Toronto-Dominion Bank Earnings Call Nuggets: Supp-Pack and Credit Card Business

Toronto-Dominion Bank (NYSE:TD) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.


Colleen Johnston – Group Head, Finance and CFO: So, Peter, I’m going to start off just to respond to your question about the supp-pack and then Ed’s going to talk about the broader philosophy. So, the numbers in the supp-pack are really not representative of what would happen in the case of a rate change, and they really assume that when rates move everything moves up. In fact, customer rates move at the same rate, and obviously, market rates move. So, it’s not really a helpful number in terms of simulating what would happen with rate increases and obviously it doesn’t model in all the other variables around customer behavior et cetera. So the models that we have internally and again the many variants of that give you, I think a little bit more of an idea of again in this case what we were modeling 25 basis points. Having said that, that isn’t linear, again because even if you think about what happens if you go to 50 or 100 you don’t necessarily take that multiple. Again you have to factor in all of the changes in behavior et cetera and this isn’t just a NIM game. Obviously it affects – these things affect volume as well. So we really wanted to do through this process is just, again without trying to drill too much into our models at least give you an indication that there is a fair amount of NII upside and I think on the philosophy Ed would like to walk through that.

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W. Edmund Clark – Group President and CEO: There is no question that as we shorten up duration we start affecting that number. The way you are required to report that number what it basically says is that the U.S. would go to a minus 80 basis point interest rate and you can come to your conclusion whether that’s a realistic number to assume. So we don’t believe it is. So we in turn turned to our own models. We look at a world in which definitely the Canadian rates could come down and it is possible that the U.S. goes down to zero, but we think it’s – you are starting to get into quite a different world if you say you are going to run the Bank on the assumption that we are going to have large negative interest rates in the United States. So as we shorten up the duration though that number does expand. But what we do is, as an internal measure we use as a measure that says let’s have a base of zero for the United States and a number somewhat higher than that for Canada and hold that as our constraint of how short we will actually go duration. The reality is, it’s a judgment call. There is clearly, as you shorten up duration, you are running higher risk that interest rates will fall here but you are also getting potentially three to four times upside if interest rates start to move, and we’re saying explicitly, the market to hold your position and say I want it to be neutral, which means, go out long-duration here, we think is the wrong positioning for the bank and that’s why we’re trying to be explicit with you, that, yes, we’ve shortened duration and we are willing to give up earnings in the short run to have a better percentage leverage on interest rates rising, constrained though, we have an internal measure that’s not the one in that supplementary pack…

Peter Routledge – National Bank Financial: Ed, in terms of the share repurchase program, keeping in mind TD’s historic prudence on capital, but when we take a look at what you’ve announced today is lower than what your peer group has done, how aggressive can we assume that you’re going to be on the share repurchase program and secondarily, can we characterize this as underscoring your recent statements of the large acquisitions in the U.S.?

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W. Edmund Clark – Group President and CEO: Well, I don’t think – first off, I would say, when we announce something, we’ll probably actually do it. So, you can expect that we will actually implement this buyback program rather than an announcement, but I think we are in a different position than the other banks and so, we’re not going to try to imitate the other banks in this. They’re running their strategy, which is, they believe, is good for their bank and we’re ours. You start with the fact that we do earn a higher rate of return on risk weighted assets or regulatory capital, however you want to mention them. So, therefore, we have a superior ability to generate capital. So, in some sense, we have a bigger issue than everyone else, but corresponding to that, we also have more opportunities. So, I think we’re – as you know, we have a balance sheet in the United States as long deposits and short assets. We’ve been very, very prudent and will continue to very prudent, but we’ll always see in the market all the time to say can we in fact acquire more assets, because clearly our return on the U.S. investment, would be significantly higher if we could fill in that balance sheet. Right now, those are difficult to find at returns, risk-adjusted returns are acceptable to us, but we wouldn’t want to run our capital down to a point where we couldn’t afford to buy one, we’d have to issue shares for this kind of a small I mean these are tend to be small acquisitions. I’ll put Target is a small acquisition in a certain order of magnitude you don’t want to have to issue share. So, we would probably carry a somewhat bigger cushion. We probably have a smaller cushion in terms of the volatility of our capital than some of our competitors, but we would want more of a cushion to be able to do small asset acquisitions. In today’s market, we don’t see large acquisitions of anything that’s of interesting to us. I think what I’m trying to say in my statement, though when we look at that we certainly wouldn’t rule it out, that as we look at all of those factors, as we generate this capital faster than other people then we would decide, well the best thing to do is to give it back and I do think there’s a change in the world that we’re in is that, we’re in a world of fairly capital-intensive world and so lugging excess capital around waiting for a deal doesn’t seem like a very good thing to be doing. And so, if we have a cushion that will allow us to do small acquisitions I don’t know why we’d keep a whole lot more than that.

