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

With us, we have TD Bank. And presenting from TD Bank is Leo Salom, Head of U.S. Banking. Welcome Leo.

Brian, good to be here with you.

Great. Thanks for coming. All right. Let's start with -- so on the recent earnings call, you announced you're going to focus on opening 100 new branches by end of calendar 2028, subject to regulatory approval. Maybe you can provide a few more details on the growth strategy.

So very excited to be able to make that announcement. We -- this is really a return to sort of a proven track record that we've had previously. We did open up about 250 stores over the last decade. Obviously, given the last 2 or 3 years with the remediation, we took a pause. This is returning to that expansion strategy. I think maybe a couple of things that I would say. We have a pretty substantial existing footprint across the U.S. today, 1,100 stores. This is really a focus to densify, strengthen our footprint in those particular markets. And with really -- with 2 critical objectives. One, in the major markets in England, the New York area and New Jersey sort of Philadelphia, where we already have a top 3 deposit position, we really want to ensure that we're properly positioned for the emerging demographic trends that are taking place. So it's -- think of that as a true positioning and an extension in terms of the existing footprint that we have. The other part of the expansion is the Southeast expansion, where we really wanted to take on a greater footprint in markets like Florida, Carolinas more broadly, we'd like to try to embed or increase our presence in those particular markets. Taken in aggregate, it will be a substantial move and growth will be short a period of time. We said we'd open up the 100 stores by the end of 2028. And so we'll get started on that in short order here. But it's an exciting step forward, and it brings us back to a bit of an expansionary posture.

Great. And then how does the branch expansion strategy interact with the consent orders and asset limitation currently in place for TD's U.S. Bank. Can you comment on what you mean by subject to regulatory approval?

Sure. Brian, and I know I've mentioned this in the past. I wouldn't want anyone to interpret the fact that we're opening up stores as the fact that our remediation plan is complete or that we satisfied all elements of the consent order. . The consent order always provided for the ability for the bank to be able to open up stores or branches -- and this is essentially us having a degree of confidence in discussions with our regulators that we will be able to open up those 100 stores by the end of 2028. I should say that with regard to the AML program itself, we feel quite comfortable with the work that we've done in that space, a tremendous amount of progress, Brian, in a relatively short period of time. And I think that where we are on that remediation where we are from a maturity standpoint, gives us the confidence that we can embark on this expansion plan at this point in time.

You shared that TD continues to make meaningful progress on its AML remediation. Can you provide an update on this progress? Any updates on the time line?

Sure. So I know I've had conversations with many of you with regards to the work that we've done from an AML standpoint. I'd say, first of all, we are very pleased with the progress that we've made on our overall AML remediation plan. And I've signaled that on various analyst calls. But if I just take a moment to describe what we've done -- we've completely rebuilt the management team around the BSAML program. Today, we have 40 very seasoned titled officers supporting various aspects of our AML program. We have strengthened and renewed a lot of our policies and procedures and upgraded them accordingly. We've implemented a new customer risk rating program. We've implemented a new transaction monitoring core platform. We've revamped our investigations capabilities, changed our training programs and really strengthened the relationship with the sort of engagement model law enforcement. Put all those things together, a lot has been done in a relatively short period of time. There's still more work to do with regards to the AML program. But I think we're entering into a very important phase with regard to the program. And that is phase associated with validation and sustainability. That's really the work ahead of us now is really to ensure that it gets valid. And for some of you that you might have heard me say this in the past. When we say validation, it means that every management action that we've implemented will be challenged by the business community by the business itself will be subject to internal audit validation will be reviewed by the monitor and ultimately, it has to be accepted as effective by the regulator. And that's the process we're in right now. I think we've made a lot of progress on the actual management actions themselves. We're now in that important validation stage to be able to secure regulatory relief.

Great. And then on expenses, TD increased its guidance for the U.S. BSA AML remediation expenses from USD 500 million for fiscal 2026 to USD 550 million for '26. What was driving that increase? And what is your outlook for the U.S. BSA AML expenses for '27. Should we expect some moderation in costs?

