CA - The Toronto-Dominion Bank (TD) Barclays 21st Annual Global Financial Services Conference (Transcript)
2023-09-13 16:18:09 ET
The Toronto-Dominion Bank (TD)
Barclays 21st Annual Global Financial Services Conference
September 13, 2023, 11:15 AM ET
Company Participants
Leo Salom - President and CEO, TD Bank, America's Most Convenient Bank
Conference Call Participants
John Aiken - Barclays
Presentation
John Aiken
Okay, ladies and gentlemen, we're going to start what is at least my final session. Very happy to have Leo Salom, TD's - now I'm going to - CEO of TD USA [technical difficulty]
Leo Salom
That's good. That's going to be there again.
Question-and-Answer Session
Q - John Aiken
Leo, thank you, very much for joining us. Just kind of open up with, obviously, the U.S., we saw some lending deposit issues earlier on in the year. Wanted to get your view on what happened, and how TD is approaching this business post [technical difficulty].
Leo Salom
Well, John, just to reflect on 2023, it was remarkable year. I mean we had the second, third, fourth largest bank failures in U.S. history. And that did trigger a tremendous amount of uncertainty in the marketplace overall. When you couple that with the fact that we'd already seen deposit outflows. In fact, I think on a year - in the last 15 months, we've seen about $1 trillion leave the U.S. banking industry.
The two forces did bring the tremendous amount of uncertainty in the marketplace. I think fortunately, TD weathered that process quite well. I think we're somewhat unique just based on our balance sheet. We've got $150 billion of excess deposits. And in this environment, that's given us a tremendous amount of flexibility.
The product of that is largely really the bank itself. I mean we - at our core, we are a community institution. We've got a very rich retail and small business deposit base. And I think that almost 60% of our deposits are, in fact, retail checking accounts and low savings products. So I think that gives us a really stable funding base to be able to then project - we're still very focused on growing our core customer franchise.
Likewise, we've got a very strong corporate cash management business. In fact, just recently, we became the third largest government banking cash manager in the country. And so given the focus on deposit base that has certainly served us well, and it should serve us well as we move forward. It will give us the liquidity to be able to stand by our clients, support them do this in this period, but also to selectively be able to take share and be present from a lending perspective at a time when some of our competitors might be a little bit more challenged from a liquidity standpoint. So clearly, I don't think we've seen the end of this. There's still a tremendous amount of downward pressure on deposit levels overall in the industry. But I think TD finds itself in a very enviable position.
John Aiken
And can you speak to the arrangement with Schwab sweep accounts, and how that impacts your strategy? And can you also talk about there was a recent - or not as read, but a recent change to the agreement. What was driving that on your side because, of course, Schwab has - we can see Schwab is the best seller.
Leo Salom
And maybe for the broader group. So we do have a 12.4% stake in Schwab. It's a very important, very strategic relationship for us. We're extremely impressed with that franchise, serves over clients with over $8 trillion in savings. So it's a very important part of our overall financial holdings. I would say that part of that is that we do have a sweep arrangement with Schwab currently at the end of the third quarter, those sweeps totaled about $103 billion overall.
Now that number has come down on a year-on-year basis as a result of clients using the term that Schwab uses sorting their cash and putting more of it to work either in T-bills or other equity investments. And so that number has come down a bit, but it is at $103 billion, it's an important part of our overall deposit base.
We would expect that number to continue to decline. We - the new agreement that we put in place. We did provide Schwab with a little bit more flexibility, just given the overall market environment. And in exchange for that flexibility, we raised the floor, the minimum floor that Schwab sweep agreement to $60 billion from $50 billion, and we extended the contract to the year 2034. And the reason why we did that was essentially to be a very good partner.
This is a period of tremendous uncertainty in the marketplace. There was liquidity concerns. We wanted to provide Schwab with some short-term flexibility, but in exchange, we were able to extend the contract that we're quite comfortable with.
John Aiken
And then post First Horizon, you've obviously had spent personally a lot of time on the transaction. But we're in the new reality. What are the lessons learnt from the experience? And then what are you doing now to move the business forward?
Leo Salom
So John, let me say that we were disappointed that we weren't able to close that transaction. I think First Horizon is a terrific organization, and I wish Bryan Jordan and his team the greatest success as they pivot towards their organic strategy. From our perspective, I think we did learn a lot, but we are pivoting likewise to an organic growth strategy.
