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

Good morning, everyone, and thank you for joining us. Riaz, as a special thank you to you to get us -- helping us get started on this conference. Before we do, I want to just make some opening comments here. This is the first in what we hope are -- will be many U.S.-Canadian collaborative conferences for the financial services sector. This conference really, the genesis of the conference was really our U.S. partners. They are the ones who got it started, but it quickly evolved into a collaborative effort with Canada and the U.S. I would encourage you to look at the list of presenting companies. This is, I think, a pretty good list of presenters in both Canada and the U.S. Our partners in the U.S., Andrew Kligerman, who covers insurance; Moshe Orenbuch, specialty finance; and Bill Katz, the asset managers, they've assembled a pretty good group of companies. Myself, [ Cherilyn ], and [ Graham Writing ], we've also put together a good list of Canadian companies. Riaz, perhaps let's turn to you in some opening comments, focusing on the U.S. I will say this, in my entire career, I've never had U.S. research partners. I do now. It's a bit of a game changer for me to be able to go on a website and get Bill Katz' research whenever I want it. I've never had that. So it's important to me now at this point in my career to have it. So maybe some opening comments with a focus on the U.S.

Sure. Terrific. Thank you, Mario, and good morning, everybody, and thank you for joining. Look, let me start by saying that the TD Securities journey and growth has been nothing short of fantastic over the last 10 years. I mean, if you go back to 2014, we were reporting revenue of, say, CAD 2.7 billion or so. And then as we started down the U.S. dollar strategy journey and positioning TD Securities for growth, just in pre-COVID years, the revenue was sort of in the CAD 3.2 billion to CAD 3.5 billion range. And then into 2021 and '22 and the industry did much better. We did better along with it, but also continue to grow our capabilities and started to see revenue for -- a 50% increase in revenue to nearing the $4.8 billion range. And then, of course, with the acquisition of TD Cowen, we've seen CAD 5.8 billion of revenue last year and CAD 3.7 billion of revenue in the first 6 months of this fiscal year, and those are in Canadian dollar terms. I would say that the -- from about '21, as I came into this role, there was really an overwhelming belief here that in order to continue down that growth strategy and to continue to serve our clients, both in corporate investment banking and global markets well that we would aspire to strengthen our platform. And the acquisition of TD Cowen has done just that in adding U.S. equities capabilities, a fabulous research platform, Mario, that you just referred to as well as continuing to strengthen the corporate and investment banking practice that we were well down for the 10-year journey before that. I think all of that has really strengthened our product capabilities to serve our clients even better. We've added a world-class financial institutions team, both in investment banking as well as in research and in the various classes of financial institutions in banks and asset managers and insurance, et cetera. And all of that product capability is so nicely wrapped around 2 major competitive advantages that we have, which is we have a very strong balance sheet that we can deploy to the benefit of our clients, but also a fantastic research capability because as all of you know that TD Cowen's philosophy on research that we have really now adopted across TD Securities is to be focused on new areas of innovation, focus on thematic research as well as company-specific research. And that is an amazing platform for which generates tremendous ideas for our clients and opportunity to deepen our engagement and our thought leadership right across the platform area.

So I'm going to get us started with some questions. I'm going to look over my left shoulder every once in a while. That's the screen that will show me any questions coming through. Feel free to type in a question and send it along, and I'll look over my shoulder every once in a while and ask it. Before we get started on any questions around Cowen, the obvious thing I wanted to address is the rate cut we saw yesterday. I don't imagine 25 basis points means all that much. But if we do get a period here of several rate cuts, particularly if we don't see them in the U.S. but see them in Canada, can you talk about what that means to TD Securities?

Look, I think are part of what we've been doing over this journey that I described, Mario, is continue to diversify our business model to be able to serve our clients in a variety of geographies as well as in a variety of products. So look, I think as we see maybe a little bit of rate relief and inflation really starting to materialize in Canada are -- that starts providing relief to borrowers, but also starts strengthening the investing climate again because, as you know, our investors and companies can look at uncertain environments, and it may then -- as you start seeing better trends, it may well encourage our clients to become more active in driving their strategies with more confidence. So I think for us, that is a very attractive environment to be in, as you would see that the financial market is starting to continue to show the momentum that they really maybe started, let's say, post Labor Day last year as we started deal activity picking up. We see that more debt capital market deals, we're starting to see more equity capital markets deals, more M&A, more syndicated and leveraged finance. So -- and the sponsors become more active in starting to take advantage of opportunities as the -- as people start getting more confident that maybe what we have here is a successful soft landing. So removing that macro uncertainty, or at least starting to show a more confident trend and stability in the macro environment, is really very good for the economy, and therefore, it's very good for our clients and, therefore, very good for TD Securities as we continue to position to serve our clients better. Now as far as the U.S.-Canada differential goes, I mean, that is a subject that is being hotly debated in the global macroeconomic space among the economists to say, well, how far can the world continue to cut while the U.S. continues to be in the space where a higher-for-longer environment is more persistent in the U.S. than it is to be in a global context. So there, I think it's a great opportunity to provide macro research to our clients to help them think through their strategies, particularly if they have cross-border flows, whether they are more import-driven or export driven or whether they have subsidiaries that operate in the U.S. or U.S. parents that have subsidiaries in Canada. And just think about the whole capital allocation and financing framework that each of our individual clients think through as they own cross-border operations. I think it's just going to continue to be a very interesting and dynamic environment, not only on the rate cut side, but also as we start approaching the U.S. elections in the fall.

