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

Good afternoon, and welcome to TD Bank Group Conference Call. I would now like to turn the call over to Ms. Brooke Hales. Please go ahead, Ms. Hales.

Thank you, operator. Good afternoon, and welcome to TD Bank Group's conference call. We will begin today's presentation with remarks from Bharat Masrani, the bank's CEO; after which Leo Salom, President and CEO, TD Bank, America's Most Convenient Bank, will discuss TD's balance sheet flexibility and financial strength in the U.S.; next, Ray Chun, TD's incoming Chief Operating Officer, will offer comments on the bank's scale, resilience and strategy; finally, we will invite questions from prequalified analysts and investors on the phone. Also present today to answer your questions are Ajai Bambawale, TD's Chief Risk Officer; and Kelvin Tran, TD's Chief Financial Officer. As noted on Slide 2, our comments during this call may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially. Additional information about material factors and assumptions and risks is available on our website and in the material change report dated October 10, 2024, which is available on SEDAR+. With that, let me turn the presentation over to Bharat.

Thank you, Brooke, and thank you, everyone, for joining us today. Money laundering is a global threat. And as we have said before, there were serious failures of our U.S. AML program. Our U.S. business did not fulfill its obligations to protect against money laundering. We've taken full responsibility for these significant failures. And I've taken responsibility as this happened on my watch as CEO. Following several years of active cooperation and engagement with authorities and regulators, today, we announced that TD has reached a resolution of the previously disclosed U.S. AML investigations. The resolutions with the DOJ includes plea agreements. The monetary penalties are largely in line with TD's previous disclosure. The bank will pay a total of USD 3.09 billion. We do not expect any further monetary penalties related to the U.S. AML investigations. The OCC Consent Order includes an asset cap applicable to TD's 2 U.S. banking subsidiaries. The total assets of these 2 subsidiaries cannot exceed USD 434 billion, the total assets as of September 30. The asset cap does not apply to TD Securities or any of the bank's Canadian or other global businesses. The OCC Consent Order also includes more stringent approval processes for new bank products, services, markets and stores in the U.S. to ensure the AML risk of these new initiatives is appropriately considered and mitigated. Each of the OCC, FRB, FinCEN and DOJ have imposed remediation requirements with respect to TD's U.S. AML Program. There is significant overlap in these requirements. We continue to work with the regulators to ensure there is coordination to enable the bank to fulfill the remediation requirements efficiently and effectively. Both the DOJ and FinCEN will appoint a monitor to review, assess and oversee our AML remediation. We anticipate 1 monitor to act for both organizations, but this will be the decision of the DOJ and FinCEN. We are committed to working successfully with the monitor to enhance our U.S. program and meet our obligations and the terms of the resolution. The resolution also requires oversight of the bank's AML remediation efforts by all U.S. Boards and the parent Board, which TD already has in place beginning with the establishment of a special committee of our U.S. Board last summer. Board certifications will be required for dividend distributions from our U.S. subsidiaries to the parent to help ensure TD continues to prioritize the AML remediation. The resolution does not impact TD's ability to pay common share dividends from the parent. We will now focus on our AML remediation efforts, approach to operating under the asset cap and our commitment to continue to serve our customers. We will also describe how we intend to reposition our U.S. investment portfolio, leveraging our strong capital position to lay the foundation for our U.S. business to deliver expected shareholder returns in the years to come. With that, let me turn it over to Leo.