And in fact, I would argue, TD in the U.S. has had a proven track record to be able to grow organically. You think we're the product of three acquisitions right through to about 2011 time frame. And then after that, we then built organically the franchise that we enjoy today with 10 million clients, nearly 1,200 stores from Maine to Florida.
I think we've been able to, over time, organically build and scale our franchise. We've got one of the leading retail deposit franchise in the country. We're a leader in the small business lending space. We've got deep community banking presence in every major MSA on the East Coast. And increasingly, we've been looking - we've been building our specialty banking businesses in the mid-market space in areas like healthcare, education and support sector, and those have been a source of significant growth for us going forward.
So where we stand right now, one of the areas that we're really focused on is bringing some
additional capabilities to that core franchise. What I mean by that, there'll be three areas that we're leaning into quite deliberately, building our cards business, our consumer lending business broadly, but specifically cards.
Secondly, building up the wealth franchise. And third, building out our mid-market business, our C&I - in mid-market business really across the country. Those three areas we think are highly complementary to our existing franchise and should give us additional revenue lift in the near term.
John Aiken
Leo, that's fantastic. It literally moved into my next question in terms of what outside of Schwab, what actually is TD U.S. Wealth Management strategy, and where are your aspirations? What would you like to look like in 10 years' time?
Leo Salom
Sure. And maybe just some - just to provide a little bit of context. As part of the shareholder agreement we had with TD Ameritrade, the agreement basically said that we were the bank and TD America was the investment provider. With the sale of TD Ameritrade to Schwab, it basically opened up the door for us to be able to build an investment advisory business sort of both mass affluent and high net worth clients. And that's what we've been doing.
So for the last two-plus years, we've been adding to our ranks. We added another 75 advisers to our mass affluent rank this year. We'll continue to scale that business. Yes, I'd like to have a physical presence, financial advisory presence in most of the stores where we deem high net worth and mass affluent opportunities exist.
We also want to continue to build our high net worth coverage across the country and build our specialty teams to support the needs of high net worth clients. So very similar to what, John, I know you and I talked about the wealth franchise up in Canada. I think we have an opportunity to be able to replicate the same success that we had there. And I come back to just the embedded opportunity. We've got 10 million clients, 3 million mass affluent client, and I want more of those having their entire relationship with TD as opposed to strictly the retail sort of banking relationship with us.
John Aiken
And is the growth just coming from targeting advisers? What are your plans for product offering? Are you going to try to do that in-house?
Leo Salom
So we have completely retooled the product offering. So I'm quite comfortable from a product standpoint. We've also invested quite a bit of time on the referral and the customer relationship management capabilities between retail and between our commercial bank and wealth team. And this year, the growth that we did experience, the business was up almost 13% from an AUA perspective on a year-on-year basis. The growth that we've seen as a result of the partnership, stitching the various parts of the bank to get not too different from what you might have observed at the end.
But obviously, the U.S. marketplace is a little different, but bringing those teams together has been really quite successful. We're also building infrastructure. So we've retooled our brokerage and investment advisory platform. We've introduced a new wealth lending platform. We've deployed sales force across both our retail and wealth teams so that we can automate leads management and the entire wealth discovery process.
So I think we're really blessed to play at this point to be able to scale this franchise going forward. I wish I could go a little faster, quite frankly, but selecting advisers and entrusting them with our clients, wealth objective is something that we take quite seriously. We want to make sure that we're building a very high-quality franchise going forward.
John Aiken
Got it. And then one other interesting piece for TD was the recent acquisition of Cowen. How are you working towards integrating that platform as you extend out capital markets in the U.S.?
Leo Salom
Yes. I am truly thrilled about the addition of Cowen to the team. Obviously, from a TD Securities perspective, this was a very complementary transaction. So if you think of TD Securities previously, we've had a very strong - the capital markets business. We had strong FX capabilities, a strong corporate banking franchise. And what Cowen brings is all of the other sides of the ledger, a strong equity capital markets capability, equity research, strong M&A and a mid-market clientele that was quite complementary to our large client clientele.