For sure. So let's focus on this quarter, Q2, it was clearly a strong quarter. When you look at the results, it was clear that part of the reason why TD's estimate -- TD's actual EPS was greater than the estimate, there's no doubt a contribution to that came from TD Securities. It was consistent with what we saw from some of the U.S. banks when they reported their Q1 '24 results. It's consistent what we saw from a couple of the Canadian banks. Can you talk about what's driving this resurgence in capital markets across the U.S. in particular? And is there room for Canada to participate in this? So maybe just focus on the quarter for a moment.

Look, I think for the quarter, we had $1.9 billion of revenue, which is a record for us and very consistent with that growth profile that I spoke earlier. And it's a very diversified growth profile because the growth has been coming from really all parts of our businesses. Like if you look at trading-related revenue, it used to be in the late 2019, 2020 periods, $500 million to $600 million a quarter, and that's grown smartly to $600 million to $700 million a quarter. Our lending book, which used to be, say, $60 billion in 2020 is just under $100 billion now. If you look at the capital markets revenues and you look at the deal counts and the revenue flows that we're participating in, that's grown smartly. So not only are we getting geographic diversification, but we're also getting an overall business model diversification and adding resilience to the revenue streams that we're earning. Now I think for -- and I think we've done this in a way that really all parts of the businesses have been growing quite smartly. And we see a tremendous amount of potential to continue to grow it in that more diversified way. But I think that when we see the power of the combined TD Securities, TD talent platform in markets that have started to show better momentum is that, in my view, that really started with the Labor Day last year. When people started getting, perhaps, more used to the idea that we were going to have high rates, that maybe they're going to last a little bit longer, we started seeing some signs of growth in areas and in the U.S., particularly in the technology side, in health care. And energy has continued to show, commodities have continued to show a tremendous amount of resilience. We saw deal-making and financing activity just continue to come together. Now in Canada, that, particularly in the equity capital markets, that has not really shown as much early momentum as the U.S. has. But I think invariably, as things stabilize and people start to get more confident in the soft landing narrative here, I expect that we will start seeing more activity than even what we've got now. So similar to the U.S. themes, Mario, I do feel more optimistic and more bullish in this environment.

Sitting here in my seat in Toronto, I have felt a shift in the gravity, migrating toward the U.S. Things have changed. I feel it, mostly for the best. Can you talk about how TD Securities has changed over the last, let's say, 5, 10 years? How -- you talked about diversification. That diversification has meant to me a shift to the U.S. Can you talk about that, how the dealer has changed?

Well, let me start with what is the same about the dealer, which is that when I came into this role in September 2021 and we were just emerging out of COVID and have started to travel more to not only centers in Canada, in Montreal, Calgary, Vancouver, but also then into New York, Houston, London, all the way out to Singapore. The one common theme across the whole of the dealer was that I was really incredibly impressed with the talent that we've amassed at this dealer. And we have a terrific culture that I like to describe perhaps as a caring performance culture, that we do really have a very significant drive to not only serve our clients well, but also to make sure that it's fun to work here with the colleagues that we have and that we become, and continue to be, an employer of choice. And that remains the same throughout the period. And one of the very attractive things in the TD Cowen acquisition is in the very early days as the leadership of legacy TD Securities and legacy Cowen came together to meet and start talking about the potential for getting the 2 platforms together. There was a very clear view from both sides that, that carrying performance culture, which -- it was expressed at a legacy Cowen in words such as vision, empathy, sustainability, teamwork kind of themes were very similar to what we have here at TD Securities. And that gave us a tremendous amount of confidence to bring the 2 together. But look, I think if you are a -- any kind of a Canadian company and you become very successful in Canada and, say, you sell widgets and you're going to sell one to every Canadian, you'll sell 40 million widgets. And then you say, as a shareholder and as a colleague that, look, where do we go for growth. And most Canadian companies looks out first. And if you become equally successful in the U.S. and you sell a widget to every U.S. citizen, you're going to sell 300 million widgets. And 40 million are going to be in Canada, and 300 million are going to be in the U.S. And so that does as a shareholder, as you think about how do you get growth, setting TD Securities up for growth does necessarily mean that you have to be very good in the United States because as much as we think of Canada, in every respect, maybe the U.S. has been 10x Canada, influential markets, it's probably way more than that. It might be -- we could surmise that it's 20, 30, maybe even 40x Canada in terms of importance to clients globally, to corporates and institutions globally. So we do need to have that strength of the platform to be -- and we're adjacent to the world's best financial market. And so we do need to have strength in that place. But we are anchored in Canada. We are a Canadian bank, and we want to continue to occupy that top position in Canada. Not only do we want to continue selling those 40 million widgets in Canada, but we also need to continue to drive towards making that 42 million, 44 million, 45 million every day so that we're occupying the top positions in the businesses that we choose to be in, and where we want to be very, very competitive and provide the best-in-class service to our clients, not only in Canada but also in the United States. But successful Canadian companies that grow here and that continue to look for growth tend to use U.S. capital markets, and the U.S. sometimes tends to be the -- many times, tends to be the first destination of choice to grow just because of its adjacency and its scale. So I think TD Securities has pretty much followed a similar formula, and we're on that journey. And our home market is in Canada. And I think time and time, it's proven that you have to have a very strong position in your home market to continue to lever that and set that up for an ability to compete more internationally.

