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

Joined by Ray Chun, the CEO or the soon to be CEO of TD Bank. Thank you for joining us. I just -- before we begin, I just want to remind everyone that Ray's comments today may include forward-looking statements. Actual results could differ materially from forecasts, projections or conclusions in these statements. Listeners can find additional details in the public filings of TD Bank Group. So with that, we can kick off the session. Ray, good to see you. Thanks for joining us today.

Thanks for having me here today, Darko.

So I think there's an awful lot of things we can -- ground we can cover today. I think I want to absolutely start with one of the things we heard in the fourth quarter call was that you're going to do a strategic review. And in that strategic view, you made the comment that all things are on the table. So I want to start off there and think about -- what does that mean? So for example, would you consider an exit of the U.S. business, would you consider a sale of the Schwab stake? Is anything like that being considered and/or probabilistic?

Well, thanks for having me here again Darko, Happy New Year to everyone here. And maybe I'll just step through the question the way you've sort of laid it out. If I think about the U.S. business. First and foremost, we are 100% committed to our franchise in the United States. It is a terrific franchise in the United States. And certainly, in the near term, obviously, our #1 priority in the U.S. is our AML remediation. But if you think about what have we built in the U.S. in the last 20 years. We're now a top 10 bank in the United States. We have scale in the top 10 MSAs. We play in 50% of them. 75% of our deposit business, we are top 3 market share in the markets that we play. And so when you think about the fact that we've got 10 million clients, we service and advice to over 700,000 commercial banking clients. We are the #1 SBA lender in the United States in our footprint, #2 nationally. We're a leader in government banking. We're #4 in government banking nationally. And so all that to say, in 20 years, we have built a terrific franchise in the United States. And so we will continue to have a strong presence there. From the strategic review perspective. So what are we looking at in the United States? I have to say a couple of things. One is we've been very clear that with the asset cap restrictions that we're going to restructure our balance sheet. And we expect to have the restructuring of our balance sheet completed by the end of fiscal 2025. And then we're also looking to reposition our bond investment portfolio, and we're well underway with that. As we mentioned back on December 5 on our Q4 analyst call, we've executed on $6 billion of our bond repositioning already. that's netting us about USD 175 million lift in fiscal 2025, and we expect to have the balance of the bond investment portfolio repositioning done in the first half of fiscal 2025. But ultimately, in the U.S., as part of the strategic review, what you should be looking for is a renewed focus around delivering and optimizing on our ROE in the United States, which will mean that we'll probably look to exit some of our loan portfolios. And some of that we've actually shared on that piece of it. Now if I move to your Schwab question and I know one that's certainly high on everyone's radar here. First of all, let me just say Schwab has been an excellent investment for TD over the years. There's 2 parts to the Schwab arrangement that we have. One is the deposit agreement and the other is obviously the 185 million shares approximately that we have in Schwab. What I would just highlight to everybody is those are 2 independent agreements. And so regardless of what we decide to do with the Schwab investment, the deposit agreement would continue on, on a go-forward basis. And so if you think about the Schwab investment, that is part of the capital allocation review that we are doing as part of the strategic review. And so that will be part of the deliberations. And as we make those decisions, I'll be back to inform the Street. One of the things that I should have said at our Q4 analyst call around the strategic review and our Investor Day is that I said that we'd be holding an Investor Day, Darko, the sort of back half of 2025. But every quarter, as we make decisions regarding the strategic review, we will share those decisions with all of you and our investors and certainly The Street. And so you should expect to hear more on some of these questions as we move forward. So I hope that answers on some of those questions that you've actually laid out.

Have you determined anything yet?

It's early days there. Early days. But I think like the thing that is that we're moving against is the commitments that we made on October 10 both on the AML remediation, but also on the repositioning of our balance sheet in the U.S. Those are actually in flight and we'll provide updates as we come along in the coming quarters, and our bond repositioning is going as expected.

And when we think about the deposit program that you have with Schwab, how critical is it for you? I mean it's going to come due in 2036, I believe. Is that something that you'd like to renew? Is it some -- is it a business that is core? Or is that also being considered?

Listen, we're looking at it all, but it is -- it's a great relationship that we have with Schwab. On the deposit agreement, part of the agreement is that there's a floor and September 2025, the floor on that agreement is $60 billion. the cap is $30 billion -- plus $30 billion. And so the cap is $90 billion. The floor is $60 billion. And so certainly, it's something that we like and it's a good relationship that we have with Schwab.

And so as a result of the asset cap, the review, there -- I've received some concern from investors and say, look, will TD immediately try and match the type of EPS growth that they've done in the past? Will they try and work hard towards a relatively high ROE? And in order to do that, could that involve a very aggressive push in Canada in any shape, form or fashion. So how would you respond to that sort of concern that some investors have that you might go a little aggressive in Canada?

