The Toronto-Dominion Bank (NYSE:TD) Q4 2022 Earnings Call Transcript December 1, 2022
The Toronto-Dominion Bank beats earnings expectations. Reported EPS is $2.18, expectations were $2.05.
Operator: Good afternoon, everyone and welcome to the TD Bank Group Q4 2022 Earnings Conference Call. I would now like to turn the meeting over to Ms. Brooke Hales. Please go ahead, Ms. Hales.
Brooke Hales: Thank you, operator. Good afternoon and welcome to TD Bank Group's fourth quarter 2022 investor presentation. We will begin today's presentation with remarks from Bharat Masrani, the bank's CEO. After which Kelvin Tran, the bank's CFO, will present our fourth quarter operating results. Ajai Bambawale, Chief Risk Officer, will then offer comments on credit quality, after which we will invite questions from pre-qualified analysts and investors on the phone. Also present today to answer your questions are Michael Rhodes, Group Head, Canadian Personal Banking; Paul Douglas, Group Head, Canadian Business Banking; Raymond Chun, Group Head, Wealth Management and Insurance; Leo Salom, President and CEO, TD Bank, America's Most Convenient Bank; and Riaz Ahmed, Group Head, Wholesale Banking.
Please turn to Slide 2. At this time, I would like to caution our listeners that this presentation contains forward-looking statements that there are risks that actual results could differ materially from what is discussed and that certain factors or assumptions were applied in making these forward-looking statements. Any forward-looking statements contained in this presentation represent the views of management and are presented for the purpose of assisting the bank's shareholders and analysts in understanding the bank's financial position, objectives and priorities and anticipated financial performance. Forward-looking statements may not be appropriate for other purposes. I would also like to remind listeners that the bank uses non-GAAP financial measures, such as adjusted results, to assess each of its businesses and to measure overall bank performance.
The bank believes that adjusted results provide readers with a better understanding how management views the bank's performance. Bharat will be referring to adjusted results in his remarks. Additional information on items of note, the bank's use of non-GAAP and other financial measures, the bank's reported results and factors and assumptions related to forward-looking information are all available in our annual 2022 report to shareholders. With that, let me turn the presentation over to Bharat.
Bharat Masrani: Thank you, Brooke and thank you everyone for joining us today. Q4 was a strong quarter for TD. Earnings increased 5% to $4.1 billion and EPS rose 4% to $2.18. Revenue grew 12% year-over-year, reflecting increased customer activity and the benefits of our deposit-rich franchise. While we have seen some increase in PCLs this quarter, credit performance remains sound, benefiting from TD's through-the-cycle underwriting practices with key credit metrics remaining well below normalized levels. Our banking businesses have performed well in this environment, enabling us to continue to make strategic investments in our people, in technology and in new capabilities in our businesses to drive future growth. TD's Common Equity Tier 1 ratio ended the quarter at 16.2%, reflecting significant organic capital generation, the goodwill hedge for the First Horizon acquisition and the divestment of a portion of our Schwab shares in August.
We continue to expect the bank's CET1 ratio to be comfortably above 11% post closing of the First Horizon and Cowen transactions. We remain confident in the earnings power of our franchise and today declared a $0.07 dividend increase, bringing our dividend to $0.96 per share. I am proud of what we have accomplished this quarter and this year and we are entering 2023 from a position of strength. We continue to innovate to keep pace with market developments and build new capabilities for our customers. Among financial institutions, TD has the largest patent portfolio in Canada and the fifth largest patent portfolio in the U.S. Enterprise-wide, 150 of the bank's patent applications have been granted this year. And this quarter, TD was named the Best Consumer Digital Bank in North America for the second consecutive year by Global Finance, reflecting our industry-leading digital capabilities and the strength of our mobile and online offerings.
Using AI-powered insights, we are delivering highly personalized experiences to our customers, helping them navigate financial challenges and meet their financial goals. Let me now turn to each of our businesses and review some highlights from Q4. Our Canadian Personal and Commercial Banking segment delivered earnings of $1.7 billion. The personal bank finished the year with momentum, including the highest net customer acquisition since 2014 with record acquisition in new to Canada market. We are committed to helping new Canadians and have introduced customer-centric value propositions, including our newly launched banking package, specifically designed for international students, a first among Canadian financial institutions. We saw industry-leading market share gains in non-term deposits and achieved TD's highest market share ever in this category.
