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

Good morning, everyone, and welcome to the TD Bank Group's conference call. I would now like to turn the meeting over to Ms. Brooke Hales. Please go ahead, Ms. Hales

Good morning, and welcome to TD Bank Group's conference call concerning TD's acquisition of Cowen. My name is Brooke Hales, and I'm the Head of Investor Relations at the bank. We will begin today's presentation with strategic remarks from Barrat Masrani, the bank's CEO. Next, Riaz Ahmed, President and CEO of TD Securities, will provide more detailed commentary on the transaction. He will also ask Jeffrey Solomon, the Chair and CEO of Cowen, to share a few thoughts. Kelvin Tran, the bank's CFO, will then present the key financial details. Finally, Barratt will offer concluding remarks. We will then open the call for questions from prequalified analysts and investors. Also present on the call to take questions today is Ajay Bambawale, the bank's Chief Risk Officer. Please turn to Slide 2. At this time, I would like to caution our listeners that this presentation contains forward-looking statements, that there are certain material factors or assumptions were applied in making these forward-looking statements. And these forward-looking statements contained in these presentation represent the views of management and are presented for the purpose of assisting the bank's shareholders and analysts in understanding the bank's financial position, objectives and priorities and anticipated financial performance. Forward-looking statements may not be appropriate for other purposes. Please consult our new release and IR deck for addition information regarding materia factors and assumptions that may impact our forward-looking statements. I would also like to remind listeners that the bank used non-GAAP financial measures such as adjusted results to access each of its business and to measure overall bank performance. The bank believes that adjusted results provide a better understanding of management views the bank's performance, but we caution that non-GAAP measures and ratios are not defined terms under IFRS, and therefore may not comparable to similar terms used by other issuers. Additional information about our use of non-GAAP measures is on Slide 2 of the deck. Please turn to Slide 3 and I will turn the presentation over to Bharat.

Thank you, Brooke, and good morning, everyone, and thank you for joining us on short notice. I am incredibly proud of the franchise we've built in TD Securities over the years. We have grown our business organically and via acquisitions in close partnership with the bank, leveraging TD's brand, broad customer base and balance sheet. TD Securities has grown from a traditional Canadian dealer to a client-focused North American dealer through purposeful investments and execution of our U.S. dollar growth strategy, consistently deploying our One TD approach to serving clients across industries and regions.Today, TD Securities is a leading full-service investment bank, offering a wide range of capital markets and corporate and investment banking services to clients in key financial centers. You've heard us talk often about our aspiration to build an integrated North American franchise with global reach. Today marks an important milestone in that journey. This morning, we announced an agreement to acquire Cowen in a USD 1.3 billion all-cash transaction. As we have communicated frequently and demonstrated through our past acquisitions, our M&A strategy includes pursuing growth opportunities to add capabilities where we identify needs in our own businesses. The acquisition of Cowen will add key capabilities to a growing global markets platform in U.S. equity sales and trading and in U.S. equity research. It will also add scale and industry expertise across U.S. capital markets and M&A advisory. We have been deliberate in choosing to partner with Cowen at this time. As you know, a few months ago, we announced TD's agreement to acquire First Horizon. Given the highly complementary nature of Cowen's businesses and the limited impact for TD Bank, America's most Convenient Bank, we are confident that we can execute this transaction without any impact on the pending integration of First Horizon. Like the First Horizon transaction, this acquisition is about accelerating growth, both for TD and for our new partners. This transaction is financially attractive. The acquisition is expected to generate an approximately 14% adjusted return on invested capital on a fully synergized run rate basis and is expected to be modestly accretive to fiscal 2023 fully synergized adjusted EPS. Adding further diversification and scale, the Cowen acquisition will build upon TD's proven business model. And importantly, in Cowen, we are acquiring an organization that is culturally aligned with TD supported by a disciplined risk culture. We're confident that this transaction will accelerate the growth of the combined organization, delivering strong returns for TD, talent and all of our stakeholders. I will now turn the call over to Riaz to provide more details on the transaction. Riaz?

