If I think about -- I start with the brand, like our brand is just fabulous in the Canadian marketplace, #1 for awareness and consideration, and that's obviously very, very powerful and helpful. We have the best branch network in the country. And I say that with great confidence. We're 90% urban. We are #1 -- if you look at the markets in Canada have 500,000 people or more, we're #1 in 84% of those markets in terms of branch share. And so we're where the people are, which is terrific. On the digital side, we have more digital presence, whether it be web traffic or usage of our mobile and online platforms, anyone else in the marketplace. Our deposit business, it is a real source of strength. It's the largest deposit business in the country, and we're growing share. We grew about 60 points of share, last time I looked. And at the same time that we've been able to increase our wealth business through our mutual fund referrals. And so we're both growing the personal bank's deposit business and creating a referral engine to the wealth business through the mutual funds, which is terrific to see. And the other thing I'd say is, look, I really -- the energy and the enthusiasm of the colleagues I work with is just off the charts. And that really matters in banking. I know when JP was given an introduction earlier, he talked about the value of in-person and being in person. And for us, that value is so terrific because I'm just really proud of the staff that I'm working with. And so that's a bit about my background.

And the impressions. So the Q1 call, there was one question asked about market share. And you're -- in some market, you're lagging a bit. And your response was -- the tone was a little bit, we can do better. I'm curious about what areas do you see that need some work? And how are you planning on addressing those areas?

I do remember that question. It was the first question of the earnings call. And that was my first earnings call, so I appreciate -- or answer that in here. Thank you. The question was specifically around our res business, our real estate business. And if you look, on the one hand, you say, well, geez, our growth on a year-over-year basis was 9%. And just about any market, you'd say that's really, really strong. But honestly, in the Canadian market right now, that's a bit of a laggard. And so when I just described all the strengths we have and then I say, but we're not leading in growth in mortgage and home equity, those two don't seem to fit together. And so I said, look, we can and should be doing better. And that's why I did call out. And I describe the strength of the bank, really If you kind of double-click specifically on the RESL business, beyond the fact we have all the strengths I talked about earlier, look, we have a multichannel approach where we have several different ways we could acquire customers. And we're probably the most distribution of probably anyone in the marketplace. And we're seeing some momentum in a number of places. We've made some adjustments to our product suite and our broker channel, which has worked well. Our mobile mortgage specialists, who aren't really tethered to a branch, but their productivity has increased at double-digit pace since pre-COVID. And so we're seeing momentum, but we still need to be doing better. And we do have a lot of things that we're doing to ensure that we're going to get there. When I was giving my background in terms of who I am, the one thing I didn't mention, I actually started up my life as an engineer. I was a mechanical engineer of material science and actually practice as an engineer for a while. So I do have a bit of an engineering mindset. And if I look at our RESL business, one of the things I've done is I've asked for a complete end-to-end review of the process. Everything from when we originate. If we take an application or being a branch or through a mobile mortgage specialist through underwriting, through funding, through servicing and almost an industrial engineering mindset. And look, the good news is we're actually seeing opportunities there. We're seeing opportunities on the account management side. We're seeing opportunities through auto adjudication. We're seeing opportunities in creating better connectivity between the underwriters and then the folks who are taking the applications, our advisers are taking the applications. And we're seeing opportunities in terms of tooling that we bring to bear, whether it's the data, the analytics, the workflow management, things like that. And so when I was on the call, what I said was we can be doing better. But I also said I believe we have momentum, and I actually really do believe that.

Well, one of the changes I believe you made recently to your -- on the distribution side -- sorry, the FlexLine product is being in...

Offered to the brokers. Yes.

Broker channel. So what -- why wasn't it there before? I guess that'll leave me with my first question.

So it's -- when you work inside a large bank, when you look at the prioritization of kind of what you're offering, where there's always a bit of a pecking order. And we have a certain amount of money that we're going to fund and you have things above the line and below the line. And the broker channels has become more and more important, particularly with COVID and where people are going into a branch less. And to be fair, one of the reasons we had been lagging in RESL was because people are coming into the branch less we were more branch-dependent probably than most. And so we saw the broker channel was actually accelerating. It is like this is the time that we need to roll the product out.

And is that FlexLine -- I'm a little bit confused sometimes, the combined mortgage and HELOC projects, like the regulator is kind of shining a light on that. And it's a big product for every bank at this point. And TD was an innovator and that's a big product for you. Is that -- what are your thoughts on potential regulatory oversight of that particular type of product?

