TD - The Toronto-Dominion Bank (TD) NBF 21st Annual Financial Services Conference Transcript
2023-03-29 14:16:09 ET
The Toronto-Dominion Bank (TD)
NBF 21st Annual Financial Services Conference
March 29, 2023 11:40 AM ET
Company Participants
Michael Rhodes – Group Head Canadian Personal Banking, TD Bank Group
Conference Call Participants
Presentation
Unidentified Analyst
All right. I'd like to welcome to the stage our next guest, Michael Rhodes, Group Head Canadian Personal Banking. Michael was here last year as well when we're dealing with a different issue geopolitical one. And this year it's a closer to home issue, but nonetheless not a fun issue. And that segues into the first question, a couple of questions anyway on deposits. Everybody, not everyone, a lot of people have been asking me about uninsured deposits in the Canadian banking system, and then I got a follow up to that one, but if you have any quantification there at all?
Michael Rhodes
Yes. And so I know the difference, obviously folks in deposits and maybe just a categorical comment about our deposit base. And then I'll answer your question made from an industry perspective and a TD Bank perspective, because I don't believe that's something that we disclose from a bank perspective. But overall actually we feel very, very good. We have a very good core stable retail deposit base. And I imagine you're going to be asking me about what the performance trends are looking like.
Unidentified Analyst
Yes.
Michael Rhodes
And it's all pretty benign. It's – our trends we're seeing at our deposit flows. We track flow of funds, as you can imagine, on a daily, weekly, monthly basis. And the flows of funds have been pretty consistent, pre-Silicon Valley Bank, post-Silicon Valley Bank, to our forecast, no matter what kind of variance I look at, there is nothing particularly like interesting or about the data. It's just kind of more BAUs, the way I would describe it. So the deposit base is performing very, very well. In terms of the uninsured mix, again, I'd actually point to a third party source. DBRS put out a report that said in the Canadian banking system roughly 65% are uninsured. What was the number that they had? I'm not saying that's our number, but I'll say we feel very good about our deposit book and how it's performing in this environment.
Unidentified Analyst
Right. So that issue becomes less of an issue when you tell me that the flows are similar to what they have been.
Michael Rhodes
Yes.
Unidentified Analyst
However, I guess, the – not, however, but has the trend of core deposits switching into higher cost GICs. Has that accelerated at all or…
Michael Rhodes
Okay. So let me got – a good question. And towards the core non-term deposits, and so we call them versus term deposits, GICs, maybe I can have a step back and kind of anchor in our overall deposit book, and then I'll disaggregate to the individual trends.
Unidentified Analyst
Perfect. Okay, perfect.
Michael Rhodes
So if you look at our first quarter data in our deposit book, we're up about 8% on a year-over-year basis, which was good. We are very happy with that. Then we disaggregate that number, we have non-term or core deposits, and then you have term deposits. And actually OSFI has data as public available where if you go and kind of look at this, you can see that for TD, our most recently reported core deposit mix was at 77%. The industry is in the low 60s called 61%. So we have an advantage in terms of the core deposit base of our book, which we quite like, and it's a kind of anchored in our overall value proposition and business model. And so we like that.
Now you also asked about trends, and so if I look on a year-over-year basis, our core deposit book is down about 2.5%, whereas the industry, the next closest competitor is about 6%. And term is clearly growing. You can't have your core go down 2.5% less. Term is growing to get it to an 8% number. And so, we do see some mix shifts, although the mix shifts that we're seeing here to four have been less than the industry is seeing. And that's why you're seeing a relatively better margin expansion relative to the industry. And that's the trend that we're seeing.
And since Silicon Valley Bank, I don't want to provide a guidance or anything like that right now, but a lot of movements and rates and pay attention to the – my advice to you will be pay attention to what the pricing is of GIC’s, because we've seen customer behavior gets anchored around rates. And so when rates go down, you are more likely to keep your balances and chequing accounts lower yield as savings accounts, when they are up, there is the human behavior actually shifts to GICs. And so just take a look at the kind of the market rates and what's going on there and that will probably give you some indication whether the trends are increasing or decreasing.