Yes. So Brian, we did say on the call that we were going to come in for the full year at $550 million. So a $50 million increase vis-a-vis what we had said for -- and what we did say is that the majority of that expense increase was associated with the look-back exercise that we're running. To a lesser extent, it was also related to the fact that we've accelerated a series of management actions that were previously scheduled for later on in 2026, outside of our fiscal period and 2027, and we brought those in to be able to get out in front of some of the critical deliverables that we had. . I'd say, as I think about 2027, we do believe we'll be able to moderate overall governance and control costs associated with the AML remediation effort. I'd say that moderation is probably to take place more in the second half of the year versus in the first half of the year, but it will allow us to be able to start to realize some degree of benefits. Some of you might recall in the Investor Day we did communicate that we do expect that more than half of the total remediation expense, we'll be able to be reduced permanently while there'll be a portion of that, that will remain as part of our run cost as part of the AML program. But I think that's a -- I think being able to experience some degree of moderation will certainly help us in next year's overall expense profile.

Okay. Great. I think this is more broadly, TD has maintained its guidance for mid-single-digit growth for fiscal '26. What are some examples of how you're driving structural cost savings in U.S. banking. What's your outlook for overall expenses for fiscal '27?

Yes. So the work we're doing on expenses is critically important. I know many of you have heard me talk about the fact that we're really looking at our structural cost envelope in the U.S. business. In the Investor Day discussion, we did put out a target to reduce our structural cost by $750 million. And I can say, based on the progress that we've made this year, having achieved almost $200 million of cost savings this year already. that I think we should be able to achieve that within the MTO period. Some of the things that are driving some of those savings is partly the score optimization work that we did earlier this year. We also discontinued a number of businesses, part of our balance sheet restructuring effort. We have been leaning in to certain organizational health initiatives to be able to bring down our overall staffing levels in select areas in the bank. We're leaning in awfully hard on this moderation of G&C costs as we're getting through some of the remediation, we are able to begin to start realizing some degree of benefit. And probably the 1 that's early days, but it's showing some promise is the work that we're doing from an AI perspective to actually see some additional expense. You put all those things together, and I think the way I'd ask all of you to think about it is we've already been able to moderate the absolute level of expenses in the U.S. banking business. So our overall expenses on an absolute basis have been about $1.8 billion, just above $1.8 billion for the last 4 quarters. What we would like to be able to do is create the capacity for ourselves to be able to reinvest back at scale in some of the critical things that we're trying to achieve, including our branch expansion plan, including the increase of frontline bankers and financial advisers, leaning into some of the infrastructure investments we're trying to make in data and technology. But I think the point that I'd want to underscore is we're trying to create the capacity to be able to enjoy the value of J-curve type investments without the J curve to be able to allow us to be able to self-fund an accelerated degree of growth within the envelope that we currently operate today. And I think we're making good progress, more to come over the next 24 months.

I think that kind of leads directly into my next question. Is AI driving expense savings? And can you provide examples of AI initiatives transforming how you operate the business in the U.S.?

Sure. So in a word, absolutely. I do think -- I am truly excited about what we're seeing from an AI perspective. And I'll just talk about some of the things we're already doing and maybe some of those things that are probably to come in terms of some of the opportunities. . The single most impactful AI program that we're running right now is our software development program. We've now enabled 1,800 of our developers with GitHub copilot. I'd say while adoption curves will vary across that universe of developers, we're seeing anywhere between 30% to 40% improvement in technology capacity available to those individuals, which right now, we are going to look at potential cost synergies there. But we're also experiencing what is a significant increase in just our ability to bring solutions to market faster. And so we're using it as a capacity increase as opposed to a hard dollar reduction at this moment in time. but obviously, we'll revisit that as we move forward. I'd say another area that we've applied to AI at scale is within the AML effort itself. We are investing -- we've already deployed 3 models. So things like scanning negative news for any adverse developments on any clients in the portfolio or using AI to be able to look at our transaction alerts and be able to decipher were patterns in it and be able to surface that much more effectively. We're now working on a solution to be able to construct an investigator's desktop to be able to allow them to be able to look at hundreds of different items and immediately scored and be able to provide them with greater insights on how to manage that particular investigation. So all of these things will make not only the AI program, I'm sorry, our AML program much more effective but it should, over time, develop -- generate some really significant efficiencies. I'd say 1 area that I'm particularly excited about is the work we're seeing in the call center space. So in the voice and chat AI space. We are working with a vendor as we speak, to be able to enable a voice AI agent solution that we're targeting to address about 50% of the calls into our call centers. In fact, we were at a Board meeting yesterday, we got a chance to actually be able to demo the new piece. And it is it's incredible what's possible today in just the last 3 to 4 months, the quality of the sort of speech dynamic and the latency, the reduction in the latency that exists is now making what seemed almost unlikely a year ago, very likely now. And so what we will do, obviously, that will create some synergies in terms of frontline staffing. We hope we'll be able to reinvest some of that in being able to enrich the overall experience in the call center over time. I use those as just examples, but I would -- Ray, Ray Chang, our Group CEO, talks about reimagining banking. I really do think that a genetic AI and some of the things that we're looking at, at the moment will allow us to be able to change the way we work internally. How work gets done inside the organization, and I think it will unlock a significant amount of expense synergies over time.