For the bank, what's exciting about the bank is that Cowen brings a whole new set of client introduction opportunities in that mid-market space, an area that we want to grow nationally. And I think Cowen immediately brings us a significant prospect base of client opportunities. I also think it gives us a chance to be able to offer a full range of services to those mid-market clients that have grown to a point and have the sophistication to tap into equity market. Now we have a unit research coverage and the capabilities to be able to serve that client through their life cycle. So I think for the bank, it will accelerate some of our plans in the market space.
John Aiken
We'll pause Leo just to see if there's any questions from the audience. We have one.
Unidentified Analyst
I understand that the reason that you couldn't close First Horizon, I don't know if the reports were confirmed, but that it might have evolved around regulatory concerns about AML and KYC. If that is an ongoing issue, what are you doing to resolve it? Because I would think that would still impact your ability to open new branches on an organic sense.
Leo Salom
Yes. Let me separate the two items for a moment. Our decision to walk away from First Horizon was really predicated on the fact that we just did not have regulatory certainty with regards to time. And we felt that as time elapsing, the best thing we could do, given that uncertainty was to walk away from the transaction. And I assure you that was not an easy decision. Separately, last quarter, we did make a disclosure saying that we are in discussions with both the DOJ and our regulators about a specific matter at hand.
So I don't want to complete the two. We made that disclosure because we felt it was appropriate to do so. What I can tell you is any time we have any sort of inquiry on any of our regulators, we take those items very seriously. And we employ whatever resources are required to be able to deal with that issue. And I can tell you, we believe that's a manageable item and in the fullness of time will resolve.
John Aiken
Is there any other question? No. Okay. Nice little answer. So Leo, what's TDs' view in terms of the economic outlook for the U.S.? And how is that shaping your plans in terms of revenue growth, earnings, however you want to characterize throughout?
Leo Salom
I mean I think we've been incredibly impressed with the state of the U.S. economy. It's demonstrated a tremendous amount of resilience, job growth, albeit decelerating, has still been positive. The U.S. consumer continue to spend, albeit we're seeing a shift from goods to services, but notwithstanding still strong fundamental growth.
Inflation is cooling, maybe not as quickly as some would like, but we are seeing a cooling effect, which hopefully will give the Fed some flexibility as to what they need to do over the next FOMC meetings. I do believe we'll see some deceleration in terms of overall economic growth as we go into next year. Just the absolute level of interest rates will begin to weigh on both consumer and commercial clients alike.
From my perspective, I do think there's still some intangibles that are important. What capital rules finally get enacted, what are the liquidity implications, what TLAC and other resolution requirements actually imposed in the industry. Those are big factors, and they will influence the lending capacity of a good portion of the U.S. banking industry. So that's an important factor in terms of supporting the overall U.S. economy. I'd say likewise, the geopolitical risk that exists are still quite significant.
We're seeing as kind of decelerates, we're seeing global trade decline. And I think that is also something that could weigh on the overall outlook. That said, we don't see a significant downside recessionary scenario, materializing next year. What we do see is a gradual deceleration from this year, and we believe that the ability to avoid a recession is still feasible, but it's still a 50-50 proposition with regards to what that outlook looks like for next year.
I come back to - from TD's perspective, I think we're extremely well positioned. We have one of the strongest capital ratios in the industry. We have the liquidity to be able to serve our clients and to be able to once again selectively take share. I think we've got a proven growth model. We were quite comfortable being able to grow in down market scenarios. I think we've demonstrated that in the past with the financial crisis through other recessionary scenario. So I think we've got - we're very well positioned to be able to deal with whatever economic outlook comes our way.
John Aiken
And then what is this - how is it like affecting your budgeting for the growth in terms of your lending volumes? Like you obviously have some initiatives that you've in place that are trying to grow, but what are you looking lending to fall in if you can give us a range in 2024?
Leo Salom
Well, maybe I'll just anchor it based on what we saw in the third quarter, John, just to give you a sense. I think we saw some really strong lending performance in the third quarter. Our mortgage business was up 17%. Our cards and auto businesses were in that 7% to 8% territory. Our commercial lending businesses grew 9%. So on balance, we still see some lending momentum. I think there are signs of decelerating at the industry level. As I said before, I think our relative position might give us a chance to be able to be a little bit more selective and continue to grow our loan portfolio in a profitable suggested manner.