Yes. So let me address that in a couple of different ways. First, I'd say is that we do not need to move from our risk curve, right, to continue to grow. That's the 70% of our business in Canada, and that includes our Canadian P&C business, our Wealth and Insurance business and certainly, our TD Securities business on a global basis, that don't have any of the asset cap restrictions, we see significant growth opportunities and significant momentum in all of those verticals. And I'll talk about that in a second. And we can capitalize on the forward growth in those businesses without having to extend in any way on the risk curve and stay within our risk appetite. If I just look at the momentum that we have in our Canadian Personal and Commercial Bank in Q4, record revenues. We had robust growth in loan and deposit side. If you think about from a checking account acquisition, record checking account acquisitions in 2024. We delivered on our Investor Day commitment to grow our New to Canada acquisition by 50% relative to 2022, and we delivered that by the end of 2024. And so we are absolutely the leader in Canada and New to Canada acquisition, which is 100% of the growth of Canada. So it's a market space you have to win and it's a critical segment of customers, and we're focused on that. You overlay the fact that we have the #1 credit card portfolio from active cards in market. We crossed a milestone in 2024, 8 million cards now in market. The #1 small business bank in Canada also. And so from a commercial banking perspective, now you've seen 2 consecutive quarters of deposit growth. Q4 on a quarter-on-quarter the deposit growth would have been peer leading on that side of it. And from a full year loan growth, we've outperformed the peer average in 2024. So terrific momentum in the Canadian P&C business on the Wealth side of the business, the business that I've had a chance to run both of these businesses, Wealth and Insurance. On the Wealth side of the business, again, a record revenue for Q4 and driven by strong asset growth. We're seeing higher trades per day. Just take a look at our Wealth business and the significant upside opportunity. I mean we have the #1 direct investing business in Canada, 40% market share when you look at the top 6 banks from an AUA perspective. We're continuing to lead in direct investing from an innovation. I think all of you would have seen that we've made a significant investment in our active trading platform. It is the most sophisticated leading active trader platform in the country, and we're starting to see significant uptick on that side of it. We then launched what we call partial shares or fractional shares. We're the only Canadian bank in direct investing that offers this capability. This is a game changer for retail investors. And so we're seeing not only significant wins from that side, but customers are switching their direct trading accounts because of this capability, and we're the only Canadian direct investing company or a bank that has that. And then you look at the fact that we're the #1 institutional asset manager in Canada, and that in 2024, we had the largest market share gain in ETF. So terrific momentum across our Wealth businesses, Insurance and as all of you know, we're the only Canadian bank that has a general insurance business. We're now #3 in home and auto insurance in Canada, the #1 direct insurer. We have made significant investments into the Insurance business to modernize the platform from a technology perspective, and now we are the leading digital insurer. Darko, 40% all of our new business in insurance is done straight through processing. So the marginal cost of a new policy is significantly lower than our competitors. And so the expense advantage that we already had as a digital player is even more magnified now as we move forward. And I think that's a business that will continue to add terrific fee business for us. And then finally, when I look at the TD Securities, TD talent integration, which has gone incredibly well. And it really is because we have two companies that had very different capabilities that are coming together. On the TD Cowen side, we now have the equity capital management for the U.S. We have U.S. equity research in one of the leading research teams in America. We've entered new verticals like health care, biotech, that will be significant for us as we move forward. And so now, for the first time, we have a fully integrated North American dealer as we move forward. And so on your question, on can we continue to deliver from an EPS, ROE. When I look at the momentum that we have in these businesses and the significant growth opportunities in those businesses, as we revisit how to reallocate our capital as a part of our strategic review, I think you should expect that we are going to accelerate our momentum and continue to outperform against our peers as we move forward.

Okay. Thank you for that. And I think I wanted to just come back to some of those things. But before I do, let me just -- I mean, we could sit here and dance around the topic of AML, but let's not dance around it. Let's talk about it a little bit. So I wanted to give you the opportunity actually to talk about the AML remediation program. And maybe a couple of things that I think the audience would like to hear first and foremost is, what can you share about the efforts so far? I'm thinking about hiring technology, monitorship. What is it that you can share so far on the program? And then the second part of the question is I have a concern, as many do, that although you've outlined these costs, these costs can creep as time goes on. So maybe you can talk about what you've done so far and then address the concept that there's going to be potentially some cost [indiscernible].