Unidentified Analyst
Okay. And as far as deposit betas go – are – there is still upward pressure on…
Michael Rhodes
Yes actually our deposit…
Unidentified Analyst
Pressure, how would you look at it?
Michael Rhodes
I will probably tell a boring story here, which is probably good. Our deposit betas are relatively well performing and like if anything we've probably marginally outperformed where we thought we were going to be. And so if I think about margin impacts, I'm more interested myself in mix shifts than I am in betas right now.
Unidentified Analyst
So moving away from the topical stuff I want to go back to some of the comments you had made or messaging you provided when you took the role that the bank needed to be a bit more aggressive to win back market share that it was losing. And we've seen some improvement in commercial and catchup in mortgage. And that's what you want to see. But in the current market environment where we got a looming recession, whenever that's going to happen, if it's going to happen, plus the recent events, it doesn't make it seem as, I guess, interesting to be aggressively chasing market share at this point.
Michael Rhodes
Yes.
Unidentified Analyst
I mean, that's my word, but how would you respond to that?
Michael Rhodes
So great question and there is a lot to that question. And let me disaggregate the question a bit, because when we talk about market share, I think, we have really good opportunities to expand market share in some critical key products. And the word aggressive is an interesting one. I don't know if I used that word myself last year or not but I wouldn't use the word.
Unidentified Analyst
That's how I remember it.
Michael Rhodes
Okay. I wouldn't use the word aggressive like, I think we have tremendous opportunity. And market share expansion is coming from taking advantage of the opportunity. And let me disaggregate this to try to bring it to life if I can. If I look at our – just our number of customers we have and say the retail banks, 13 million, we have the largest customer base in the marketplace. If I look at our growth of our customer base and our growth of customers is coming from new credit card accounts, new mortgages, new checking accounts, but it's primarily new checking accounts.
If I look at our Checking Account acquisition, first quarter was the best performance we'd seen in years for our first quarter. And in fact, we were up like 16% on a year-over-year basis. And close to that versus pre-pandemic. So the customer flows are strong, our aggregate number of customers are strong. Our flows of customers are strong on both a net and a growth basis. And I look at our interactions per customers and we have all sorts of data. We look at web traffic and mobile downloads, branch traffic, et cetera. We have more interactions per customer, so okay, more customers, faster growth rate, more interactions.
We don't have the biggest mortgage book and we don't have the biggest credit card book, like we have all the raw materials necessary in order to kind of grow into our customer base. And what we're actually seeing now is we have a lot of playbooks how to make this work effectively. And I'm actually feeling pretty good about this. So I see market share expansion, but not by being aggressive, but just by executing really well. And I'll give a couple of examples. One example is I think everyone knows branch traffic is down for transactional type activities and so much less likely to come into a branch. And it's a danger of having an Apple Watch as it rings when you're on stage.
So much less activity inside the branch and so one of the playbooks you have is actually we mine our existing customer base. We look for digital indicators. We look for modeled indicators for propensity to take various products. So I take our mortgage business, we have these high opportunity leads, which we think are actually very likely to be interested in a mortgage business. And we have our advisors make outbound phone calls and engage with customers. We might engage with them in a digital environment. We're seeing our ability to close these high value leads is up by a factor of 3x on a year-over-year basis.
And so for me, the opportunity for market expansion is just taking this great asset we have. We have such a wonderful retail distribution network. We have more digital traffic than anyone else. We have the strongest brand according to Brand Finance. We have great partnerships. We have all the raw materials. If we execute well, we're in a gain share.