Great. Thank you, Bharat. If I can ask everyone to turn to Page 4. Our AML program remediation is essentially organized under 5 core pillars: people and talent; governance and structure; policy and risk assessment; processing control' and data and technology. The progress we've made to date in our people and talent and governance and structure capabilities have provided the strong foundation required to develop and execute on our broader remediation strategy. We've appointed a new Head of Financial Crime Risk Management with proven leadership and experience, and we've built the U.S. AML team with many other recognized executives and specialists from across the industry, including AML experts from regulatory agencies and law enforcement as well as proven leadership across critical domains such as technology, data management, execution delivery, modeling, automation and advanced analytics. AML-related performance objectives have been clearly defined and aligned across leadership and teams. We have also comprehensively redefined our AML governance approach, including redesigning our management and Board oversight structure and program execution, while establishing clear mandates and escalation and approval processes. Today, I am confident that TD has the right team and the right structure in place to oversee our BSA/AML program and remediation efforts. I can ask everyone to turn to Slide 5. We've already taken many actions to reduce AML risk and we'll continue to implement improvements powered by investments in data and technology. We know that completing all the required changes will take time. To date, we've implemented new technology solutions with stronger detection and data management capabilities, advanced analytics and modeling capabilities. In addition, we've also strengthened customer on-boarding procedures and improved the thoroughness and timeliness of our investigations. We expect to have the majority of our planned strategic solutions in place by the end of fiscal 2025. And all implemented solutions will be subject to internal challenge and validation. We will then work with our regulators to demonstrate the performance and sustainability of those implemented solutions. Now this is a multiyear endeavor, and we will continue to provide updates on our U.S. AML program remediation when appropriate. While steady progress has certainly been made, we have significant work ahead. As we've said before, remediation of our U.S. AML program is the bank's top priority. It is my top priority. Our comprehensive remediation program is well aligned to the regulatory requirements, and I'm confident that we will deliver the required changes and build the future of our U.S. business on a stronger foundation. If I can now ask you to turn to Slide 6. Earlier in the presentation, Bharat described the asset cap included in the OCC Consent Order. TD AMCB will restructure its balance sheet to enable us to comply with the asset cap, while creating loan capacity to continue to serve and support our customers' financial needs as they evolve, deepening relationships over time. We will manage down non-scalable and niche portfolios that do not fit our focused strategy or that have a lower return on investment. To that end, we intend to sell portions of our residential jumbo mortgages, correspondent lending and Exim lending portfolios. We will also selectively reduce our commercial auto dealer lending portfolio and other niche portfolios with a strategic focus on our retail and commercial clients. In addition, investment maturities on our sizable investment securities portfolios are expected to provide additional balance sheet capacity. If I can ask you to turn to Page -- to Slide 7. Fiscal 2025 will be a transition year for U.S. Retail as we undertake a balance sheet restructuring to comply with and maintain a buffer to the asset cap. These actions will also enable us to operate within the requirements while continuing to meet our customers' needs. We will reduce assets by approximately 10%, which will include managing down or selling certain loan portfolios. We expect the P&L impact to be substantially offset by the repositioning of our bond portfolio as we sell lower-yielding investment securities and reinvest the proceeds. The sizing and security selection will depend on market conditions. While these actions will require some capital costs to be incurred at execution, they will provide flexibility to adapt to the inherent uncertainties that arise from the resolution of the U.S. AML investigations. We've also decided to reflect U.S. governance and control costs in the U.S. Retail segment as we continue to advance our AML remediation work. So there are a number of moving parts in the near term. And as we prioritize our AML remediation and restructure our balance sheet to create capacity to continue to meet our customers' needs, over the medium term, these actions will position us to establish a strong, sustainable risk and controls infrastructure, preserve return on equity in the medium term and lay the foundation for the U.S. franchise to deliver expected returns for our shareholders in future years. If I can now ask you to turn to Slide 8. TD's success in the U.S. has been driven by meeting the needs of our retail small business and commercial customers and clients in the communities we serve along the Eastern seaboard. Our businesses have proven resilient, delivering strong results through very challenging operating environments. TD Bank America's Most Convenient Bank is a strong institution with a leading core deposit franchise and robust liquidity levels. We will continue to serve the needs of the 10 million clients and customers in the U.S. who rely on us to achieve their financial goals, including more than 675,000 small business customers, 25,000 commercial clients and over 1,200 government banking clients. With that, let me turn it over to Ray.