In our real estate secured lending business, annual average portfolio loan growth is at its highest level since 2010, and this quarter, retention rates increased by 3.4% year-over-year. We also had record credit card spend and organic loan growth driven by a diverse lineup and compelling acquisition offers and Rewards Canada readers recognized TD with more rewards in 2022 than any other card issuer with the TD Aeroplan Visa Infinite Card and the TD Cash Back Visa Infinite Card ranking best in their respective categories. The business bank, again, delivered double-digit loan growth at 15% year-over-year. TD was particularly proud to be named highest in small business banking customer satisfaction among the big five Canadian banks, according to J.D. Power's 2022 Canada Small Business Banking Satisfaction Study, reflecting our commitment to legendary customer experiences.
Turning to the U.S., our U.S. Retail Bank delivered record earnings of $963 million, with strong revenues despite the implementation of the previously announced enhancements to our overdraft policies, demonstrating the bank's ability to continue to adapt as the market evolves. With the contribution from our investment in Schwab of $237 million, segment earnings were $1.2 billion this quarter. We took market share in our footprint in personal deposits with growth of 5% year-over-year and business deposits were flat in a highly competitive environment as customers continue to entrust TD Bank, America's Most Convenient Bank with more of their business. Mortgage loans grew 17% year-over-year, while credit card volumes were up 8% on increased spend from a year ago.
Commercial loan volumes increased 5% year-over-year, excluding PPP loan forgiveness, reflecting continued strong growth in middle-market and specialty lending. And we maintain our leadership in small business banking, ranking one by total number of approved U.S. small business administration loan units for the sixth consecutive year. We also announced the extension of our agreements with Target and Nordstrom to 2030 and 2026 respectively, enabling the bank to continue to be the exclusive issuer of co-branded and private labeled consumer credit cards for these leading retailers. Before we leave the U.S. Retail segment, I want to provide an update on our acquisition of First Horizon. We are currently planning to close the transaction in the first half of fiscal 2023 subject to customary closing conditions, including approvals from U.S. and Canadian regulatory authorities.
We are excited about the benefits that this acquisition will deliver for all of our stakeholders. As we announced in October, effective this quarter, we established a Wealth Management and Insurance segment. This new reporting alignment reflects the significant and growing contribution that these businesses make to TD's success. This quarter, the segment earned $516 million, demonstrating the power of our diversified business mix as higher insurance volumes and the benefit of higher interest rates offset the challenges presented by market volatility, severe weather events and trading volume and claims normalization. Our advice businesses achieved record net asset growth this year, as clients turn to our growing base of advisers to help them navigate a challenging market environment.
TD Asset Management continued to innovate to meet client needs, recently launching the TD alternative risk-focused pool, a new retail multi-strategy solution to offer exposure to liquid alternative investments. The fund is an extension of our highly successful retirement portfolio franchise and provides retail investors with access to tools, historically only available to institutional investors. Our number one direct-to-consumer insurance business continued its digital transformation with over 20% of new sales this quarter completed digitally from end-to-end. Our insurance business is focused on leveraging its competitive strength and intends to expand its services into an underserved market by launching small business insurance in 2023. Finally, I want to acknowledge our customers across Atlantic Canada that were impacted by Hurricane Fiona and to thank our insurance colleagues for their tremendous efforts on the ground, providing support through the TD Insurance Mobile Response Unit to ensure that we were there for our customer when it mattered most.
In our Wholesale Banking business, we delivered net income of $275 million. Revenue was roughly flat year-over-year as the impact of a weaker underwriting environment was offset by strength in other parts of our business, including higher global transaction banking, trading and lending revenue, again reflecting the benefits of our diversified business model. TD Securities acted a sole book runner on the Council of Europe Development Banks, €100 million reopening of its €1 billion 7-year social inclusion bond supporting their commitment to address the long-term needs of Ukrainian refugees in their host communities. We have made significant progress in preparing for the closing of the Cowen acquisition. On November 15, Cowen shareholders approved the transaction, with over 99% of those voting, voting in favor.
We are awaiting certain regulatory approvals and are planning to close the transaction in the first calendar quarter of 2023. Overall, I am very pleased with the results we delivered in 2022. We built momentum in our retail segments and won more customers with differentiated legendary experiences. And we announced two strategic acquisitions, which when closed will meaningfully accelerate our growth in the years to come. As you know, we have said that we expect to grow adjusted EPS by 7% to 10% over the medium-term. For the year ahead, there are both tailwinds, including rate momentum and the anticipated closing of our announced acquisitions and headwinds, including geopolitical tensions, the complex operating environment and potential economic slowdown.