Yes. And certainly, some regulators, you've probably seen some press [indiscernible] have commented on the product. Look, at the end of the day, whenever you're lending money, you want to make sure that you're doing it in a prudent way that's good for the customer. We're pretty confident we understand what the regulators' intentions are with the product. And we believe that our path forward, it is going to be a good path. If I actually look at the combined loan product and HELOC in general, it's actually interesting. When you look at some of our numbers, if you look at our financials, it's hard to see how we compare to the marketplace because we actually have more granularity than most in terms of how we report out. If I look at CBA data, which we probably don't have access to, but I do, we're fourth in the marketplace. So we actually see this as an opportunity because in most places, we're first or second in terms of our product share. And here we're fourth.

Fourth in what like...

In volume. In volume.

Volume.

Just on volume, just a balance sheet metric. And so our aspirations go from fourth to a higher position in the league tables. And we can -- we very much believe we can do this in a way that's absolutely compliant with regulatory expectations.

Got it. The credit card business, so that's one where I don't know TD is a big market share, of course. But if I look at pre-COVID balances to today, that's one where your recovery has been slower than some of the peers. And I'm wondering, is that because you had a heavy travel card emphasis? Or is it the legacy -- not legacy, it's called the MBNA product because that's a more borrowing-based product, and that's just not what people are using anymore or as much?

Right. So I'd probably say yes and yes.

Okay.

So it's interesting. So we've -- you just subscribed two different segments, one of which is the high-end travel cards, which is the -- our Aeroplan is our anchor product. And that's just -- it's a fabulous product. And actually with Aeroplan, the product was just relaunched actually during COVID. And the relaunched product, it's the best travel product in the marketplace, part on. Unfortunately, people haven't been traveling as much. And we actually see with our spend data in the credit card business that we still wound up to pre-COVID spend levels on travel. We are on everything else. In fact, you look at our balances and you see our balances shrink. But actually our spend on our credit card business, if you compare Q1 2022 to Q1 2020, which was a pre-COVID period, our spend is up 13%. Now our balances are down $3.5 billion or so, roughly $3 billion or so. And on a year-over-year basis, our spend is up 23%. And so we're actually seeing good spend patterns, but it's not actually translating into balances. So a few things as you unpack this. Clearly, the travel programs -- without that high-spend levels, the travel programs haven't achieved that level of spend yet, but we actually see momentum there. We're actually -- we're confident, actually, even in February, we're seeing the momentum there. And so we feel good about that. And then on the balanced consolidation side, like when COVID hit, lots of stimulus programs, customers flush with cash. The need for balanced consolidation loans has gone down, and that's impacted the MBNA business. If I think about the recovery from here, I actually think the travel rewards category is going to probably recover faster than the balance consolidation category just because there is so much liquidity in the system. Now that liquidity in the system is not all bad for us. In fact, that translates into very strong deposit balances. And you can again see our deposit balances are quite healthy. And I've spent a lot of time on credit card. I can probably go on this for forever.

I do have a follow-up, and it's on the revolver rates being so low. I mean I anticipated, my simplistic view of the world, that government programs have got wound down when September last year. You'd have a few months go by and people will start having to carry balances again. Or maybe my time and expectations are off, but not just now, but it sounds -- I've talked to a few other bankers. And it's -- they seem to be pushing back expectations for when revolver rates will actually go back to pre-COVID levels. Why is that? And what's your outlook?

No, so I think our outlook would actually be pretty similar. That's taking a while for revolve rates to get back to pre-COVID levels. I will say they're firming up and not going down anymore. They're actually probably edging up a bit. But look, I know the stimulus programs have stopped and some other factors that kind of came into play. The truth of matter is -- which is good. The consumers still have a lot of liquidity, even despite the fact that the stimulus programs have ebbed. I do remind folks though every once in a while that there are bunch these natural hedges in the credit card business. The revolve rate goes down, actually, your loss rate goes down also. And I know the focus these days is pretax, pre-provision. We got on NIAT basis. It's actually -- it performs well. All that said is, look, we want to see the balances come back and are confident they will. As I said, I think the travel is going to recover a little faster than the balance consolidation.