Unidentified Analyst
Well, one product line in particular I look at is credit cards. And there are obviously some industry headwinds, like the revolving balances and stuff like that, that are still low. We’ll talk about that in a moment. But if I just look at TD versus the peer group, your balances are 7% below where they were pre-COVID. And your peers are slightly in positive territory. I mean, there’s maybe mixed travel rewards install. You’re maybe more exposed to that or maybe there are some other factors. Could we talk about why your recovery is maybe lag the peer group.
Michael Rhodes
Yes. Great question. And I might take a little while to answer to this one because there’s a lot to it. The punchline is – I’ll give the punchline, you feel really good about our cards business and how our position and what that means on a go forward basis. You are correct. Our loan volume is down relative to pre-pandemic and the market’s up anomaly, but we’re down.
That being the case, if I look at our spend and spends a tricky one because actually – spend is a tricky one because not everyone’s reports spend data in the same way, but our loans are down, but our spend levels are up 20% plus versus pre-pandemic. And so what’s that about? And it does get into these mix impacts.
And so if you look at our book and particularly looking through going through COVID, there were two elements of our book that were probably differentiated from the average. It was differential from the average as we had a higher propensity for balance transfer activity and balance transfer activities used to kind of pay down existing debt.
Well, I look at my checking accounts and I see cash volumes are up. And so the consumer demand for balance transfer activity is lower, you’re seeing that. And the second is we do skew higher on kind of the high end rewards and travel programs, which actually have a lower revolve rate.
And so there’s a decoupling between my spend patterns and my loan patterns. And you see that reflected. And one of the levers that Canon [ph] will – there are few levers that Canon will shift that over time, one of which is the revolve rate. And our revolve rate has only recovered 25% since pre-pandemic.
And so this just feels like a lot of upside in terms of revolving and balances and interest income at that revolve rate kind of ebbs back in. So that’s one area. The second area is we think about growth of share. New account acquisition like our new account acquisition for a credit card business has been very, very strong as of late. In the first quarter, our new units were up 25% on a year-over-year basis.
And so revolve rate restores, those our new accounts come in as balance transfer activities increase on an ongoing basis. You’re going to see kind of more normalizing of the trends. But like at the end of the day, I think share is one interesting metric actually, I really care about is how are we doing in serving our customers? Are we giving customers the credit they need today to buy things and pay for our future income? And that could be pay next month, in which case revolve rate’s very low could be paying a year, in which case the revolve rate is higher. And I think we’re doing a great job with that. In fact, our number of active customers is the highest it’s ever been.
And so as we have that dynamic going on, and so we’re serving our customers well, but beyond that, if I look at – we don’t share this data, I’m not going to give any precise data, but our card income in the first quarter of this year relative to pre-pandemic, first quarter, it’s up and our return on capital is up. And so I’m serving my customers well, I’m giving them the credit they need. We’re actually earning a fair return for our shareholders in the process. I’ve got a roadmap that takes me to growth. I’m actually feeling pretty good with the card business.
Unidentified Analyst
So the balance transfer business, that’s the MD&A…
Michael Rhodes
That’s correct.
Unidentified Analyst
…pretty much, is that – that’s more of a mass market type customer. So that would tell me that they’ve still got a lot of excess liquidity.
Michael Rhodes
When we look at our checking account customers and look at customer behavior, we do see on average our customers have more liquidity. And you can create different deciles and quartiles to try to figure that out and really kind of cross the spectrum we’re seeing higher balances and strong cash flow, both.
Unidentified Analyst
So I don’t know what specific day marks in the start of mortgage season, but we’re probably in there. What’s the – what are your expectations? What are you seeing? Is there any green shoots to use that tired analogy?
Michael Rhodes
Yes. So I feel like there’s some green shoots. I do. I’m pleased with our pipelines. Like, I can’t compare this to anyone else. And so maybe our pipelines are like everyone else’s, but I look at our own pipeline and I feel good about where we are and how we’re performing. And also if I look at the past year, and I know you started out by saying, you talked about market share and market share growth. And I caught out specifically RESL. I say, I want to reverse the trend. And in the past year, we grew share in two quarters. We actually lost share in two quarters, and the quarters we lost share, it was kind of tight coupling, but still half and half growing share, losing share.