On balance, unless macroeconomic conditions were to shift dramatically, we believe that we will meet or exceed our medium-term target range in 2023. I am proud of the strong financial results and returns we generated for shareholders this year and how we have positioned the bank for the macroeconomic volatility ahead. I am equally proud of the value we delivered for all of our stakeholders. This quarter, we announced a $10 million investment into the Boreal Wildlands Carbon Project in Northern Ontario, developed by the Nature Conservancy of Canada. This is the largest single private conservation project ever undertaken in the country and supports the fight against biodiversity loss and climate change. By supporting the growth and development of voluntary carbon markets and through the formation of its carbon advisory business, TD Securities is focused on providing new financing solutions to help our clients transition to a lower carbon economy.
We are also innovating in supplier diversity, working with the tenth partnership for refugees in the Canadian Aboriginal and Minority Supplier Council. TD had sponsored a new certification program for businesses owned by entrepreneurs who recently arrived in Canada as refugees. This program will provide better market access for refugee-owned businesses and promote greater diversity in government and corporate procurement. TD's leadership builds upon our longstanding support for suppliers pursuing diversity certifications, promoting economic inclusion across supply chains. TD is also committed to supporting equitable access to funding. As part of the bank's $10 million 5-year commitment, the Black Opportunity Fund announced an inclusive lending program for black entrepreneurs.
This program aims to support the continued effort of combating anti-black racism and brought a systemic discrimination and to help meet the needs of black communities across Canada. In the U.S., we invested $5 million in Citizens Trust Bank, a minority deposit institution based in Atlanta, to further support inclusive growth in the Southeast. Enriching the lives of our customers, communities and colleagues is the center of everything we do at TD. I would like to end by thanking our TD bankers around the globe. They are responsible for our strong performance in 2022 and they are the reason that I am confident we will build upon these achievements in 2023. Thank you for your hard work and dedication. With that, I will turn things over to Kelvin.
Kelvin Tran: Thank you, Bharat. Good afternoon, everyone. Please turn to Slide 11. For 2022, the bank reported earnings of $17.4 billion and earnings per share of $9.47, up 22% and 23% respectively. Adjusted earnings were $15.4 billion and adjusted earnings per share, was $8.36, up 5% and 6% respectively. Reported revenue increased 15% and includes the net gain from mitigation of interest rate volatility to closing capital on the First Horizon acquisition and the gain on sale of Schwab shares. Adjusted revenue increased 8%, reflecting volume growth and margin expansion in the Personal and Commercial Banking businesses. Provision for credit losses was $1.1 billion compared with a recovery of $224 million in the prior year. Reported and adjusted expenses increased 7% and 6% respectively, reflecting higher employee-related expenses and higher spend supporting business growth.
Absent the retailer partners net share of the profits from the U.S. strategic card portfolio, adjusted expenses increased 7.2%, ex-FX. Consistent with prior quarters, Slide 28 shows how we calculate total bank PTPP and operating leverage removing the impact of the U.S. strategic card portfolio, along with the impact of foreign currency translation and the insurance fair value change. Reported total bank PTPP was up 24% from fiscal 2021 before these modifications and adjusted PTPP was up 8% after these modifications. Please turn to Slide 12. For Q4, the bank reported earnings of $6.7 billion and earnings per share of $3.62, up 76% and 77% respectively. Adjusted earnings were $4.1 billion and adjusted earnings per share, was $2.18, up 5% and 4% respectively.
Adjusted earnings include favorable tax impact of earnings mix and the recognition of unused tax losses. Reported revenue increased 42% and includes the net gain from mitigation of interest rate volatility to closing capital on the First Horizon acquisition and the gain on sale of Schwab shares. Adjusted revenue increased 12%, reflecting margin expansion and volume growth in the personal and commercial banking businesses and the impact of FX translation. Provision for credit losses was $617 million compared with a recovery of $123 million in the fourth quarter last year. Reported and adjusted expenses increased 10% and 9% respectively driven by higher employee-related expenses, the impact of FX translation and higher spend supporting business growth.
Employee-related expenses reflect an increase in our full-time equivalent stock as well as the full quarter impact of the additional merit increase announced in Q3. In fiscal 2022, we had a strong revenue environment and made a conscious decision to step up our investments across a number of areas, including digital properties and frontline colleagues. We expect some of that growth momentum to moderate in fiscal 2023 on a quarter-over-quarter basis. Our goal of delivering positive operating leverage over the medium-term remains unchanged. Absent the retailer partners' net share of the profit from the U.S. strategic card portfolio, adjusted expenses increased 9.8% ex-FX. Reported total bank PTPP with the modification shown on Slide 29 was up 81% year-over-year before modifications, and adjusted PTPP was up 9% after these modifications.