I'd say from an overall outlook perspective, I would - cards is an area that we have specifically said we want to grow and target for growth. Today, about 14% to 15% of our customers have a TD credit card. And I think there's a natural ability to move that either we've thrown objectives of 25% to 30% as a desired [technical difficulty] allow us to nearly double our bank card business. This past quarter, we grew that business by 13%. But we'd like to continue to lean in on that. We've done a lot in that space.
We've launched two new credit card offerings. We revamped our new cash-back cards. We signed a new seven-year agreement with Visa that provides us with the wherewithal to make some reinvestment back into the growth of that franchise. We've repatriated our servicing back into our center back but - and now we're converting multiple cards platforms into one. So we really are positioning the cards business for accelerated growth with a focus most - first and foremost, on making sure that our clients have a TD credit card wallet.
John Aiken
And just to underscore this, this is the TD brand card as you're planning on growing, not the white label partnerships, which - that's - it'll have its own growth outlook.
Leo Salom
That's correct. Now that said, I am equally pleased that we did extend both the Nordstrom and the Target co-branding cards. And we're very comfortable with both of those places. I think we're fortunate to be associated with two premier retailers.
John Aiken
And still on the personal side, TD in the U.S. takes with residential mortgage has taken a bit of a different approach than most U.S. banks do. Can you talk about the philosophy of keeping the residential mortgages on book as opposed to securitizing the market?
Leo Salom
Yes, first, we think the mortgage product is an important critical decision in the client cycle. And so obviously, for our clients, for our franchise clients, we want to make sure that we can provide them those services. Our mortgage portfolio has grown nicely. So this past quarter, it was up 17%. Not necessarily because originations have been up sharply.
In fact, they haven't, purchased mortgages money has been down something about 30%, 40% all year long and the refi business has been all, but not existed this year given the overall rate structure. So we are - for our existing clients, we're still active in the market. We want to be able to increase our penetration of mortgage sold or existing core client base. That said, I don't expect mortgage volumes to necessarily expand dramatically. Just to give you a stat, today, rates are flirting with a 7, 7-quarter handle.
Most of our book, 97% of our book has an interest rate of less than 6%. And 87% of the book has interest rate of less than 5%. So it's unlikely in the near term that we're going to see a big refi boom, et cetera. So this is really about purchase money focused on our existing clients, making sure we're there and providing them good value and an effective solution to some of their more -
John Aiken
And then on the commercial side, you mentioned a couple of industries that you're looking focused on. What do you need to be able to continue to grow that business? Is it bringing bankers on, is it just expanding business relationships?
Leo Salom
From a commercial lending?
John Aiken
Yes.
Leo Salom
I think we're doing a number of things. I think both - commercial banking is all about the quality of the talent. So making sure we've got strong mid-market bankers in the communities that matter putting the critical sectors that we choose to be able to play in. That is first and foremost. So you would expect us to continue to add to our ranks selectively and to also add our ranks geographically in those markets that we want to continue to lean into.
I'd say, likewise, we're also leaning into the infrastructure business as well. We are consolidating multiple commercial banking platforms into one, creating more end-to-end straight-through capability. And that has two fundamental impacts that allows them to be able to serve our clients much more effectively, improve our response times, but also bring down the unit cost for that particular business, and it generates some productivity savings that we can reinvest back in the business.
So we're doing a number of things. But there's no question that talent will be a critical part of that overall expansion plan, leveraging the Cowen client base, marrying it to our existing banking footprint is going to be a big source of growth going forward.
John Aiken
And then I guess we've seen interesting development in industry margins. Can you remind the audience of what your outlook is for margins for your line of business?
Leo Salom
Sure. And I think we shared some guidance on our most recent earnings. Just to the NIM and to some degree of perspective. If you look at the five quarters ending the first quarter of 2023, our overall NIM expanded 118 basis points. The second largest of any of our expanded peer set. In the last two quarters, you've given about 29 basis points of that back, really anchored around two fundamental reasons.
One, just overall deposit rates have increased more broadly in the book. But the bigger impact was the actual deposit migration itself and largely amongst mass affluent clients. Now the opportunity cost of not sorting cash is just too high. And so we saw a significant movement in that space.