So the other today versus pre-COVID comparison I look at is margins. And your margins are still further off from pre-COVID. How much of that is because of this cards issue we're talking about because it was the highest spread products? And how much of that is due to other factors? What might those be?

So obviously, everyone tracks our margin and you can see what it does on a quarterly basis. And when I came to the job it was the first thing that I did show me the margin trends and what's going on. Look, at the end of the day, look, we are more interest rate sensitive than most. And so when rates are going down, you feel that in terms of margin compression. My hope is when rates go up, you see the opposite effect. And certainly, right now, it seems like we're in a rising rate environment. But it's a combination of mix and while card balances are much lower balances in aggregate than say, RESL on the balance sheet. They're much after yield. That mix really does matter a lot. And their loan margins also and your loan margins look on a relative basis. And also balance sheet management strategies kind of come into play. So those combination of factors have caused some -- of a relative decline in our margin what we might see for others. That being said, coming into a rising rate environment, I think the things that have been -- you've seen it looked a little adverse. We should hopefully start looking a lot more positive.

Right. And that's my -- leads into my next question is a rising rate environment. How much pricing power do you have on the deposit side of the balance sheet such that maybe you can overshoot some of the rate sensitivity metrics you've given us?

Yes. So I think about a rising rate environment, I'll give you a number, which is actually disclosed number. So is in the first quarter, we actually disclosed the impact of that.

You can give us the other number.

Okay. That's fine.

We're among friends.

Yes. And I'm sure we are. [indiscernible] maybe first one on these.

I don't want to be the last.

You don't want to be the last. No, but if you actually look in our disclosures, you see that just a 25 basis point increase in the short end for the enterprise is worth about $394 million. About half of that is in Canada. So that gives you kind of a sense of the leverage on the ups for how we see margin going forward. And now I tell you I was going on this, talking about -- what was the question again?

I guess pricing power on deposits.

Oh, pricing power, okay.

What's the...

Yes, and then why is that pricing power so attractive. About 3/4 of our deposits in the Canadian bank don't attract rate, if you will, and so basically 0 yield, about 25% due. And so that 25% could be very thoughtful in terms of in the marketplace, what's the customer expectation, what's the competitive dynamic, what the yield curve look like. But think of about a 75-25 mix, but...

And this 75, you don't pass anything through...

I guess with the 75, you actually need to kind of watch that and monitor it very, very closely because you don't pass anything off. But there are mix shifts that can happen between the 75 and 25.

Got it. But I imagine, given the level of excess deposits that are across the system, the competitive intensity just isn't that high. Or is it more of a behavioral issue?

I hate to forecast competitive intensity in the future. So I just know -- like we've gone through prior rising rate cycles like -- and this is different, without a doubt, what we're going through right now. But if you were to look at our prior raising rate cycles, you could probably use that as a proxy to think about what this will look like.

Okay. Expense management and investment spending. So we're in the phase now where banks are gearing up for more initiative spending. I'll start with what are your areas of focus right now. What's the priority for these investments?