Please turn to Slide 13. Canadian Personal and Commercial Banking net income for the quarter was $1.7 billion, up 11% year-over-year. Revenue increased 16%, reflecting margin expansion, volume growth and increased client activity, including credit card related and foreign exchange revenue. Average loan volumes rose 9%, reflecting 8% growth in personal volumes and 15% growth in business volumes. Average deposits rose 4%, reflecting 8% growth in personal deposits, including industry-leading market share gains in non-term deposits and a 2% decrease in business deposits. Net interest margin was 2.7%, up 11 basis points compared to the prior quarter, primarily due to higher deposit margins, reflecting rising interest rates, partially offset by lower loan margin.
Total PCL of $229 million increased $59 million sequentially. Total PCL, as an annualized percentage of credit volume, was 0.7%, up 4 basis points sequentially. Non-interest expenses increased 12% year-over-year, primarily reflecting higher spend supporting business growth, including technology and employee-related expenses. Please turn to Slide 14. U.S. Retail segment reported net income for the quarter was $1.2 billion, up 7% year-over-year. Adjusted net income was $1.2 billion, up 10% year-over-year. U.S. Retail Bank reported net income was $926 million, up 3%, reflecting higher revenue, partially offset by higher PCL and non-interest expenses, including acquisition and integration-related charges for the First Horizon acquisition. U.S. Retail bank adjusted net income was $963 million, up 7%.
Revenue increased 22% year-over-year reflecting higher deposit margins and volumes and higher earnings on investments, partially offset by lower income from PPP and lower loan margins. Average loan volumes increased 4% year-over-year. Personal loans increased 10%, reflecting higher residential mortgage and auto originations, coupled with lower prepayment and higher credit card volume. Business loans were flat, reflecting strong originations, new customer growth, higher commercial line utilization and increased customer activity, offset by PPP loan forgiveness. Excluding PPP loans, business loans increased 5%. Average deposit volumes, excluding sweep deposits, were up 3% year-over-year. Personal deposits were up 5% as TD took market share in our footprint.
Business deposits were flat and sweep deposits declined 5%. Net interest margin was 3.13%, up 51 basis points sequentially as higher deposit margins, reflecting the rising interest rate environment and positive balance sheet mix were partially offset by lower loan margins. On Slide 33, we've continued our disclosure on the impact of the PPP program. This quarter, PPP revenue contributed approximately $9 million to net interest income and 1 basis point to net interest margin. Total PCL was $169 million, an increase of $86 million sequentially. The U.S. Retail net PCL ratio, including only the bank's share of PCL for the U.S. strategic cards portfolio, as an annualized percentage of credit volume was 0.4%, higher by 20 basis points sequentially.
Reported expenses increased 15% and include acquisition and integration-related charges for the First Horizon acquisition. Adjusted expenses were up 11%, reflecting higher employee-related expenses and business investments. The contribution from TD's investment in Schwab was $237 million, up 22% from a year ago, reflecting higher net interest income, partially offset by higher expenses, lower asset management fees and lower trading revenue. Please turn to Slide 15. Wealth Management and insurance net income for the quarter was $516 million, down 15% year-over-year. Revenue decreased 1%, reflecting lower transaction and fee-based revenue in the Wealth Management business and a decrease in the fair value of investments supporting claims liabilities, which resulted in a similar decrease in insurance claims, partially offset by higher insurance premiums.
Insurance claims increased 11% year-over-year, reflecting increased driving activity, inflationary costs and more severe weather-related events, partially offset by favorable prior year's claims development and the impact of a higher discount rate, which resulted in a similar decrease in the fair value of investments supporting claims liabilities reported in non-interest income. Non-interest expenses increased 1% year-over-year, reflecting higher spend supporting business growth, including higher employee-related expenses and technology costs, largely offset by the impact of lower legal provisions and variable compensation. Assets under management and assets under administration both decreased 7% year-over-year, reflecting market depreciation, partially offset by net asset growth.
Please turn to Slide 16. Wholesale Banking reported net income for the quarter was $261 million, a decrease of 38% year-over-year, reflecting higher non-interest expenses and PCL. Adjusted net income was $275 million, down 35% year-over-year. Revenue was $1.2 billion, up 1% year-over-year, reflecting higher global transaction banking, trading related and lending revenue, partially offset by lower underwriting revenue and markdowns in certain loan underwriting commitments. PCL for the quarter was $26 million, an increase of $1 million from the prior quarter. Reported expenses increased 22% and include acquisition and integration-related charges, primarily for the Cowen acquisition. Adjusted expenses increased 19%, reflecting continued investments in Wholesale Banking's U.S. dollar strategy, including the hiring of banking, sales and trading and technology professionals, timing of employee-related costs and the impact of foreign exchange translation.