I would expect just to be clear, that, that deposit migration impact will continue over the next few quarters. That said, though, we are providing guidance that in the near term, NIM will be relatively stable. So how do I reconcile that? Or on tractor rates are giving us a significant tailwind. But we've got some headwinds associated with deposit migration amongst our customer base, but we've got a tailwind with regards to on rates with regards to our tractors. Those two will largely neutralize themselves. And so we'll see more stability in terms of the overall deposit NIMs in the short term.
John Aiken
And then in terms of just overall growth on the platform entailing to the question that was asked earlier, are there plans to increase your footprint, maybe expand into geographic regions that you're excited about with First Horizon?
Leo Salom
Well, I think a couple of things. We still have growth opportunities within - so Florida, the Carolinas, we've operated in those markets for a very long time. This past quarter, we did open up seven stores, largely focused on the Carolina and Florida market. So I think we want to make sure that we achieve density in the markets in which we operate. It's just a stat that I think is important to us. 78% of our deposits are in markets where we have a top three market position.
And that sounds like for instance. In other words, we truly believe in making sure that we own a particular marketplace, we find that we are more effective when we have critical mass in a marketplace as opposed to simply having a number of beachheads spread widely. So there's still work for us to do in Florida.
We think that's a really attractive market, and there's pockets in Florida and Northern Florida, which are important to us. And likewise, growing in the Carolinas, both in South Carolina, where we've had a presence with the former acquisition, and in North Carolina, which we think is an exciting new market, Charlotte, the place, I believe, this past quarter, we added three new stores. And that is - that's being able to build enough critical mass to be able to support our presence in the marketplace and then serve the community is really important.
John Aiken
Leo, when you mentioned Florida, it triggers obviously, the North American platform that TD enjoys. How much integration do you have with the Canadian retail banking operations and the connectivity, how does your platform benefit with Canadians migrating the snowbirds -
Leo Salom
Just on a number front, whether it's in retail, we have a series of transaction payment solutions that allows Canadian snowbirds to be able to attract back forward wealth. We have wealth advisory teams that are dedicated on clients that have a dual resident. In our commercial banking business, our commercial banking teams are collaborating on a regular basis with clients that have a footprint in both locations. That's one of the things that we can do. We're uniquely positioned to be able to support clients that straddle those two markets. And we want them to feel just as home in the U.S. as they might - as they are being served PTCTA of Canada.
John Aiken
I would like to comment, clients how [technical difficulty] every second quarter. It's almost like Toronto, but before - as we're slowly winding that opportunity in case, anyone has additional questions? We've one.
Unidentified Analyst
Thanks. We've heard a lot from your U.S.-based peers about the Basel III process and the risk that some products particularly credit card and mortgage would prefer adverse capital requirements from the closed changes. And I won't repeat all of the or rather words that I've heard, but question is, is there a similar movement even at the Canadian level that would similarly affect your ability to do an effective mortgage or credit card business in the United States, or is the Canadian regulatory picture a more stable than U.S. it seems to be?
Leo Salom
Yes. There's nothing underway that is explicit as the - as Basel III end game rules presently. But as you can imagine, regulators around the world will tend to converge over time. So certainly, I'm expecting Canadian regulatory will take a look at some of these proposals, and they will assess whether it's appropriate that may be a market or not. I would say with regard to the end game rules itself, I think we find ourselves with more than sufficient capital buffers to be able to step into whatever proposed regime takes place.
And that - I think that gives us a degree of flexibility. The fact that we're global G-SIB means that on some of the TLAC and other recovery related measures have been introduced and announced by the FDIC that we're already ahead of that curve as well. And I think that's a huge advantage. And liquidity, while nothing has formally come out of liquidity. I think likewise, given our - given what we talked about from a liquidity standpoint, I think we find ourselves.
So I think we're most focused about is regardless of what final combination gets presented, I think it's important for us to be in a position to continue to serve our clients and to be able to grow our franchise. And I think we do find ourselves in that envious position to be able to do that. I know that there's - today, there were a number of lawsuits and filings and challenges with regards to what's been proposed. But from my standpoint, regulators are responding to the events that took like in the past three, four months.
So I'm not surprised that we - I think some degree of reaction certainly around end game rules was to be expected. Some response to the AOCI will certainly, given the interest rate changes that took place, that was to be expected as well. I think there are some areas in the end game rules that do create some pause. Some of the increased capital requirements for mortgages from a policy standpoint has historically been an area that both government regulators, et cetera, wanted to support. I think that's an area that we want to take to make sure that there isn't anything that might didn't work [technical difficulty] mortgage lending in the country.