Can I ask everyone to turn to Slide 9? Thank you, Leo. While there is no doubt that we have significant work effort ahead, TD has the scale and resilience to deliver. We have almost $2 trillion in assets, making TD the sixth-largest bank in North America. Our deposit franchise is second to none, a differentiated strength for TD on both sides of the border. As a G-SIB, TD is held to high standards by our regulators to promote the stability of the financial system. If you can turn to Slide 9 (sic) [ Slide 10 ]. TD has consistently maintained liquidity and capital ratios in excess of published regulatory minima, with a focus on holding sufficient liquidity and capital to help withstand stress. As a prudent risk management measure in the near term, TD is targeting liquidity coverage ratios above 150% for the bank's Canadian Retail businesses, its 2 U.S. bank subsidiaries and TD Securities. TD is in a position of strength with the CET1 ratio of 12.8% as of our third fiscal quarter and significant capital flexibility, if needed. As you heard from Leo, we are leveraging our strong balance sheet to reposition our U.S. investment portfolio, supporting the U.S. bank's return on equity over the medium term. The bank has and will maintain the financial strength to continue to serve our 27 million customers and clients in North America and globally. And turn to Slide 11. In Canada, the bank has momentum, leading market share, a diversified business mix that delivers strong returns through the rate cycle. We will continue to execute on our strategies across our Canadian retail businesses where the opportunities are compelling as we deepen customer relationships by delivering on our One TD approach. At our Investor Day in June 2023, we highlighted medium-term targets for our Canadian retail businesses. We are on track to deliver on those ambitions. In our wholesale bank, we are targeting a top 2 market share position in Canada. In the U.S., we continue to make good progress integrating the TD Securities and TD Cowen teams, deepening our client relationships and gaining momentum across our banking and markets businesses. The opportunities in Canada and in TD Securities are significant. More than 70% of our TD earnings are delivered by businesses outside our U.S. retail bank. This is a difficult chapter for TD. And I want to underscore that we will make the necessary changes to put the bank on stronger foundation. This is TD's #1 priority and my #1 priority. Make no mistake, we will meet our commitments to our regulators and the DOJ, and we will get the job done. Let me close with the message to our 95,000 colleagues. Their dedication and effort every day is tremendous, and I want to extend my heartfelt thank you to each and every one of them. With that, operator, we can now open the line for questions.

Thank you. We will now take questions from the telephone lines. [Operator Instructions] The first question is from Ebrahim Poonawala from Bank of America.

I guess maybe just one big-picture question now that we have all these details out, Bharat. And I'm not sure if Alan is on the call, I think there's a quote in the press release talking about how the Board is focused on addressing these failures. So I guess if Alan's on the call, he's been on the Board since 2014. But, Bharat, now that all these details are out, I would love to understand, I get you're going to remediate these issues. What went wrong structurally? Is it a leadership issue? Was it a lack of sort of information flow from the U.S. sub into Canada why these lapses happened? I would love to know. But structurally, why did this happen with TD and not with the other banks, the Canadian banks that operate in the U.S.?

Ebrahim, nice to hear your voice. Listen, we've been very clear. We had a major failure in our U.S. AML program. There are various reasons for it. We've talked about it. This is on us. We own it. We should have done better. We know what the issues are. We are fixing them. As we move forward, we're ensuring that this never happens again. This is a sad day in our history, and for which we are very regretful and apologetic to all of our stakeholders, because this is a terrible event for TD, but we know what we have to do to go forward. And this was a failure of our U.S. program, and we are fixing it, and I'm 100% confident that we get to the other side and emerge even stronger.

Got it. And I guess maybe one question for Leo, just around the expenses. I wanted to understand on the Slide 7, the controlled governance costs. Is it just semantics that you're moving things around? Or do we expect another additional USD 500 million in expenses in 2025, over everything that's already been invested in '24 towards this? And do you have enough visibility where you can handicap that the investment spend tied to this is largely done?

Yes. So maybe, Ed, if I can take a step back. We've been hard at work now for well over a year in terms of developing a very detailed AML remediation plan, one that covers the entirety of the program, and I feel very confident that we have a path forward that's very clearly defined. To that extent, we now have much more clarity with regards to the component parts, whether that be data technology necessary to be able to bring that program forward. What we're flagging with regards to the expenses is simply we want to move the expenses now that we have that clarity back into the segment, because I fully intend to report on a regular basis our progress on the AML remediation program, as well as on the expense evolution over time. The USD 500 million number -- the USD 340 million number that you see on the page -- or I'm sorry, USD 350 million, was the 2024 number that was actually incurred, expenses incurred and it was reflected in the corporate center. We're just moving the geography and moving that into the segment. Our expense for next year for the AML remediation program and related governance and control type activities is USD 500 million. I expect that to be the peak of our expense run rates related to this remediation. But I did want to cite that, I do expect that level to be sustained through 2026, as we continue to execute the plan of record. But if I could leave you with one final thought on this, is I really feel exceptionally confident with the leadership team that we've assembled to actually execute against that. We've brought in a very seasoned BSA/AML officer for the U.S. We brought in a terrific group of executives, over 40 titled officers to support the actual execution of the program as well as the actual remediation activities. And we've staffed the group with over 700 additional resources in both investigative as well as in change management roles. So long-winded way of saying we have a plan. We feel quite comfortable with it. We're executing it. And as I think Ray said, we will get this done.

