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

And I'm going to come back to that in just one second. Just on the mortgage piece that a fundamental shift that Sona has done under her leadership is the mix that you're seeing in our mortgage portfolio. And so the mix between broker to proprietary to direct, right? And so what you're seeing in TD Bank is we used to have a higher broker mix, which is lower margin, right? And this year, we have record proprietary, that's the MMS mortgage sales force, plus our branch mortgage sales and due to those 500 mortgage specialists that we put in. So you're seeing for the first time, our proprietary mortgages, even though the RESL market is down in Canada on a year-on-year basis, our proprietary mortgage is actually on a record, right? And so terrific momentum. It's a mix issue. And also the mix between mortgages and HELOCs, we're also rightsizing that mix and you get -- and certainly, we're getting a better balance between HELOC and mortgage. That gives you another pickup in the margin. And so keep that in mind as you think of the RESL portfolio. When you think about sort of acquisition, new to Canada, which is your question, Mike, I think about acquisition in 3 buckets, specifically in Canada, new to Canada, switchers and students. And you have to actually try to win in all 3, right? And so what you see in Q3 for TD Bank is we had the highest switcher acquisition numbers that we've ever had on record, and we've had the highest student acquisition numbers that we've had. And so we've revamped those 2 programs. While immigration has come down, it's still a significant factor. And we absolutely win from a new to Canada perspective. And -- but those numbers are down a little bit. I do think in the next few years, those numbers, you'll start to see that sort of tick back upwards as we sort of revisit our policies as a country. But that's what gives me confidence is that you have to win on all 3 of those categories. You got to win on new to Canada, you got to win on the switchers and you have to win on students, and we're seeing terrific momentum on that. And then that translates into credit card sales, mutual fund sales. And if you look at our credit card acquisition, again, #1 in year-on-year growth in credit card acquisition for the last 4 quarters. And so we're continuing to see that momentum play through throughout the entire organization. But it all starts with, can you win the acquisition battle? Can you get primacy of the Canadian consumer? And that's where we actually have a very big competitive advantage.

I want to go back to deposits in Canada and your core deposit franchise. You did allude to a couple of interesting numbers and stats. How does TD continue to maintain that advantage? Because you're clearly in an advantageous spot right now, but things can always change. Like what do you sort of -- what's the secret sauce of keeping TD at the top on that core deposit base?

Well, listen, I do think the -- I mean, we bank 1 in every 3 Canadian. And the last numbers I saw is something in the neighborhood of about 35% to 40% of all new to Canada do select TD as their first account. And so what we've been focused on as part of our strategy is, number one is deepen the relationships of the clients that we have. And it's not just in the retail, it's whether it's our TD Securities clients or our commercial banking clients, significant opportunities to deepen those relationships. And the biggest way to deepen those relationships is actually make it simpler and easier and faster to do business with TD. And so I can tell you, and I've told some of you before that if you think of the new to Canada customer, we open about 500,000 new to Canada accounts, and we consider new to Canada over a 2-year period. And I would tell all of us in this room that if we move to any country, you do 1 of 2 things. you'd open up a bank account and you go get a credit card, right? And we made it incredibly hard for our clients to get a credit card because we didn't do zero score credit bureaus well. And so that process took so long, it frustrated our colleagues, it frustrated our clients. that only 30% of our new to Canada clients were getting a credit card with TD and then 70% went elsewhere and yet 100% wanted them. And I could tell you, it's not a risk issue because I've had the risk team review the portfolio of new-to-Canada credit cards relative to the non-new-to-Canada portfolio, it is a marginal difference in delinquencies. So it has nothing to do with the risk perspective. It was all about the process was so complicated. The team has changed that process. And now as you open your checking account, it will soft ping the bureau. And as long as you do not have anything derogatory on your credit bureau, I don't -- and I keep saying, "I don't know how someone ruins their credit bureau in 2 days of being in Canada," right? I hope not, that we will then preapprove you for a credit card on the spot as you open your checking account. That leads to something like 250,000 to 300,000 new credit cards. But more importantly, I've always said that when clients open their bank account with us, I think in most clients' minds, Mike, they're doing us a favor, right? They're depositing money, they're giving us their funds. And the first time a client really tries to figure out, does my bank trust me? Is my bank helping me is when they apply for a credit card. And for new to Canada, we weren't creating sort of that wow moment on a regular basis. And now it's the complete opposite. That will then earn us the right to have the savings discussion. that will earn us the right to have the mortgage discussion. And so it's really important that you get those 2 pieces right. Can you get them in the door and then the products and services that they need, can you deliver it to them in a simple, easy, frictionless way. And that's exactly what we're working on right now.