If I look at spot balances of RESL on a year-over-year basis in the first quarter, we were third out of five. Do I call it success? No, I don’t call that success. Is that reversible of the trend? I think that’s an absolute reversal in the trend. A lot of things we’ve been doing in terms of our own ecosystem and driving our balances and driving our customer engagement have been positive. And so I actually feel good about our pipelines. I feel good about how our position in the second quarter and beyond in the RESL business. This is not the booming business from a few years ago, but I think green shoots is probably the right analogy.
Unidentified Analyst
So there was an article a few or I don’t know a month ago or so about certain product character – mortgage product characteristics. And your bank was mentioning along with another as having once the trigger rates were said, yes, the amortization extent. I mean, mathematically I see how that works, but when the borrower renews, they have to get back on side, right?
Michael Rhodes
It’s a timing issue.
Unidentified Analyst
So what’s the expected increase in monthly payment, and in the early days of this phenomenon where you've already had some of these borrowers renewing from really low rates to higher current rates, what – are they making lump sum payments? Are they just eating the higher payment going forward? What's that been like?
Michael Rhodes
So, there are two populations. One is the renewal, one are customers hit this trigger point. And the trigger point is a combination of when your amortization terms negative and loan-to-value ratios hit a certain point. The vast majority of the volumes were actually in the former category in renewals. We're seeing very few customers actually hit a trigger point. Customers are actually self curing before they get to that point. And on renewals what we're seeing is that customers predominantly are just paying for the higher refinance rates out of their income. We're actually seeing very little change in trends on kind of re-amortization, kind of spreading out payments. The numbers are very small. I mean very, very small in terms of customers who are doing that.
And I'm probably not terribly surprised; we wrote most of these loans assuming some type of stress and 2% buffer. And so customers have the inherent cash flow in able to do this. But when we rewrite these loans, kind of salaries and incomes have gone up. Actually for some customers government transfers particularly around kind of daycare has gone up. And so we're actually seeing customers be able to manage the higher rates quite well so far.
Unidentified Analyst
And you mentioned the term curing themselves. What does that entail?
Michael Rhodes
So when a customers with the way our mortgage product or available mortgage rate is structured is when rates go up, your payment does not go up. And so in an environment where maybe initially rates might have gone down from your original underwritten point, you're actually over amortizing, if you will. And as rates go up, you start under amortizing relative to what you might normally expect and say a 25 year term. And so when a customer hits for us to trigger rate, which is the point where their amortization in essence becomes zero. At that point, like we do have some reach out efforts. We do talk to customers about what's going on. There's nothing they need to do, but customers in many cases are electing to just increase their payments.
Unidentified Analyst
Okay. And how about spreads? I've asked every head of your type of business that the same question. And they're saying it's two-thirds of the way to what on normal run rate is, something like that. What – is a renewal or origination still a drag on your margin today? And…
Michael Rhodes
So probably less precise than maybe I've heard from others in terms of spreads and just give a kind of categorical answer, right? If I look at last year, and those spreads, and I'd say particularly in the fourth and even a bit into the first quarter of this year, there were pockets of the marketplace where spreads were really getting tight into place that were and if by my lens, we tried to be pretty disciplined, irrational with pricing. It wasn’t making a lot of sense. Since then, we’ve actually seen spreads kind of returned. Since then it feels like more normal, probably not quite what we might have seen on prior times. But I think the spreads are returning a bit. And so we like the profile of the business we’re underwriting today. And we like both the quantum and the quality of the business we’re underwriting today.
And so I think spreads have returned a bit to where they were before, probably not fully at that level. But we’re certainly on the right path. At this particular moment in time, though it is sometimes hard to read because interest rates are bouncing around the whole heck of a lot. And we don’t change our consumer pricing at the same rapidity of the volatility of interest rates. All that being said, like the spreads feel – they feel they’re heading in the right direction.