Increase is really the USD 350 million to the USD 500 million. That's how you should look at it.

From a consolidated.

Yes, from a consolidated perspective.

Right. Incremental is USD 150 million next year versus what you already incurred this year. Got it.

That is correct, EB.

The next question is from Gabriel Dechaine from National Bank Financial.

Yes, I just want to follow up on some of these numbers on Slide 7. Firstly, the asset reduction, you're saying a USD 200 million to USD 225 million hit in 2025, you'll offset through higher reinvestment yields from some assets you're going to be selling or have sold already, I don't know. It says accretive to NII over the next 2 to 3 years, but in the brackets, it says, positive USD 300 million to USD 500 million in 2025. Is that just for perspective? Or is this actually going to happen in 2025?

So Gabe, this is Leo again. Just to give you a sense, what we want to do with the investment bond portfolio is we have an opportunity to sell up to about USD 50 billion nominal amount of low-yielding securities. We're looking to sell those and reinvest the proceeds into a similar composition of assets but obviously, yielding at a higher rate. The loss upfront associated with that will accrue back into our P&L over the next 3 years with a slightly weighted first and second year profile. That trade, which I know a number of our competitors have also implemented, we feel that will give us some short-term profitability that will offset some of the costs that we will be incurring both in loan repositioning costs as we exit portfolios that we deem to be less strategic, as well as we invest the balance of the proceeds in our regulatory program. So it's our way of being able to improve the near-term financial profile while taking the necessary steps that we need to make in terms of repositioning the bank to operate within the asset cap.

Okay. So the accretive NII stuff is going to be coming in over the 2- to 3-year period. This USD 300 million to USD 500 million is some sort of a recovery from the USD 1.5 billion loss for whatever reason?

Correct, in any way.

And the USD 1.5 billion onetime cost, it's a capital impact. Is that for the U.S. sub only? Or is that going to be reflected in the top of the house CET1 ratio? Because I believe those would already reflect some AOCI losses?

Yes. So it would. Kelvin here. It also impacts CET1 at the top of the house. And so the way to look at it is USD 1 billion after tax is about 22 basis point hit. And so USD 1.5 billion is about 33 basis points.

Okay. So when does that happen?

Yes, as we execute it [indiscernible]...

Okay. And then just on the -- so I'll wrap up here. I saw at the end of June in your U.S. call reports, you had total assets of just over USD 400 billion. And then the asset cap in your press release and the OCC, it's based on a USD 434 billion number. So in the span of 3 months, USD 30 billion of assets were added to the U.S. I'm wondering how that happened. And then I guess, given that you do have U.S. -- I'm thinking about loan growth here, the composition of your balance sheet. You've got a lot of excess deposits. You're capped, but could you just reduce your loan-to-deposits ratio and still grow?

There's maybe 2 questions there. So let me take each one very quickly. First, from a liquidity standpoint, you'll see on Page 7, we did say that we increased our available cash liquidity. We thought that was simply prudent given the fact that we took a large reserve in last quarter or just a few months ago. And now we came out with the global resolution, we felt that it was prudent to keep a higher level of liquidity, and we borrowed to raise cash against some of our HQLA investments. So that explains the sort of asset level. To your broader question, and I think it is a very important question. So I'm just going to spend a moment on it. What we're trying to do is create capacity within the balance sheet. So by reducing total assets by 10%, we want to be able to do 2 things: one, strictly comply with the asset cap. We want to give ourselves a buffer so that we can honor our obligation to regulators under the Consent Order; but also critically important, we want to make sure that we can continue to serve our existing clients as their needs evolve, as well as be able to continue to serve the needs of our communities where we serve up and down the East Coast. Both of those are critically important. So by doing the things that we've talked about here, that will give us the flexibility to be able to do that in the short term. In addition, I think your point that you're raising is a valid one. Our total investment, cash and investment portfolio, as a percent of total assets is 45%. That would be higher than what you'll find at most other institutions. That investment portfolio does give us some flexibility in the future as well above and beyond what we're doing with this initial 10% reduction in terms of total assets. So a long-winded way of saying, I think there is flexibility to continue to serve our clients and respect the actual asset cap commitment that we have.