Okay. Maybe switching over to Wholesale Banking. Obviously, the business has done a lot better last few quarters. The market has been very constructive in terms of the backdrop there. Your ROE has been significantly improved. And I have to -- it's almost like a boiler question I'm asking because clients are asking, investors are asking, in terms of the sustainability of wholesale, how do you sort of see that? I'm guessing the revenue diversification is going to help sort of stabilize it. Maybe there's less of a downside scenario if markets do turn. How do you sort of see that dynamic in terms of your wholesale business?

Yes. I couldn't be more pleased with the performance of our wholesale business. First and foremost, as all of you know, 3 years ago, when we did the Cowen acquisition, lots of questions on, could you make this acquisition work? It's not easy to take a boutique investment firm and put it together with a G-SIB and could the cultures come together, could you retain the talent from the Cowen perspective? And it could not have gone any better. And I'll tell you from a talent retention perspective, but just the fit from a culture. And a lot of that is because the reason we bought Cowen is that the capabilities and the talent that Cowen had, Mike, is exactly what we needed, right? There wasn't a sort of pick who's going to stay, who's going to go. We actually needed it all. So from the research capabilities to the prime brokerage capabilities to verticals like health care, biotech, things that we just didn't play in that are the growth parts of the wholesale business. So we've been able to bring in that entire business into the TD infrastructure. Where we found synergies is in our sort of operations back office. So that's number one. I would tell you, that the mix of where we're doing business has changed. I mean the U.S. is obviously the largest market. And so like historically, we would have had more earnings coming out of the Canadian wholesale bank. But now we've got about 50% of our earnings in the Investment Bank coming from the U.S., 30% from Canada and 20% from the rest of the world, Europe, Asia and what have you. And I see that mix continuing to sort of play into the U.S. piece of it. But I said it in my opening remarks, if you go back 3 years ago when we did the Cowen acquisition, we've now shown every quarter, we've doubled the revenue for this business on a quarterly basis. We did have a record Q3. The markets are constructive. So I do think at some point, some of that comes back a little bit. But we've diversified now our earnings, and it's been really important. One of the things that we said at Investor Day is that we needed to make sure that at TD, there would be a focus on driving fee income. And that's exactly what you've seen with TD Securities, our Wealth Management business, our TD Insurance business, our credit card business. Those are the businesses that we wanted to supercharge coming out of the Investor Day, and you're seeing that exactly play out with the discipline on our cost restructuring. And if you go back to our Investor Day, I think the ROE that the TD Securities was producing back then, I'm going to get this number, was around 9% in that range. Q3 ROE was 16.7%. And so Tim and team have done a terrific job and not just driving revenue, but they've made tough choices on expenses. They've made tough choices on restructuring their business. They've gone down to each individual client level in both our wholesale business and in the commercial bank. When we say we're going to get serious around ROE, we know the ROE at every client level and then what's the projection over the next 2 years. And we're trying to build deeper relationships, more fulsome relationships with every one of those clients. And so where we deploy our balance sheet, we want to make sure it's a true partnership and a relationship.

Okay. So it sounds like the U.S. opportunity is still there in terms of growing organically, potentially tuck-in deals, I'm guessing as well. What about your longer-term ambitions? Like do you ideally want to have more of the bank's earnings coming from wholesale? It's a question that I get often just given how good the business has really been in the last couple of years, and it seems to be in a much more steady state sort of diversified business than it was in years past. Would you ideally want to move the needle on that?

Absolutely. I do think where we want to be is probably somewhere in that 20% to 25% of the bank's earnings coming from the wholesale business. It's at 15% today. And that's not changing our risk appetite. That's not changing our risk curve. It's actually playing right within those, as I say, in the golf terminology, right down the middle of the fairway folks, right, is what we want to play. But we have the client base. What we haven't had historically is the capabilities that we've needed like Prime services, transaction banking. We're making a significant investment at TD Bank on transaction banking, and you'll see that to play through. Prime Services in the United States. We've had it in Canada, but not in the U.S., and you're seeing that play through. So I think it's fair to say you should expect to see the wholesale bank contribute what any G-SIB bank would have in that 20% to 25%. And in these constructive markets, I would tell you, most G-SIBs are probably 30% to 35% of their earnings are coming from the wholesale bank. My goal is somewhere in the 20%, 25%. And so I think from an upside perspective, still significant opportunity for us.