Credit Card Business

Andre-Philippe Hardy – RBC Capital Markets: A question on the credit card business. It used to be a business that you described as underpenetrated made that statement again in justifying the MBNA acquisition in Canada. Is that still a business you view as being underpenetrated and if yes, is it the right time to be looking to increase that business given the high consumer leverage?

Tim Hockey – Group Head, Canadian Banking and TD Auto Finance; President and CEO, TD Canada Trust: So, I’ll take that. I’d say in Canada, we used to talk about it being underpenetrated relative to its market share versus our sort of traditional 21%, 22% share. We now have number one share in the credit card space. So, we would see that as being, yes, still a growth opportunity, but certainly not one that we would have had, say, five years ago. The question for us is, North American and in that case, we certainly believe that there are great growth opportunities in the U.S. ahead of us. If nothing else other than just penetrating our existing customer base in our U.S. store base.

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W. Edmund Clark – Group President and CEO: I guess the one follow-up comment I’d made is, the MBNA turned out to be a terrific acquisition for us. So, it’s been a very good acquisition. And I think it – and it was a factor in our winning the Target deal – combine Target which also turned out to be a very deal. I mean, it’s clearly put us in the position where there are opportunities coming our way in North America and given my earlier comments – and we have a deposit-rich Bank and so that’s obviously an area that prudently and I think there are some matters of building your operational capability to take advantage of the opportunities that are coming our way…

Michael Goldberg – Desjardins Securities: Michael Goldberg, Desjardins Securities. To get back to capital for a second, do you want to reiterate what you probably said in the past, how does continuing dividend growth fit into your capital plans in addition to the share buyback? And in relation to looking at asset expansion, if you are going to do something and you’ve been successful with auto loans, cards, and mortgages in the U.S., would it most likely be in those areas or would you want to start adding to your capability in U.S. C&I?

W. Edmund Clark – Group President and CEO: I’ll start and then I can ask Bharat. So, first off, our dividend policy hasn’t changed, and as you know, it’s pretty good new story for the shareholders that we’ve said that we would – we’d moved our dividend payout ratio range, and so we’ve got able to get ourselves more in the middle of that range. As always, we’re going to do it the TD way, which is just every year methodically go up to that range. But that implies that our dividends will grow faster than our earnings per share, which is exactly what has been happening. But there’s probably a couple of years left where that will continue to happen. So, we’ve always separated out your dividend strategy and your capital strategy. If you have surplus capital that you don’t think you’re going to use in the near future, then buy back shares; if you have great earnings growth, you can have great dividend growth. In our case, it’s supplemented by the fact that we’ve decided to change the payout ratio. I think we don’t rule out entering the new spaces of asset generation. But clearly, you have to be a lot more careful about doing that; in a sense, buying asset-generation capability that you don’t have, then you are expanding it where you already have demonstrated capability. So, your threshold of returns would be, obviously, much higher where you’re going into a new piece of territory than it would be if you’re just adding on to the portfolio.

