Q2 2024 Earnings Summary
- Wealth Management and Insurance earnings increased by 25% year-over-year to $418 million, reflecting the strength of TD's diversified business model and effective integration across business units. The segment saw significant growth in client referrals from branch banking to wealth, with closed volumes up 23% year-over-year for financial planning, demonstrating successful cross-selling initiatives and market share gains.
- The U.S. Retail segment achieved a 7% sequential growth in net income after tax, driven by strong operating momentum, peer-leading loan growth in both commercial (up 20%) and retail loan businesses, a 6% reduction in expenses due to productivity programs, stable deposits, and an improved return on equity. This performance indicates the strength and resilience of TD's U.S. franchise, even while making significant investments in governance and control.
- Expense discipline and productivity initiatives are expected to enhance profitability in the U.S. Retail segment, with anticipated modest margin expansion in the second half of the year providing a tailwind to revenue growth. Combined with operating momentum and a relatively stable credit outlook, TD expects improved profitability and clear momentum going into 2025.
- TD is facing significant issues with its U.S. AML (Anti-Money Laundering) program, requiring an investment of $500 million in remediation efforts, which could impact future earnings and indicates deficiencies in risk management. The bank cannot provide a timeline for resolving these issues, and there are concerns about potential regulatory impacts beyond the U.S.
- The bank incurred charges this quarter for a civil matter in the U.S., adding to previous litigation issues such as the Stanford litigation, suggesting increased legal and compliance risks that could affect capital ratios and overall financial performance.
- Increased expenses due to investments in risk and control infrastructure and a larger-than-expected restructuring program may lead to higher expense growth than anticipated, potentially impacting earnings. Savings from the restructuring are expected in 2025, but no guidance has been provided for 2025 expenses.
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U.S. AML Issues
Q: How will AML issues affect TD's U.S. operations?
A: Management acknowledged that the U.S. AML program fell short and they are actively fixing it by investing $500 million in remediation and enhancements, hiring AML executives, and onboarding hundreds of AML professionals. They assured that this issue is specific to the U.S. and not systemic across the bank. They are working to bring closure to discussions with regulators but couldn't provide a specific timeline. -
Credit Migration Impact on Capital
Q: What is causing the CET1 ratio decline?
A: The CET1 ratio decreased by 50 basis points quarter-over-quarter, mainly due to credit migration increasing risk-weighted assets by $7.1 billion. Credit migration is observed in U.S. Retail, especially in commercial loans and commercial real estate, as well as higher probability of default in U.S. auto loans. In Canada, migration is seen in the auto book and commercial loans. Operational risk impact from legal items also affected capital by 15 basis points in Q2 and is expected to impact Q3 by 12 basis points. -
U.S. Retail Growth Amid AML Issues
Q: Will AML issues stagnate U.S. growth?
A: Management emphasized that despite AML challenges, the U.S. franchise showed strong performance with 7% sequential growth in net income after tax, peer-leading loan growth, and a 6% reduction in expenses. They are focusing on digital and mobile strategies while pacing store expansions. While investing significantly in resolving AML issues, they believe the franchise is robust and continues to grow. -
Wealth Management Strength
Q: Is the wealth management performance sustainable?
A: Wealth management earnings reached $418 million, up 25%. Management attributes this to their diversified business model, client-centric approach, expense discipline, and integration across the bank. Initiatives like increased referrals from branch banking to wealth, up 12% year-over-year, and co-locating private bankers in commercial centers are driving growth. -
U.S. Commercial Real Estate Exposure
Q: How is TD managing U.S. CRE risks?
A: TD has been proactively managing its U.S. commercial real estate portfolio, especially office exposure, reducing it from $5.1 billion at the beginning of COVID to $4.2 billion today. They have been building reserves, now over 2.5 times pre-pandemic levels. They conduct thorough borrower-by-borrower analyses and feel well-reserved for potential losses. -
Share Buyback Plans
Q: What is the outlook for share buybacks?
A: The bank intends to complete its share buyback program, subject to market conditions. They consider buybacks when they believe it is in the interest of the bank and shareholders, balancing this with capital impacts from operational risk-weighted assets. -
Expense Management and Costs
Q: How are expenses being managed amid AML investments?
A: While core expense growth is expected to be 2%, additional investments in risk and control increase total expense growth to mid-single digits, consistent with prior guidance. They are executing a productivity program focusing on organizational health, real estate rationalization, and vendor relationships, aiming to deliver positive operating leverage. -
Cowen Acquisition and Sponsor Business
Q: How is the Cowen acquisition benefiting TD?
A: The integration of Cowen provides mid-market investment banking and sponsor finance capabilities that, combined with TD's balance sheet, create opportunities for growth in the sponsor business. They are seeing early momentum and have transferred three Cowen bankers to enhance capabilities.