Okay. Just to give me like a real-world example here though, maybe like thinking along the lines of the assets that you're getting out of, the loans you might be getting out of, there might be single product customers. You want to give yourself some room for, say, a commercial client that you have that's borrowing $20 million today that might grow and need $50 million in the future. Do you want to -- do you have enough capacity for that type of client? Is that it?

That's exactly right. We're -- we have either niche portfolios, portfolios that are not at scale and are not as profitable or, to your point, where we have pockets of portfolios that are not truly franchised, and they don't represent an element of our core strategy going forward. Those -- we have been -- I should say, we have been acting to reduce exposures in those areas. But with the asset cap, we want to be much more deliberate. I do want to come back to one thing though. I'm stressing the flexibility because it's important to us. We've served over 10 million clients, including 700,000 commercial clients in the U.S. for the better part of 2 decades. And it's important for us to be able to continue to do that. But I don't want to round the corner on one simple point, which is getting this remediation done and getting it done completely comprehensively is my first priority. Nothing else matters if we can't do that and so that will have my complete attention over the next few months and quarters.

The next question is from Doug Young from Desjardins Capital Markets.

Maybe just a few other -- just I want to clarify a few things from Page 7, and I apologize if some of this is redundant, but I think it's just -- it's important. Just first on the cost side, Leo. So you're moving it from corporate back into U.S. Retail. So none of the AML costs was going through the U.S. Retail in fiscal '24. So that USD 350 million, USD 500 million is all of what's being invested and that USD 500 million is the peak but will stay up there. Like there's no incremental AML-related costs that were in U.S. Retail, above and beyond what the numbers you quoted. Is that correct?

Doug, your point is correct. These are the -- these is all of the AML change remediation and related infrastructural costs associated with the plan.

Okay. And then second, just to kind of simplify, I think, what you went through with Gabe. Just like you're reducing the U.S. asset base by 10%. And then net of the cost of the USD 200 million and USD 225 million, you are expecting to pick up USD 300 million to USD 500 million and the cost of that accretion is USD 1.5 billion. And that is expected to go through fiscal '25? Is that -- it's like when I look at those 2 numbers, the USD 200 million to 225 million and USD 300 million to USD 500 million, I would imagine you're going to pick up the yield immediately. So I'm just making sure that when we're thinking about modeling this for fiscal '25, it's not expecting that down in fiscal '25, and then a rebound in fiscal '26, '27. Just want to get clarification on that.

It's Kelvin. So the USD 1.5 billion hit would be in 2025. And then the accretion really depends on the pace of the sell-down and the reinvestment over the year. But yes, you're right, that both would be expected in 2025.

Yes. Okay. Okay. And then just lastly, like I know in the OC setting, I think it was in the OCC, they did talk about restrictions on stock buybacks. And you mentioned everything else around store openings and whatnot but there wasn't any mention. Like do you have to go through -- and I'm not suggesting you're going to be buying back stock anytime soon, and I kind of get that, but in future periods, do you have to go through the Fed or through the OCC to get approval for stock buybacks?

Doug, all the resolutions, all the agreements we have in the U.S. are related to our U.S. subs. They're not related to...

Okay. Okay. So not at the top of house. Okay.

The next question is from Meny Grauman from Scotiabank.

Leo, you mentioned something that I want to follow up on. You talked about the inherent uncertainties that arise from the AML resolution. So just hoping you could go into more detail there in terms of what you're referring to. Is that just sort of the timing and pace of the repositioning of the balance sheet in the U.S.? Or is there something else that you're referring to?