So I'll tackle both. On the AML remediation, as we've been saying all along, it is the #1 priority for the organization. It is my #1 priority as the incoming CEO. And so -- although the global resolution was announced on October 10, one thing I did want to get across to everybody is that we have been working on the AML remediation for some time now, right? And so we have a very detailed action plan with critical milestones laid out that we will need to achieve. And our expectation is that by the end of 2025, the majority of the management actions will be completed, right? And so -- and then you've got to go through some of the data, the technology, but also we then have to have the internal audit validation, sustainability. And obviously, we need to then have the regulators come in and test and do the sustainability there. So this is a multiyear journey, right? And we are making good progress on our AML remediation, but there's still significant work to be done. We have set up an AML remediation office, Darko, staff specifically to deal with the regulators, but also make sure that we stay on track with the milestones and the time lines. What we'll commit to everybody here is that on a quarterly basis on our analyst call as we move forward is that we will update all of you on what milestones have been completed, what's the work that's required in the next quarter. And so that you have good transparency around the work and the pace and the progress and are we on track to deliver on our commitments on our AML remediation. From a talent perspective, we have had terrific response in acquiring and attracting top talent in this space. And so whether it's AML, subject matter expertise from other large U.S. banks that have now joined us, to law enforcement leaders senior regulatory agency leaders that have come across are adding the subject matter expertise. And so we've made a significant investment in talent, not just at the executive level, but all levels, first line, second line, third line, we've added in risk. We've added in audit. From a technology perspective, we have already invested in enhancing our monitoring, our detection our capabilities around analytics, data. And so we are making significant investments, and this is the progress that I'm talking about, Darko. Having said all of that, I just want to keep reinforcing that it is a multiyear journey. We are on pace but we'll continue to update everybody as we go along on that side of it. From a cost perspective question, the one part that I would say as part of the consent order is that there is a look-back period over the next -- and that we need to still go through. And so as we go through the look-back period, there may be some things that come up that will require additional investments. But as I said, we've been at this for a while now. And so we have a good understanding of what the work is that's required the resources that will be needed, and we now have the talent inside of TD to deliver against the milestones that we've laid out. From a monitorship perspective, we've made progress there. And if you go back, you'll see that from a monitorship perspective, we submitted our list of candidates for the monitorship to both the DOJ and FinCEN. And just fairly recently, they both have now approved using the same monitor on a go-forward basis. And so we look forward to working with our monitor to making sure that we are delivering a market-leading AML platform. Now I would just remind everybody in the DOJ and FinCEN public notes that the conversations and the reports from the monitor are confidential. And so we probably won't provide any more updates with respect to the monitorship, but other than the fact that it has been selected and we're moving forward with the monitorship.

Okay. Great. Thank you for the detail. And so one last question before I leave this whole topic. But it's one that as I sat through and I went through all of the details of the DOJ and the consent order and so on. There was one revelation in there that stuck with me, which was one of the things that you've done over a long period of time in the U.S. was you had kept your AML budget flat over a very long period of time. And that was considered to be a fairly big breach of what they were looking for. But from my point of view, I thought to myself, well, if you did it for AML, it's possible you could be doing this elsewhere. It's possible that this might actually be a cultural thing at TD and that you might be suppressing budgets everywhere. So maybe you can speak to the decision-making process that led to suppressing that budget and speak to -- and I don't know how we can really dive into this, but speak to whether or not this is happening elsewhere at TD?

Sure. Fair question, Darko. So let me -- I think there's two big lessons learned that have certainly come front and center as we've come through this AML challenge. And first is that you need to have talent that is commensurate with the size and complexity of a bank of TD in this particular space. This is a dynamic space. It's an ever-evolving space from an industry perspective. And so talent at the most senior levels in AML is absolutely one of the top priorities that we have as an organization. And I just talked to you about the talent that we've now attracted. We have a new Head of U.S. financial claims and risk management. We have rebuilt the entire AML team in the United States. And the reason I mentioned this is that matters because that talent then will determine what investments are required what capabilities are needed, what tools, what platforms we should be using. The other learning that we had was the importance of external benchmarking, right? And so the combination of having the right talent and consistently doing external benchmarking will allow us to make sure that we are providing the appropriate resource funding and support to make sure that we're staying relevant. What I would say, Darko, is that at a macro level, if you look at our expense budgets over the last -- in our expense growth historically. TD Bank has been growing our expenses probably disproportionate to the industry. And so we certainly have not spent money and our expenses on that perspective is did we spend it in the right places with respect to AML. And so -- and I think now that we have the talent in our house, it's clear that we have opportunities and we are accelerating as part of the AML remediation, the spend that's required and the commitment that's required over the multi years. And so that's on that piece of it. On the -- did we underspend in other elements or other parts of the organization, having -- personally having led the vast majority of the Canadian businesses. I've led the global Wealth and Insurance business. I've led the Canadian personal banking business. Those two areas make up the bulk of the Canadian bank. What I can tell you is that we have a very disciplined process on where we allocate project funding to make sure that we are investing in the things that we are growing responsibly, prudently and not only are we delivering for our clients, but we're making sure that we're delivering for all of our stakeholders. So I feel comfortable and good around the investments that we've made. Part of the strategic review that we're actually doing, though, is to identify, are there areas where we need to modernize our platforms faster. Are there areas that potentially did have some underinvestment and we need to accelerate those investments? And then most importantly, are there areas of growth that we can accelerate by reallocating capital. And so that is a big part of the strategic review, and I'll share that with you guys as we come along.