Okay. Capital deployment, definitely very topical in terms of TD because you do have the highest CET1 ratio, the most excess capital. And I know the ambition is to get to that roughly 13% CET1 by the end of next year. I think most investors think that it's probably tough to get there because you're sitting at 14.3%. There's so much abundant capital. But what are your sort of high-level thoughts on how you sort of move the needle because it's just...

Well, and I think I said it on the Q3 call that TD is different than any of the other banks in a positive way. And first and foremost, we do start from an incredible position of strength that we're at CET1 of 14.3% and producing an ROE of 16%. I don't know that a lot of people would have thought that would have been possible, right? So I've said very clearly that our #1 priority for deploying capital at TD Bank is organic, and that is the focus and will continue to be our focus. Then comes the buybacks, and we have the ability to do significant buybacks. And then ultimately, which is not a priority for us, but if ultimately, there is a sort of a tuck-in opportunity on any of the fee-based businesses is really where we would potentially take a look, but that is not a priority for us. And so I would say we're in the privileged position that we can actually do it all, right, that we can invest significantly to drive our organic growth. that we have the capital to do sizable buybacks. And then ultimately, we have enough dry powder that if a tuck-in opportunity was to present itself that we could deploy there. So terrific. Part of that is the advantage that we have is, as you know, that we generate organic capital at an incredible pace, right? And so in these uncertain times that we're in right now, I certainly like the position that we have. But our goal is to get to by the end of 2027, CET1 somewhere around 13%.

Right. And would you ever consider a special dividend to do that?

We've always talked about it, but we like the flexibility that NCIBs allow, right? And so I do think that, that probably would not be something that we would pursue a special dividend. The NCIB route is the route that I think gives us the flexibility. And also, I think there are some advantages also for -- from a tax perspective for shareholders and all of that. So there's other multiple reasons why I think NCIB is the better path.

Okay. Maybe just one final quick question just on AI. You've given us a lot of color on the call and throughout -- since the Investor Day in terms of what you're trying to do. Is there -- do you see an opportunity that maybe things go better on AI and there's even more upside. And I'm sure you'll tell us when the time is right. But is AI morphing into something a lot bigger?

Yes, 100% it is, Mike. And I think when we did Investor Day and we put that target of $1 billion out there, what I underestimated and my entire team is -- and some of this, again, we're like inning 1 and 2 of the AI journey is that the benefits of Agent -- what I'm seeing with the gentic AI capabilities is something that I haven't seen with automation. I haven't seen it with digital is that you can finally truly go end-to-end and reimagine entire processes. And so we've picked 5 big enterprise, what we call big rocks. Contact center is one, end-to-end retail credit, fraud, AML, KYC and adviser productivity. Those cut across. And so in those specific areas, as we drill into, we do think there is sizable upside to the $1 billion. And when I talk about the structural unit cost reduction of running TD Bank, at the core of that is leveraging AI. And I'll give you -- I told you the examples that we did around our pre-adjudication mortgages that we've taken a 15-hour process that on the pre-adjudication for mortgages for every mortgage would have taken 15 human hours. It's now down to on average 3 minutes. and it's 100% end-to-end Agentic, right? That same agent, we are deploying by the end of this quarter for funding and for discharge, right? And so think about mortgage funding, think about mortgage discharge. Mortgage funding on average cost us about $187. It's going down to $47, $46. Discharges are going from $22, $23 down to about $11. Now that Agentic capability, everybody that we do for mortgages is transferable now to small business banking, auto finance, can move down to the United States, has fun into the commercial bank. So once you build this Agentic capability, you can actually move it, and that's where I think I underestimated and we underestimated the benefits. I'll tell you another benefit. We just launched our first agent around collections. right? And so leveraging agents and AI and better data and around collections, everybody, the key is can you get in contact with the person, the connect rate. When we are using people, the connect rate was about 6%, 7%. Our connect rate using our agents now with the AI behind it and getting to them at the right times is between 20% to 25%. And so it's not just a cost reduction. There's significant productivity benefits. And so we're early days on this journey, but I am seeing things today that I have not seen with when we were on the automation journey, the mobile journey, the digital journey. This is transformative. And so I'll keep everybody updated. But it is a win for clients. It's a win for our colleagues, and it's a win for shareholders.

Okay. And I think we'll have to just given the time, I have to end it here. But thank you very much, Ray, for your insights, super, super insightful.

Thank you very much, everybody. All right.

Thanks for joining us. Pleasure. Thank you very much.