Thank you, Bharat. Good morning, everybody, and please turn to Slide 4. For those of you who are less familiar with Cowen, let me take the opportunity to introduce you to the franchise. Based in New York, Cowen is an independent U.S. investment bank serving clients from 29 cities around the globe. Cowen's strengths are highly complementary to TD Securities' existing businesses with minimal overlap. The acquisition will add new capabilities in U.S. equities, including a strong sales, trading and execution platform. The acquisition will also add a renowned global research platform covering 985 securities, which represents about 45% of the S&P 500, which is a very exciting opportunity given TD Securities confidence in the value of our research resource. In addition, Cowen will add scale and expertise in industry coverage, middle market sponsors coverage, M&A advisory and public and private capital markets. These capabilities when combined with our strong franchise will round out our product and services suite to -- help serve our clients better and to accelerate our growth. As is true of TD and TD Securities, Cowen's greatest assets is its people. Upon the closing of this transaction, TD Securities will welcome talented colleagues with deep client relationships from across the country. I'm delighted to welcome Jeff Solomon, Chair and CEO of Cowen; Dan Charney, Cowen's Head of Markets; and Larry Wieseneck, Cowen's Head of Investment Banking, along with 1,700 talented Cowen colleagues to TD Securities. I'm also pleased to announce that Jeff, Dan and Larry will join the TD Securities leadership team reporting to me upon closing. Jeff will lead parts of our combined businesses, which will be known as TD Cowen. Jeff has joined us for this morning's call and would like to share a few thoughts. Jeff, welcome, and over to you.

Thank you, Riaz, and good morning, everyone. As Bharat said of TD Securities at the start of the call, I am also very proud of the franchise we've built at Cowen. And over the past decade, we've grown our revenues from USD 288 million to USD 1.5 billion today. And we have a leading industry research and strength in key growth industry verticals as well as the top-tier algorithmic trading and equities execution platform. . The combination with TD Securities will allow us to better serve our existing clients by providing access to an expanded range of products and services and by leveraging TD Security's strong balance sheet and transaction banking capabilities. Clients will also benefit from our combined expertise and talent, and I've been incredibly impressed with the TD Securities leadership team. This transaction combines 2 winning teams that really can accelerate the growth of the organization for the benefit of our colleagues, our clients and our communities. I want to extend my thanks to everyone at Cowen who delivers every day for our clients and for each other. And TD, we know we found a partner that shares our commitment to clients, to teamwork and our culture collectively as well as to sustainability and ESG leadership. We share TD's view for the future of the combined organization and cannot be more excited to take this next step in our journey. And as we joined TD to build an even stronger franchise together, we couldn't be more excited. With that, I will pass it back to Riaz.

Thank you, Jeff. Please turn to Slide 5. TD Securities has built a strong foundation to support future growth. The combination with Cowen is the next phase in our evolution as we continue to build a leading integrated North American investment bank. On a pro forma basis, this transaction would increase TD Securities revenue by over 1/3, bringing global revenues to just under $7 billion and more than doubling our U.S. revenues. The team will also expand significantly. The combined organization will have more than 6.5 thousand colleagues, including almost 600 managing directors. We will have a leading North American equity research platform with nearly 1,300 companies under coverage and over 90 publishing analysts. To leverage the strength of Cowen brand, as I mentioned, parts of our business will be known as TD Cowen, a division of TD Securities. The integration of these 2 powerful teams and platforms will drive significant revenue synergy opportunities and we have not modeled any expense synergies. Please turn to Slide 6. Our clients tell us regularly that given their trust in TD and the value that we add, they would like TD Securities to support them across a broader range of products and markets. This transaction allows us to do exactly that. The acquisition will add U.S. capabilities to TD Securities global equity sales, trading and execution platform, and Cowen's extensive research footprint will provide opportunities for the combined businesses to seek new areas of growth. In Capital Markets and Advisory, we will be better positioned to support issuers across boarders and markets, with broader industry, geographic and sector expertise. We will have an integrated platform to drive meaningful revenue synergies. Cowen acquisition will add a private credit advisory solution that will enhance our ability to support clients of TD Bank, America's most convenient bank. Cowen's clients will gain access to a broader range of fixed income, currency and commodities products and services to support their growth and benefit as we leverage TD Securities strong balance sheet and transaction banking capabilities. This transaction combines 2 leading investment banks with complementary capabilities, which will enhance our ability to serve our existing clients and to win new clients together. Please turn to Slide 7. As we grow the TD Securities and Cowen franchises, our success will be underpinned by a shared vision for the future and strong cultural alignment. Both organizations prioritize teamwork and collaboration and create an entrepreneurial and diverse and inclusive environment where colleagues thrive. This transaction brings together fantastic talent from both organizations. The highly complementary nature of our businesses will create meaningful opportunities for TD Securities and Cowen colleagues alike, both immediately upon closing and well into the future. Transactions investment banking are always about the people. And as Jeff said, we are combining 2 winning teams, and we are keenly focused on maintaining our winning cultures while helping our clients outperform and achieve their growth aspirations. With that, I'll turn it over to Kelvin to discuss the financial aspects of the transaction.