Great. Let's turn to the balance sheet. Q3 was an important inflection point for TD's U.S. banking segment with positive sequential loan growth. What do you see as key drivers of loan growth for your business going forward?

So to your point, Brian, the last quarter, we were able to post total loan growth -- that means that we fully absorbed all of the restructuring loan runoff within the quarter. It's the first time we've done that since we announced the overall restructuring program. Our core loan growth, we have about $165 billion in total loans. Our core loan growth was 3%, evenly distributed, both retail and commercial, both posted about a 3% growth rate. . But what I think is most important is in the areas that we have signaled during Investor Day that we were going to grow, so take our bank card business, our bank card business was up 20% on a year-on-year basis. New accounts for our cards business was up 30% and spend was up 12%. Some really strong fundamental growth in a category that we've said was going to be 1 of the critical categories to win as we think about the Investor Day overall targets. I'd say that it wasn't the only category in our HELOC business, our home equity line business, that portfolio was up 6% on a year-on-year basis. and pipeline volumes were up 25%. So we're seeing some good fundamental growth there as well. And I'd say the last area that I would say is our mid-market business, which is an area that we've been deliberately focusing on and working very closely with TD Cowen, which is the investment bank that we purchased in TD Securities to reinforce our capital markets business, that overall portfolio, the mid-market business was up 15% on a year-on-year business. And I think we're just beginning to see the power of that partnership with TD Security. So you put all those things together, I'm feeling cautiously optimistic about our ability to not only sustain, but accelerate the growth that we're seeing across our various lend books.

Great. On the deposit side, with the competitive deposit market, TD is well positioned because of the strong core deposit base. What do you see as drivers of the deposit growth going forward?

So in many ways, the 1 thing I would leave with all of you is that the deposit portfolio at TV is sort of the crown jewel. I mean it is -- it is the flagship product. We have historically been a very effective deposit gatherer in the U.S. just to bring that to life a bit in the 3 largest markets that we operate in. the New England marketplace, including Boston, our presence in New York City and our presence in the greater Philadelphia marketplace, we have a top 3 market share position. In fact, 76% of all of our deposits are in markets where we're either first, second or third in terms of market share. So that gives us an incredibly strong overall position. And if you look at the type of deposits you have, we are a traditional core checking transactional primary bank institution. So that gives us a great stable platform to be able to fund our portfolio. When you combine that with the fact that our loan-to-deposit ratio is 58% overall, just sub-80, if you exclude the swab deposits, that gives us a unique position vis-a-vis our regional peers and some of our larger bank peers to be able to not only fund our balance sheet, but to do so at a much more attractive cost point and some of our peers that are forced into marginal pricing structures. So I think that's a unique advantage for us. It is an area, to your point, that we are leaning in. It's a critical part of our Investor Day objectives. In retail, we are leaning in quite significantly. The branch expansion will be helpful. I'd say the expansion of our front office staff will also be critically important. We're retooling our digital account opening capabilities and implementing next-generation precision pricing capabilities to tier much more intelligently and sort of price our book effectively as we move forward. So in retail, I'm confident that we'll be able to continue to grow that core book of business. And likewise, in the commercial side of the house, last year, we announced a global transaction banking effort, across TD Securities and ourselves to be able to focus on those cash management and treasury management capabilities that are going to position us to be a leader in the U.S. marketplace and to better service both our commercial and corporate banking clients. Really pleased with the progress we're making on that front. And I would expect that to translate into greater product innovation and ultimately, greater growth in terms of overall commercial deposits. You put those things together, I gave a guidance at the Investor Day of a mid-single-digit growth rate in terms of deposits. And I think we feel quite comfortable with that as a future guidance.

I mean we put how do these loan and deposit dynamics, plus tractor pricing impact U.S. banking NIM outlook? You've guided to modest NIM expansion for Q4. What is driving that? And what is your NIM outlook for fiscal '27?