Please turn to Slide 17. The Corporate segment reported net income of $2.7 billion in the quarter compared with a reported net loss of $150 million in the fourth quarter last year. The year-over-year increase is primarily attributable to gains from the mitigation of interest rate volatility and to closing capital on the First Horizon acquisition and from the sale of Schwab shares, lower net corporate expenses and a higher contribution from other items. The increase in other items primarily reflects the favorable tax impact of earnings mix and the recognition of unused tax losses, partially offset by lower revenue from treasury and balance sheet management activities this quarter. Adjusted net loss for the quarter was $10 million compared with an adjusted net loss of $65 million in the fourth quarter last year.
Please turn to Slide 18. The common equity Tier 1 ratio ended the quarter at 16.2%, up 126 basis points sequentially. We had strong organic capital generation this quarter, which added 44 basis points to CET1. This was partially offset by an increase in RWA, which decreased CET1 by 19 basis points. We saw a 13 basis point increase in CET1 related to the issuance of common shares under our dividend reinvestment plan. The sale of a portion of TD's investment in Schwab to provide the capital required for the Cowen acquisition increased CET1 by 49 basis points. Relating to the First Horizon acquisition, the net gain from the mitigation of interest rate volatility to closing capital increased CET1 by 35 basis points and an FX hedge increased CET1 by 12 basis points.
RWA increased 4.3% quarter-over-quarter, reflecting higher credit risk RWA. Credit risk RWA increased $22 billion or 5%, mainly reflecting the impact of FX, higher volumes and risk migration. Market risk RWA decreased $1.7 billion or 7%, reflecting lower exposures, partially offset by market volatility. The leverage ratio was 4.9% this quarter, and the LCR ratio was 128%, both well above published regulatory minimums. I will now turn the call over to Ajai.
Ajai Bambawale: Thank you, Kelvin, and good afternoon, everyone. Please turn to Slide 19. Gross impaired loan formations increased by 2 basis points to 14 basis points this quarter, reflecting some normalization of credit performance. Please turn to Slide 20. Gross impaired loans was stable quarter-over-quarter and remained at cyclically low levels. Please turn to Slide 21. Recall that our presentation reports PCL ratios, both gross and net of the partner share of the U.S. strategic card PCLs. We remind you that U.S. card PCLs recorded in the corporate segment are fully absorbed by our partners and do not impact the bank's net income. The bank's provision for credit losses increased $266 million quarter-over-quarter to $617 million or 29 basis points.
The increase was largely recorded in the Canadian and U.S. consumer lending portfolios. Please turn to Slide 22. The bank's impaired PCL was $454 million, an increase of $114 million quarter-over-quarter, largely related to some normalization of credit performance in our Canadian and U.S. consumer lending portfolios. The bank's impaired provisions remained well below pre-pandemic levels. Performing PCL increased by $152 million to $163 million, as reflected across the U.S. Retail, Corporate and Canadian Personal and Commercial Banking segments. For 2022, the bank's full year PCL rate was 14 basis points compared to a recovery of 3 basis points in 2021. The higher full year PCL rate was due to a smaller current year performing release and moderately higher impaired provisions.
Please turn to Slide 23. The allowance for credit losses increased by $445 million quarter-over-quarter to $7.4 billion, reflecting the impact of foreign exchange, deterioration in our economic forecast, some normalization of credit performance and volume growth, partially offset by release of overlays previously set aside for economic uncertainty. The bank's allowance coverage remains elevated to account for ongoing uncertainty relating to the economic trajectory and credit performance. Now let me briefly summarize the year. The bank exhibited strong credit performance this year as evidenced by cyclically low gross impaired loan formations, gross impaired loans and impaired PCLs. While credit performance remained strong, we saw some normalization in certain portfolios this quarter as credit metrics have come off their recent lows.
In addition, economic risks remain elevated, reflecting persistent inflation and rising interest rates and the increasing risk of a recession. While results may vary by quarter, I expect PCLs to be higher in 2023 in the range of 35 to 45 basis points, as credit performance continues to normalize and the economic trajectory unfolds. To conclude, TD remains well positioned, given we are adequately provisioned, we have a strong capital position, and we have a business that is broadly diversified across products and geographies. With that, operator, we are now ready to begin the Q&A session.
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