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Bharat Masrani – Group Head, U.S. Personal and Commercial Banking; President and CEO, TD Bank, America’s Most Convenient Bank: Michael the only thing I had add is that there are apart from the three asset classes you talked about there are other areas that are of focus for us. We already have existing capability but we are adding to those capabilities and those would be in health care, I know we have an interest in building that business even more than what we have today. The other one is asset-based lending. We do have a small team that we been adding on to it. The third one that has become a new focus area for us given that we have TD Auto Finance is dealer flow plan in the U.S. So those are the types of businesses where we are building out capabilities and if there were suitable portfolios or assets available in those areas we would certainly look at it seriously…

Rudy Sankovic – SVP, IR: Jason Bilodeau, TD Securities.

Jason Bilodeau – TD Securities: For Tim. Your residential secured lending growth was sort of (4%) year-on-year. I don’t want to slice this too finely but if you marry that with sort of Ed’s comments that it looks like housing is in a process of decelerating, could we see this number be slipping into low single digits in the back half of the year and how does that frame up for your revenue picture? I know we haven’t seen the rest the group yet, but how do you feel your market share in that category has been performing the last few months?

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Tim Hockey – Group Head, Canadian Banking and TD Auto Finance; President and CEO, TD Canada Trust: So I will start with the second question. Market share actually and overall real estate secured lending is actually basically flat, slightly up year-over-year. So it might be an industry type statement. So yes, we have seen a deceleration in real estate secured lending growth, probably slightly faster than we expected, if you’ve asked us this time last year. But we are still expecting that number to be in the call it high end of the middle – I don’t know how to say that – call it 3% to 5%, 4% to 6% somewhere in there but it’s decelerating absolutely.

Jason Bilodeau – TD Securities: When did it seem to you it had be sort of a downside case?

Tim Hockey – Group Head, Canadian Banking and TD Auto Finance; President and CEO, TD Canada Trust: Yes. That’s certainly not this year.

Rudy Sankovic – SVP, IR: John Reucassel, BMO Capital Markets…

John Reucassel – BMO Capital Markets: John Reucassel from BMO Capital Markets. Don’t know if it’s a question for Colleen or Bharat, just the non-interest income in the U.S. business, it looked like it was up C$30 million this quarter versus Q1 and C$50 million, call it, versus Q2 last year. Is that all Target-related and – Target was halfway through the quarter, so what else is going on there? Should we expect this – is there a bigger jump coming in this number for the rest of the year?

Colleen Johnston – Group Head, Finance and CFO: So, if you look at the quarter-over-quarter increase, that was largely Target, and to your question, Target, we really have half a quarter of Target now. So, you’ll see the full effect in Q3.

John Reucassel – BMO Capital Markets: So, that C$30 million is really C$60 million additional, non-interest income fees on this Target portfolio per quarter, if I looked at it Q1…?

Colleen Johnston – Group Head, Finance and CFO: The increase was about C$40 million quarter-over-quarter, and yeah you double that for the full impact of Target on a full quarter basis.

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Darko Mihelic – Cormark Securities: It’s Darko from Cormark Securities. Just wanted to follow-up with Tim, on the residential mortgage question. Really what I’m after here is I just kind of want to understand what’s happening on the ground with respect to Ed’s comments earlier about the government changes and sort of what we’re seeing at the really ground level, I’ll give you an example, Table 18 of your shareholders’ report, provides for us the breakdown of your insured and your uninsured residential mortgage portfolio. If you compare that to last quarter, what you see is your insured actually went down and your uninsured portfolio went up and not by an immaterial amount. That would sound surprising to me relative to what would’ve been the behavior say, a year or two ago. Is the first-time home buyer being kicked out of the market. Can you talk to where these originations are coming from, is the broker origination, the broker originated mortgages is that slowing as a percentage of overall originations. I’m just looking for some sort of a flavor for what the government changes have brought about?

A Closer Look: Toronto-Dominion Bank Earnings Cheat Sheet>>