I think likewise, in some of the other areas, access to consumer credit, you don't want to increase capital such that certain segments might find themselves not having access to credit. Distinctly, there's some elements of the proposal that I think really merit a harder look. But on balance, I would say, I'm not surprised by some of the proposals that's being presented. I think they reflect regulators wanting to make sure they weather the industry for what might be the next set of concerns.
John Aiken
Anyone else in the audience? So, one of things that has differentiated each of the banks in this more challenging macro environment is the ability to manage expenses, focus on operating leverage. Can you talk about how TD and your newer platform balance the investing in growth in each business and what needs to be done from a regulatory technical standpoint, but also trying to match the cost inflation in an environment where revenues have been growing as strong as they have been in the past.
Leo Salom
A critical managing productivity in order to be able to create the space for us to selectively invest in our franchise. And to be able to invest in just the infrastructure of the franchise, we can continue to grow sustainably and profitably, particularly important. There are a number of things that we're doing. I think the question came up two quarters ago. And I did indicate that we had kicked off a productivity exercise.
There's a number of levers that we're looking to pull in order to create some more short-term expense opportunity. Those being, first and foremost, really staring at our data and technical architectures and trying to simplify that core. I mentioned the cards platform consolidations, commercial banking platform consolidations, our data infrastructure, making sure we have a single data like cloud-based that supports the franchise as opposed to a more distributed redundant data infrastructure. I mean those things, they might seem like bread and butter, but they go to driving greater efficiency and greater quality, hardening of the actual infrastructure for the bank, which we think is really important corporate real estate.
The reality is our lives have changed. Hybrid is a reality. And we do sit on a corporate real estate footprint that's larger than the one we need. So rationalizing that will create some degree of savings.
For optimization, notwithstanding that we've talked about potentially adding stores at times, but being very disciplined in looking at our store network and pruning where appropriate to make sure that our stores are optimally positioned to be able to serve our clients critically important.
Likewise, vendor management arrangements, I'm somewhat obsessed about making sure that the marginal tiering structures of those agreements do provide the bank with economies of scale going forward. And so working with our strategic vendors, making sure that we're building long-term partnerships that makes sense, the area of focus.
And then I would say just looking at our organizational health and just making sure that we are in a position effectively to be able to grow in the areas that we want to support our core control environments and make sure that we are adequately staffed to serve clients, but doing that in a very productive way. Clearly, a big priority going forward. I think those work in those areas amongst others, will give us some of the savings to be able to reinvest in our franchise whether that be in terms of growth or in terms of building the infrastructure required to be able to continue to grow profitably and sustainably.
John Aiken
And my next question on this in terms of scale, this is not to imply that subsequently in the U.S. definitely not. But are there any advantages of your platform, can you utilize with the fact that you've actually got in North American platform on both sides? Is there any technological or any other advantages that you're able to speak out?
Leo Salom
We do that on a number of different fronts. John, to give you a sense, an area that we're investing in more significantly is our digital mobile applications. A proprietary piece of software we refer to as Easy Apply, which is our online account opening and online digital marketing platforms. That's a piece of code, very evolved code, that was first developed in our Canadian business, and we've been able to rapidly redeploy it, and it is now sort of the core of all of the account opening procedures that take place in the stores and increasingly, it can do into our digital assets.
So being able to have - being able to exchange capabilities between our Canadian development centers and our U.S. development centers, certainly, that gives us a big advantage vis-à-vis other players.
But that's not the only one. I mean our - we've got a cyber fusion center that straddles all of North America. And so our ability to alert across multiple markets and be able to bring that knowledge to bear to be able to support the U.S. branch places, it's a huge advantage. And there's many others. But I do think that while the U.S. needs to have the maturity independently to be able to operate at scale I think that being part of a North American, a significant North American player gives us huge advantages as well.
John Aiken
It's fantastic. We're bumping up against time. I hope you know that I didn't ask one question.
Leo Salom
Next time.
John Aiken
Thank you very much. Really appreciate it.
Leo Salom
John, thank you.
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The Toronto-Dominion Bank (TD) Barclays 21st Annual Global Financial Services Conference (Transcript)