There's [indiscernible] on Page 7. There's a lot of moving parts here and executing that and executing that during the course of 2025 will certainly be a significant work stream. I think the other thing that we've done is simply recognizing that this is a significant announcement to the marketplace. And it's going to be our obligation to steward the conversations with our clients and give them the confidence that TD will continue to service them as we have for the last 2 decades. And so -- but we're not taking that lightly. We have deep relationships with our clients, but this is a significant event, and we want to make sure that we manage that effectively.

And, Bharat, just tying it all together, just wondering how will your all bank medium-term financial targets be impacted by this resolution? How should we think about that?

Today, we're in our Q4. This is the time when we do our plan. We look at what the prospects are over the next couple of years and this is customary from the bank. When we announce our Q4 numbers, we give you a sense for how we are feeling about the upcoming year and upcoming period. So stay tuned. When we get to talk in the next few weeks with our Q4 numbers, we'll certainly provide you more color on that.

The next question is from John Aiken from Jefferies.

Leo, I apologize. I haven't gone through the complete Consent Order. Apparently, there's a reason why I didn't go to law school. But are there any -- is there any limitations on doing something like significant risk transfers or other measures of securitization or alternatively transferring some of the assets from the U.S. Retail Bank into other areas within the bank? Is there any restrictions on what TD can do, I guess, in those measures?

John, thanks for the question. The restrictions in the Consent Order, in the OCC Consent Order are essentially 2 broadly, I mean, 2 significant from an operating perspective. The first one is the asset cap, obviously, that we have to adhere to the level of assets as of the September 30 date. And secondly, there is a restriction from an operating perspective for us to limit our new product, new services, new markets and store approvals. They will require 2 things. They will require us to develop a process to evaluate AML risk associated with any of those activities. And then once we have done that, any item that is deemed to have medium or high AML risk must be subject to OCC approval before we can proceed with any of those activities. So those are the 2 most significant operating restrictions. There is a dividend certification restriction as well for any payments from the U.S. subs up to the parent, and that is a certification for the parent to indicate that there is sufficient funding being allocated to the AML remediation program. So those are the restrictions per se. No other restrictions exist.

Thanks, Leo. And then secondarily, as this process has been evolving, what has your discussions with your clients been like in relation to, I guess, the negative headlines that TD has been buffeted by? And can you talk to whether there's been any change in your Net Promoter Scores or however you value customer engagement?

Obviously, John, let me start by maybe reiterating what Bharat said. This is -- we've taken full accountability for the events that have transpired with regards to our AML program. We did not live up to the standards that we hold ourselves to from a risk and governance standpoint. And obviously, we've acknowledged that quite clearly with our clients. We're fortunate to have deep client relationships, many of which date back years, if not decades, with our clients. And it is important to me that we continue to stand by them to signal that TD is going to continue to support them and continue to grow with them as their businesses evolve. And so to me, that is one of the most important things that all of our frontline staff are doing to just continue to reinforce and cement the relationship that we forged with those clients.

The next question is from Paul Holden from CIBC.

A few questions for clarification. I guess, starting with the capacity to upstream dividends from those U.S. reg subs to the parent. Any reason to believe that the USD 500 million of AML expenses you plan to incur would be deemed not to be sufficient, i.e., are you seeing any reason today why the subs would not be able to upstream dividends?

No. In short, we're comfortable with the forecast that we've put in place. It's based on that detailed remediation plan that I discussed before. The only hedge that I would make to that is that obviously, as part, as you would have read in the Consent Orders, there's language with regards to look backs and additional certifications. That we'll certainly look at those, and there could be some marginal smaller remediation efforts that might be required but we're quite comfortable with the aggregate amount.

Okay. That's helpful. And then you also highlighted that TD Securities does not fall under the Consent Order. So just to be clear on that, you do have the ability to put on wholesale loans in the U.S. under TD Securities with no asset restriction, correct?

Securities is not part of the resolution here. So TD Securities can continue to conduct its normal course business.

Okay. Okay. And then final one because every one, I've heard a lot today and also in prior periods. But you always mentioned you're aiming for a global settlement, and this comes across as a global settlement. But the question is, is there a potential for any additional actions out of OSFI? Or does this cover everything?