Thank you, Riaz. Good morning, everyone. Please turn to Slide 8. The purchase price is USD 39 per share or USD 1.3 billion in the aggregate, paid for in cash consideration. This represents 1.7x Cowen's tangible book value and 8.1x Cowen's estimated 2023 earnings of USD 156 million. To provide the capital required for the transaction, TD has sold approximately 28.4 million nonvoting common shares of Schwab for proceeds of approximately USD 1.9 billion, reducing TD's ownership interest from 13.4% to 12%. When combined with this share sale, the acquisition of Cowen, pro forma for the closing of TD's acquisition of First Horizon is expected to be neutral to TD's common equity Tier 1 ratio which is expected to be comfortably above 11% at closing. As part of our ongoing capital management activities and in light of heightened volatility in interest rates and continued uncertainty in the macro environment -- macroeconomic environment, earlier this quarter, we established an accounting hedge against the CET1 ratio impact of further rate changes on goodwill in connection with the First Horizon acquisition. We are pleased that TD is in a position to close 2 strategic acquisitions that add meaningful earnings growth while remaining strongly capitalized. The Cowen transaction is expected to be modestly accretive to estimated 2023 adjusted EPS on a fully synergized basis. And as Bharat mentioned, the transaction is expected to generate an approximately 14% adjusted return on invested capital on a fully synergized run rate basis. In his remarks, Riaz provided details on the substantial revenue synergy opportunities identified in this transaction. Revenue synergies of approximately USD 300 million to USD 350 million, resulting in an increase of net income after tax of approximately USD 100 million are expected to be achieved by year 3. We anticipate that the organizational structure, an integrated client coverage model will be in place at closing with the systems integration following thereafter. We expect pretax integration and retention costs of approximately USD 450 million and no impact on the pending integration of First Horizon. We anticipate closing the transaction in the first calendar quarter of 2023, subject to Cowen's shareholder approval and customary regulatory approvals. And with that, I will turn the call back over to Bharat.

Thank you, Kelvin. Please turn to Slide 9. Before I turn the call over to take your questions, I want to emphasize a few points made in today's presentation. This acquisition will further accelerate our growth in the U.S. and positions TD Securities as a North American dealer with global reach and a full suite of cross-border capabilities. As Riaz noted, the Cowen and TD Securities platforms are highly complementary and the combination will create an expanded platform with significant growth potential, enabling us to better serve our clients. There are meaningful revenue synergy opportunities driven by the combination of these 2 terrific franchises. Kelvin mentioned that to provide the capital for this transaction, TD has sold a portion of its shares in Schwab. It is important to note that this sale does not represent a change in our strategy with risk to our investment in Schwab. We have maintained our voting interest, preserved our governance rights and have no current intention to sell additional shares. And finally, we're looking forward to working with the Cowen team who's winning culture and deep client relationships are well aligned with TD's strategy and vision. I will now open the call up for Q&A, operator.

[Operator Instructions] So the first question is from Doug Young from Desjardins Capital Markets.