So we shouldn't be at all surprised if the U.S. becomes 75% of the overall revenue at TD Securities. That's not unlikely, I guess.

No, it's not unlikely. We're probably above 50% now. And the -- but that doesn't necessarily mean that I am giving my Canadian colleagues an opportunity to take their revenue down. No. The absolute revenue in Canada needs to continue to grow just in tandem to remain highly competitive and to continue to grow here. It's just that our market is 40 million widgets and the U.S. market is 300 million widgets. And that's kind of a reality that every very successful Canadian company faces. But we are not giving up our position in Canada, we're going to continue to strengthen it.

Now thinking about the integration. At a very personal level, it feels done. And I say this because our research platform is now completely integrated with the U.S. It's changed. The way I do business and the way I write research and -- it has changed. And now I fully absorbed how to do it, and I'm comfortable with it. That's my experience with the integration. Is the integration as a whole done? Do you feel mission accomplished at this point?

There are kind of leadership and people sides to an integration. And then there's the technical side to an integration, Mario. And I would say on the people side, on the leadership side, big picture, yes, we're done. We have our refreshed leadership across global markets, corporate investment banking as well as our business operations and infrastructure teams. We were, on April 1, able to get all the regulatory approvals to bring the broker-dealer together so that we could unify our investment banking, global markets and research coverage across clients and really go out to market as a single company. And there are some technical aspects of the integration relating to technology, swap, dealer, status and some colleague onboarding and the bringing of those systems together still remaining to be done, which, as I mentioned in the Q2 call, we're ahead of where we expected it to be and pushing really hard to get it done faster than we were -- than our originally announced schedule. I am reasonably confident that we will wrap that up by December, and there might be some residual things then that are kind of left over to finish up. But yes, by and large, in terms of the people side of things and the ability to bring people together to start collaborating and working together, which is probably the most important thing for a dealer because we're such a people-oriented business and culture-oriented business, that is actually done. And things are starting to come together that give people better tools and technology to operate against that just as equally efficiently and successfully. And the remarkable thing is that we welcomed 1,700 colleagues who were very used to operating successfully without much of a balance sheet and that learning each other's businesses and how to leverage and how to come across on a stronger platform, that is also kind of an integration and knowledge management, a cultural, a partnering integration that is well underway. And I feel very good about where it's landed 13, 14 months into the integration and -- but that's a journey that will continue for a little longer.

I want to flip over now. Look, I focused so far on things that feel good about TD Securities, and there's plenty to feel good about. But recently, there have been a few things that don't feel that good about being a TD bank and the most important of which is the AML investigation. I'm not going to ask you to provide an outlook on that. But what would be helpful for me to understand and for everybody listening in is, how has -- can the AML issue, can it affect the dealer? Can it affect TD Securities? Can affect TD Cowen? Or should we think of this as an issue isolated to U.S. banking?