Sure. So probably 5 or 6 areas of focus, actually, today was -- yesterday was my first visit for the market. When I took this role, I anticipated basically going from West Coast to East Coast and visiting every market, which I've failed due to the kind of resurgence of COVID. So I was actually in one of our branches here in Montreal just yesterday. And a great team, great staff, fabulous attitude. And I asked our divisional leaders and said, "If you could have one thing, what would it be? He said more advisers." And so one of the things we are investing absolutely in this year is more advisers. And so you're going to see that as the year unfolds. And that's been a common story you've probably heard from us for a while. But beyond advisers, how else do we stimulate demand? It's going to be marketing. Being an ex-cards guy for a while, that's mostly a direct response business. And so I've been a believer in the value and the power of marketing to stimulate demand. And so you're going to see us investing more in marketing. You're going to see us invest in our operations modernization. We heard earlier about kind of tech and ops coming together and the digitization of the world. Yes, there's digitization going on. It's going to affect our operating areas. And so we're investing a lot beyond mortgage in that. We're also investing in a new operating model between tech and business. And this is actually my prior role. I ran technology and much of other things. Now I'm in this current role. But one of the conundrums you have inside a large complex organization is when you try to deliver technology is we're generally very siloed in terms of how we operate. And so how do you actually deliver technology across multiple silos and do it effectively? It requires a change in your operating model. And this is something that some banks in Asia have done, some banks in New York have done. And we're doing it now ourselves, which is -- you're going to hear us talk about platforms and journeys or platforms or enterprise capabilities, journeys of the way a customer engages with a bank. And we're putting these platforms and journeys together to cross-functional pods and empowering teams to drive change. And the whole idea is here, we want to increase the metabolic rate of driving technology change for the benefit of our business. And so you're going to see that. You're going to see investments in mobile. And I call mobile specifically because mobile is a growing channel. All our channels might be reasonably flat. Mobile is growing, without a doubt. And those investments will be in capabilities. We just launched a new reward center with Starbucks. It's just great to earn and burn with Starbucks. You can actually pay for your coffee in line with -- through the TD app now and all sorts of interesting things you can do with that program. But beyond the capabilities, probably the most important investments we're going to make are the ones you don't see. And those are the infrastructure investments. And so we're actually moving our mobile application in Canada to cloud. By doing so, we actually are going to -- we're going to bring better tools for engineers so they can write and deploy code quicker. So it's speed, increase the metabolic rate. And we're also -- we adopted a modular architecture to our services within mobile. And so again, historically, if you want to make change your mobile app, maybe 5 different groups want to do something. You had to coordinate all that into one giant release. And now by creating modular architecture, we can actually run our change programs in parallel and get more work done. And so you're going to see that type of investment. And so my guess is this year, you're not going to sit back and say, "Oh, geez, look at the great investments they've made in infrastructure," because you won't see it. What you will see is once we make those investments, and then we're talking this year, you're going to see an increased metabolic rate or the rate of change so we can actually be there for our customers in a really fast way and understand their needs and drive the solutions to support them.

So earlier, I heard you talk about the branch network, 90% urban, the best in Canada. And then a lot of emphasis on digitization. And this is the question everybody asks, and I myself included, and I think it's one I want to kind of feel the pulse of things. With all this digitization and increasing proportion of transactions online, what does the future of the branch look like? Is it just -- well, it will go down slowly and we make them smaller or something like that? Or is it something else?

Yes. So it's a good question. Let me start out with telling you a little story, if I can.

Sure.

So what you do when you're new in the role, one of the first things you do is you call customers and you talk to yourselves. You don't rely on your marketing research -- for your direct reports. So I actually got on the phone and called a bunch of our customers and said, how are we doing? And I would tell you -- and the way I called them is we do these surveys with customers. And I called customers who thought we were fabulous. And I usually call some customers who think we made a mistake in how we service them in one way or the other. And everyone regardless of what I talked to, they actually referred back and said, "I just love dealing with Jane in the branch or Harry." And actually we're referring to actually individuals in the branch. And one thing that you've heard from JP when he was introducing is he said, it's great to be here in person because personal connectivity matters. When it comes to complex financial products, being in person actually does matter. And meanwhile, simple transactions will be going. And then we'll be going and going digital, simple sales, simple service transaction in mobile going digital. Some day, they might be going virtual reality. And you're going to see in the branch, there's a shift. There's a shift that's happening away from service towards what I call the more complex sales. And for their having a physical presence, we believe matters because you're going to do those sales, they're either going to do them, work from home. You're going to do it in a call center environment or you're going to do them in the community. We believe that being in the community matters. And being 90% urban, we have the right locations. We're where the people are in order to make that happen, always going to be monitoring to kind of see. And then we'll make tweaks to the portfolio as time goes on. But I think that's our approach.

I guess the end of the branch is an exaggeration, right? A quick one on the expense initiatives. In the world that we're in, how quickly can you pivot away from if it's batten down the hatches?

Yes. So I mean if you look at -- the quick thing you can pivot away from is obviously marketing. And so when you have some excess dollars, you probably want to spend a bit on more marketing to drive volume. And when there's not, you can kind of pull that down more quickly. I would tell you, when it comes to some of the kind of technology change, the things that are going on, like our intention is to be actually quite persistent with that funding because we don't think that the need to modernize our operation is going to go away. And so one of the things that I'm really challenging my team to do is we need to figure out how to not cut back on the investments we're making but how we lean out the things that we're doing as we can afford to pay for them. And so I'm very much focused on leaning out our operations to create the call for the furnace to drive the growth.

Well, with that, I'd like to thank you for coming to Montreal.

Well, thank you.

Really appreciate your presence here, and good luck for the rest of the day.

Appreciate it. Thank you.