Riaz, I think you mentioned people is the most important part of this transaction. Just wanted to get a little bit more detail of how you've locked up key employees over what time frame have you walked people up in? And how many people are included in that kind of retention program?

Thank you for that, Doug. As we started our conversations, is that Jeff and I have spent a huge amount of time on this to make sure that both Cowen as well as TD Securities' team felt comfortable with the transaction and understand that overall that this is a transaction in which there are minimal overlaps and it is a capability additive transactions. So in the $450 million number that Kelvin noted, $200 million of that is attributed to retention, which includes the key leadership team as well as the key individuals that Jeff has identified as having importance to the -- to maintaining the transaction momentum and the culture at both Cowen as well as TD Securities. And beyond that, Doug, I think for the appropriateness of respect to our employees, I won't go into additional details at this time.

Okay. And then Kelvin, I just -- I want -- I do [indiscernible],and I've got the sale of the Schwab stake adding about 33 basis points to CET1 and the Cowen deal consuming about 14 basis points. Just hoping you in the ballpark, or do you have like the specific around each of those 2?

Yes. So the -- as we've noted, the transaction is expected to be CET1 capital neutral. The proceeds of $1.9 billion is approximately the capital that would be required, and that's about 40 basis points. Remember that on the Schwab shares, you sell -- it's not only the gain on sale that adds to capital, but also the book value of the capital. And since it -- the investment is above the basket threshold, it is actually a one-to-one capital release.

Okay. So my numbers are a little bit off. Okay. Maybe I'll take a look at that. And then just lastly, just what date did you establish the rate hedge for the First Horizon interest rate exposure?

Yes, we did it during the quarter.

You can't provide a day. I'm just trying to get a sense of where we should put the pining, but I don't know if you can provide any other color around that or...

No, I think it's important to note that we are actively managing our capital position. And with the actions we've taken and to take we're above -- or comfortably above 11%.

Next question is from Ebrahim Poonawala from Bank of America.

I had a question. I guess I would love to hear a response from both, including Jeff Solomon, on paper it feels like, the combination provides a ton of synergies with TD's balance sheet with Cowen's capabilities. If we could, Jeff, would appreciate your perspective on. Just give us a sense of what TD's balance sheet behind what you have in terms of products and capabilities does for Cowen as you think about the next few years? And Riaz a question for you and maybe Bharat, what are we aspiring for, right? I mean I think it seems like you have everything it takes or will post the deal. Do you plan -- do you see yourself as being a top 5 player in the U.S. when you think about league tables, et cetera? Would love to hear just sort of the mid- to long-term ambitions that you have in this business as we think post

Jeff, thanks about the answer there in Riaz as well. I can tell you our aspiration is to be a top dealer and make sure that we have all the capabilities that our clients require. So this is not about a particular league table positioning. We just want to make sure we have the right capabilities in the right markets for the clients we serve. And we have a growing franchise. This is an important part of TD Bank Group. I've said this over the last few years, and it's great to see that we are now in a position to make this acquisition. And as you heard in our comments, this is strategically compelling, financially attractive within our risk appetite. And as importantly, culturally well aligned. So like the First Horizon transaction, it was important that we meet our requirements for any acquisitions, and this fits perfectly. So really excited about it, Ebrahim. And perhaps I pass it back to Riaz and Jeff to answer your specific question.

Yes. Go ahead, Jeff.

Well, so first of all, thanks for the question. Well, this is for us, and we look at the growth trajectory that we've been on. As I mentioned, Riaz and Ebrahim, when we've talked, this is the first time probably in the history of Cowen at least over the last decade where we have felt constrained by the size of our balance sheet. And we put over $0.5 billion in retained earnings on the balance sheet in the last 2 years. And we still feel that there's -- our business is calling, our clients are calling for more access to that capital, both in the markets business as well as in the sponsors business. And -- when we set out to look at our strategic objectives over the course of the year was to be in a position where we could bolster our balance sheet so that we can provide more products and services. And when Riaz and team approached our team with this idea, it made logical sense because it was very much in tune and with the strategy that we were pursue anyway. And so when you look at our business, whether it's in the banking side or on the market side, having access to that capital or having access to a AA rating even if we're not utilizing that capital puts us in a very different position to serve our clients' needs as they continue to grow. As you all know, we focus on growth and growth industries. And as those growth industries mature, they require different products and services. And we've seen that as they've migrated from equity to debt and ultimately to bank debt as they become creditworthy. Those are going to be important parts of us continuing to extend our client franchise as our clients mature. So this opportunity with TD really provides us with the chance to continue to be there for our clients in a meaningful way.