Yes. I think, Mario, look, I do understand everybody's desire to want to know more. And to your point, I really don't have much to add other than what [ Barrett ] has said to date about this matter. And I think just to reiterate his continual messaging to not only the Street but all our employees as well to say that, look, we are overhauling the program, cooperating with the regulators, bringing people to accountability that need to. But also that the -- our program, in some respects, did not do its job. And we're overhauling that. And I know people are looking for that conclusion of the regulatory and the investigations, and we are working hard to bring that to -- bring that certainty to everybody as soon as we can. Now as far as TD Securities, look, at all the growth journey that I mentioned has been primarily driven within businesses that we are already in and that we've been good at and we're continuing to be very good at them and strengthening our platforms in order to gain more market share. So we're doing much better in debt capital markets. We're doing much better in cash equities. And now we have an entire U.S. cash equity platform to add to that. We're doing much better in equity capital markets, where we were really nowhere prior to the TD Cowen acquisition in the United States. And now with the addition of the technology and the health care banking franchises, we're participating and earning very decent shares and revenue in that. We're much better in syndicated and leverage plans. We have strengthened our investment banking capability. So we are growing this business and continue to expect to be able to grow it quite nicely within the swim lanes that we're already in. And so I don't expect that it should really interfere with our ability to just continue to grow organically and with that -- with the market share that -- gains that we've been able to capture. And I would say that, as Ajai mentioned on Q2 call with the U.S. -- overhaul of the U.S. AML program, we are paying very close attention to what aspects of that program that we need to also continue to add to the best practices that -- at TD Securities and participating in that journey in order to just continue to make sure that we are in a good position with respect to that in TD Securities. But as has been indicated here, too, before, we don't really know what the final monetary and nonmonetary penalties will look like. We're trying to bring conclusion to that fairly quickly. And to be able to have better visibility into how and where we go from here. But I think that the journey that TD Securities has been on can continue smartly.

That's important to me on a lot of levels. Let's flip over to a comment you made a moment ago about TD bringing the balance sheet. And I look at that, obviously, from 2 perspectives: it's revenue enhancing, but it also entered -- creates a level of risk as well. Can you talk first to how does that change? How does that help Cowen? Are there real life examples you can think of where the balance sheet made a difference for us? And then segue into does this change the bank's risk appetite, the risk posture in any way?

Two aspects that I would point to there, Mario, is, first, if you look at there are examples of clients that, for example, in the technology or health care space where we were already lenders to. And we would earn their debt capital markets business. We would have some M&A dialogue with them. And if they were nevertheless participating in any -- but we couldn't really participate in any of their equity activities. And just the fact that we now have a much strengthened -- a top 10 cash equities business in the United States, together with the research that, that brings, we've already seen very good early signs of bringing that together where the nature of the dialogue has uptiered with our clients and become much more strategic and where we can now bring the value of the combined capabilities to have a more strategic dialogue with all our clients and with greater confidence. And our clients are already starting to reward us where, sometimes, on an equity deal, we might get 1% or 2% to pay for research or for coverage or for the lending relationship, et cetera. We can start having dialogues with those clients about having 7, 8, even maybe passive [ front runners ] and maybe in time, we're targeting to being able to be active front runners. So there is a very -- that balance sheet, bringing together of the balance sheet that we were already making available in our more treasury corporate banking, leading to investment banking oriented mindset is now becoming much more confident. On the other hand, I'd say on the global market side, we're in terrific businesses around, let's say, equity derivatives, on prime brokerage, et cetera, with institutional clients. And as you well know that we can bring those capabilities to those institutional clients and deepen our relationships with them. And again, deepen the strategic dialogue where we can participate in their flows, where we can participate in the strategies and help build out their balance sheet needs, not only just in North America but also Europe and Asia Pacific. I mean, some of our best asset management clients operate globally and look for balance sheet and for research on a global basis. And we're in a much better position to offer that today than we were a little more than a year ago. And so the opportunities today to continue to grow TD Securities successfully almost seem limitless to me. And in the sense of saying that within the frame of what growth could look like in the next 5 years, I don't see any particular limitations in our capabilities to say, well, how do we actually continue growing the revenue in a smart way and then bringing our NIAT and ROE performance on that curve along to get the benefit of scale to pay for the value of the combined platform. So I think there is really both excitement, both on corporate and investment banking side and on the global market side. Now a hidden benefit that we had not really anticipated is that if you look at our transaction banking and cash management business, it's a hidden gem within TD Securities. It's an amazing deposit platform, cash management platform, and we have top position in Canada, and we're continuing to grow that business in the United States. Well, TD Cowen and TD -- America's most convenient banks' clientele, who are very similar to each other, we see Cowen has tremendous amount of relationships and strengths with clients that are really America's most convenient bank clients. And the opportunity to bring that distribution when we do middle-market transactions, IPOs, financings, et cetera, and capture that cash management business for that client is also a space that we see has tremendous opportunities on to partner with [ Leo's ] businesses as well. So I feel like there's such a -- we're rich in opportunities for growth. Can I put it that way?

I'm going to stop there on that positive note. Riaz, I appreciate you doing this, and thank you to everyone who joined us.

Thank you, everybody.

Yes. Thank you.