Q3 2024 Earnings Summary
- TD's U.S. Retail Bank is demonstrating peer-leading performance with sustained momentum, achieving sequential earnings growth; mid-market commercial lending grew by 18%, and proprietary bank card balances increased 16% year-over-year.
- In Canadian Personal and Commercial Banking, TD delivered strong positive operating leverage over 500 basis points for two consecutive quarters, with revenue up 9% year-over-year and disciplined expense management at 4%, driven by deposit growth at 7% and loan growth at 6%.
- TD's Wholesale Banking segment has more than doubled its revenue over the last five years, achieving consistent quarterly revenues of $1.8 billion, with market conditions becoming more supportive, indicating potential for continued growth.
- TD Bank expects higher expense growth in fiscal 2024, now guiding to high single-digit growth compared to the mid-single-digit guidance given prior. This increase is due to higher risk and control costs, strong performance in markets-related businesses leading to higher variable compensation, and discrete items like litigation expenses.
- Concerns exist about the sustainability of TD's high operating leverage in its Canadian Personal and Commercial Banking segment, with a 500 basis point positive operating leverage significantly above historical levels. Analysts question whether this aggressive cost-cutting is transitory, potentially requiring increased expenses in the future to sustain growth.
- The ongoing AML investigations and related provisions are causing significant financial impact and uncertainty, with TD taking a USD 2.6 billion provision this quarter. Additionally, the bank's disclosure on reasonably possible losses remains unchanged, suggesting potential for further legal or regulatory expenses. Risk and control costs are higher than previously anticipated and are expected to persist into 2025, indicating prolonged financial impact. , ,
-
AML Penalties and Potential Asset Cap
Q: Could nonmonetary penalties include an asset cap on the U.S. business?
A: Management stated that nonmonetary penalties refer to measures not involving money. They are in ongoing negotiations and cannot speculate on the final outcome but expect to reach a resolution by year-end. They emphasized it's inappropriate to speculate whether an asset cap is on the table. -
AML Costs and Expense Outlook
Q: Will AML-related expenses continue to increase, possibly reaching double digits next year?
A: Management acknowledged they are investing heavily in a multiyear AML program, including hiring over 500 new colleagues. They believe the costs forecasted are appropriate and feel comfortable with the outcome. They emphasized their commitment to building a world-class AML program. -
Impact on U.S. Franchise Amid AML Issues
Q: How will the AML program and potential asset cap affect the U.S. franchise and risk of attrition?
A: Management emphasized that the U.S. franchise continues to perform well, with strong loan and deposit growth. They are making necessary investments in AML controls while continuing to build the business and are confident there is no risk of attrition due to these measures. -
Increased Expense Guidance
Q: Why has expense growth guidance increased from mid-single digits to high-single digits?
A: The increase is driven by higher-than-expected risk and control costs, strong performance in markets-related businesses leading to higher variable compensation, and discrete items like litigation. The acquisition of TD Cowen also contributed to the higher expense growth rate. -
AML Expenses Persisting into 2025
Q: Will AML-related expenses persist into 2025?
A: Management confirmed that the AML program is a multiyear effort, and expenses are expected to continue into 2025. They anticipate expenses will peak in early 2025 as they execute on the program. -
Sale of Schwab Stake and Share Buybacks
Q: Why sell the Schwab stake while buying back TD shares?
A: Management explained they are following accounting rules and their capital framework. The sale aligns with their strategy to prudently manage capital amid economic volatility. They have completed 85% of their stock buyback program, which expires at the end of August. -
Wholesale Banking Growth Potential
Q: How fast could the Wholesale Bank grow, and what resources are needed?
A: The Wholesale Bank has more than doubled revenue over the last five years. Management sees room for continued growth across various businesses but balances this with risk considerations. They might accelerate growth slightly but are not aiming to double the business in the next one or two years. -
Expense Controls and U.S. Productivity
Q: How do expense controls, including branch and headcount reductions, impact U.S. segment revenue and productivity?
A: Management is focused on creating operating leverage through productivity initiatives like rightsizing the organization (with FTEs down about 3% year-over-year) and optimizing real estate. Savings are reinvested into governance programs and critical areas like digital and mobile, aiming to maintain market share and enhance productivity. -
Canadian P&C Outlook
Q: What is the outlook for Canadian Personal and Commercial banking given the macro backdrop?
A: Management reported strong momentum with revenue up 9% year-over-year and disciplined expense management. Deposit growth stands at 7%, and loan growth at 6%, driven by residential mortgages and credit cards. They continue to invest in digital initiatives and expect momentum to continue into 2025. -
Lower Performing Provisions for Credit Losses
Q: What is causing lower performing provisions for credit losses despite macro trends?
A: The decrease is mainly due to repayments in the Wholesale segment, resulting in released provisions, and seasonal factors in U.S. Retail. Macro factors and seasonality contributed to reductions in residential and auto portfolios.