Thank you, Jeff. And Ebrahim, I think between Bharat and Jeff, they covered off the question of capabilities. So if you're good with that, I'm good.

I think that was good. And just one follow-up. Bharat, on First Horizon, it's been about 6 months since the deal. Any reason you have to believe why the deal may not close as per the original time line lead regulatory or other issues that may delay the deal at this point?

No, I have no reason to believe that, Ebrahim. Just following its normal process within the U.S. regulatory requirements. And we obviously cannot talk about our conversations with our regulators. We feel comfortable that is proceeding at the pace we expected, and we are hoping that we can close it within the time line we had stipulated. .

Our next question is from Meny Grauman from Scotiabank.

Bharat, historically, we've seen banks build out their U.S. capital markets franchises in a more organic fashion due to the less risky option. Why not do you need to build organically and hire teams that you need to fill in any gaps and especially at this stage in the capital market cycle, just curious to your thoughts on that.

Just -- it's a good question, Meny. We think hard as to what capabilities we can build organically and where it make sense for us to acquire. As we have seen in many of our businesses where we've had the opportunity to accelerate our growth aspirations, we have not been shy to acquire. I mean the TD Asset Management, Graystone comes to mind, [indiscernible] comes to mind. And frankly, there are countless others where we felt that an acquisition adds to our capabilities and accelerates our growth. And as Riaz mentioned, this was a unique situation for us. Jeff and his team have developed and built a terrific business, and we felt very comfortable that this was the time to do it. And frankly, this is an opportunity that doesn't come every day and felt that this was critical for our growth aspirations. And I'll let Riaz talk about some details around it, but we're very, very excited on the timing of it. And frankly, this accelerates our aspirations by many, many years.

Yes. Thanks, Bharat. Meny, I would just add that from the time that we met Jeff and his leadership team, it became very quickly apparent to us that this was a fabulous franchise with great people and ones that culturally would be very aligned with TD Securities. And I think Jeff and his team felt similarly. So when you look at those capabilities in brokerage and M&A and world-class research to get all that assembled in one place and to have the opportunity to bring it together with TD Securities in order to accelerate our growth easily by 5, if not 10 years, it was just a fabulous opportunity. And so we decided to advance it on that basis, Meny.

And just in terms of how you're thinking about the Schwab stake? Bharat, you talked about not losing your voting rights or governance rights. How low does that holding of Schwab go before you lose those rights? Is there a trigger there that you can give us?

10%.

Okay. And then just related to that is, so you use Schwab to buy Cowen. Are there any other capabilities, any other acquisitions that you would contemplate taking down your Schwab stake for it? .

Not at the current time, Meny.

Next question is from Gabriel Dechaine, National Bank Financial.

on the deal. Just want to clarify a couple of capital-related items. One, I guess similar to Doug's question earlier, what I'm surprised that you're describing the deal is neutral to see you're raising more capital from the Schwab they all than what it cost to buy this thing. Your deduction goes down for significant investments in other financial institutions. And then the gain on sale, I would have assumed a more positive impact on -- Maybe you can clarify what I might be missing?

Gabriel, I'll let Kelvin comment in a moment. But look, I think while the purchase price is $1.3 billion, what we do is you have to go through line items for everything that is on the Cowen's balance sheet. So the risk-weighted assets will be close to $9 billion, $8 billion to $9 billion. And then there's about $700 million of goodwill. So the invested capital is closer to the proceeds than it is to the purchase price.

Got it. Okay. And then I guess, I mean, the comfortably above 11% -- that you're using to describe your pro forma position, the First Horizon deal. That's a bit more bullish, I guess, than what you were stating when you announced the deal 5 6 months ago. Is that mainly because of the hedge is obvious here...

Yes. There's a few reasons for that. I mean, we've raised capital for the Cowen transaction. So there's certainty around that. We've done the -- also with passage of time, there's more clarity as well. So all of those factors combined.

Okay. And when did you approach Cowen? I mean not a...

I'm sure that will come on the proxy circle, but it was early this year when we -- I reached out to [ Jeff. Robbie Pride ] and I reached out to Jeff and went to visit with him. And we shared some lovely stories about Jeff has Canadian roots and closely associated with the community in Pittsburgh and it was a -- that's how this all started there, right, Jeff?

That is correct. Yes. My grandmother is born and raised in Saskatchewan and -- the first thing we actually talked about, we sat in my conference room, which is [indiscernible] -- to my hometown Pittsburgh. We had a lot of great conversations, got to know each other as people. And I think that's an important part of this. And all the conversations with Riaz and Robi and their team with Bharat, these transactions are much more about the people that I think people -- than I think investors give us credit for. We couldn't be doing this if we didn't feel strongly about the interpersonal connections we've made over the past few months. And so -- and it started right in the very first conversation before we even got into numbers or opportunity sets, it was really just getting to know each other better. And that's what I think gave us the comfort to know that we found great partners collectively. And so we're excited.

Next question is from Scott Chan, Canaccord Genuity.

My first question is for Jeff. You talked about the solid revenue trajectory at Cowen over the past decade. And I think it's 2x over peers, U.S. peers. As Cowen engaged in any M&A over the past 10 years now, contribute to that, Jeff?

So we have -- we've made some acquisitions in both the markets business as well as in our banking business. Probably the biggest and most transformative acquisitions was Convergex, which doubled the size of our equities trading platform. Actually, it was one of the few that I think acquisitions where one plus one equaled probably almost 3 which is a pretty incredible feat when you know anything about the equities trading business. But we've done a number of acquisitions along the way, and we've integrated some great teams, and they're very much a part of our culture. On the banking side. More recently, we've been focusing on buying advisory businesses. Our acquisition of Quarton a few years ago, our acquisition of MHT. Both gave us sponsor coverage as well as industry coverage. And then more recently, we added great team from Portico who have been integrating really nicely over the course of the year, focused on verticalized software. So this has been both organic as well as inorganic. And I think as an acquirer of teams, I think we understand very clearly the need for culture to be upfront. And I said it before, I'll say it many times over, the success of these transactions has been the fact that we've to find great partners. And so being able to do this with Riaz and team, we're looking forward to being able to do more and be able to be smart about how we do that.

And Jeff, on your Asset Management and Investment Management segment that you built up, is there any room from a combined basis to further grow that business?

Yes, I think we'll continue to -- sorry, Riaz, do you want to answer that?

Go ahead.

Yes. I think we'll look at ways to do that. I think we've been very selective with the businesses that we've chosen to scale in asset management. And those are ones we think are highly unique and differentiated, and we've pivoted to private equity style investing in areas like sustainablity in health care, where we have a really strong culture and strong industry knowledge. So we'll see how things progress, but we're very proud of that business and recognize there's a tremendous amount of value there.

Right. And lastly, maybe for Riaz on the revenue synergies over the -- by year 3. Can you maybe describe where you think the best opportunities are there or focus within the Capital Markets segment?

Yes. Sure, Scott. Thank you. Look, there's a number of different places that you can seek synergies in here. First of all, just adding the new capabilities from Cowen, an U.S. equity sales trading as well as research would be a tremendous expertise that we could bring to our existing client base, both in Canada as well as in the United States and including extending those to our TD Bank Group commercial clients, both in Canada and the United States. So we expect a wider coverage capabilities. And then, of course, Jeff mentioned the scale and expertise in corporate and sponsor advisory coverage, again, continuing to help expand our client base. And we talked a little bit about the -- bringing the TD Securities balance sheet and capital markets expertise to Cowen our client base. So I think the ability to deliver this on a full-service basis to our combined client base is just very, very exciting. And I think that the revenue synergies that we've laid out are well in hand.