Unidentified Analyst
From a demand standpoint, I guess the absolute level of interest rates matters. If they come down, it’ll probably trigger demand. But is there also a function of rates having the hold ins, exhibiting some stability for an extended period before people start to say, okay, that’s new reality, I’ll jump in and not wait it out, type of thing. Is there a pent-up demand, I guess?
Michael Rhodes
Well, I don’t know. It was actually interesting. I was talking to our head of our mortgage business recently. And I looked at all the CREA data and you get all the analysis. But to be fair, I like – look at the data myself and I just kind of pull down everything. And I was talking to a gentleman who runs our business. He said, well, like unbalanced is a buyer’s market or a seller’s market. He said, I think it’s a standoff market. And the sellers have their expectation of pricing. Buyers have their expectation of what they want to pay, and then the two not just aren’t often meeting. I’m not sure which gives first to be honest. That being the case, you do see that mortgage rates have backed up a little bit as of late. And so maybe that actually creates more of a meaning of the minds in terms of where the deals come together. But overall, like I think I feel good about where we’re positioned this marketplace. I think on a comparative basis, we should perform well.
Unidentified Analyst
Now the auto business is, it’s been a while since I’ve asked about it for TD. But how big is the indirect auto business? And then, from a growth standpoint over the last few years, it’s been more of a supply constraint issue. Seems like supplies improved quite a bit. The Ford dealership I drive by every now and then they got quite a few Broncos, [ph] never find one of those before. So supplies maybe not as big of an issue, but could growth still be constrained simply because the market environment, people are less confident than interest rates have gone up. So we’re still going to be in a pretty much flat line scenario for auto lending?
Michael Rhodes
Well, so, hey, who will disclose the auto lending business and our business rolls up at the commercial bank, which is Paul Douglas and actually Paul for two more days, and then Barbara Hooper after that. And so, they’re clearly a lot closer to the dynamics of the auto business than I’m at this kind of moment in time. All that being said, all this stuff just kind of anchored back into consumer behavior and we've been through an interesting time. I've been in banking for 30-plus years. I thought I'd seen it all. I had not seen a pandemic hope to never seen one again. And there is some unusual consumer behaviors where there's kind of fear of missing out which was just kind of driving all this kind of purchasing behavior and then a kind of a kind of restoration to a new normal.
And I do think that consumers are actually kind of finding their new normal. And although there are all these events going on in the world, when I look at my book and I look at the consumer behavior, it all looks pretty, I just – less interesting than you otherwise think. Like it's all performing well. I asked our Chief Economist, Beata just the other day because we – TD Economics has a recession call for the back half this year. And she said to me, look, the economy has been remarkably resilient and it's kind of been defying gravity and defying odds. And you look at the employment numbers and you look at the spend numbers. The consumer's still actively engaged, and so it's good to be a retail banker right now. I'll to say that I feel good about it.
Unidentified Analyst
What about linkages to the wealth business? How are you managing that? From both the deposit standpoint and...
Michael Rhodes
Great question. Look Ray Chun, who runs the Deposit Business and I, we are connected at the hip because I'm an important referral source for his business.
Unidentified Analyst
Right.
Michael Rhodes
And you hear about one TD, which is the notion that a lot of our retail customers actually have needs. They can be best be served by our wealth business. And I think we do a fabulous job doing that. A holistic number is when we do a, what we call one TD referral, which is one of our partners, but one of three of those referrals turns into new business. And so I become a very important feeder for Ray. In this environment though and clearly when there’s market volatility and there has been some market volatility in the past, three months or so, you do see some customers are seeking the safety of a GIC or a depository product. And so we’ve certainly seen that trend, that being the case, I will tell you, like I feel good about the mutual fund flows and the ability that we have in the retail bank support his business for the types of investing volume that we’re generating for the long-term. So, I think it’s a really constructive and a healthy relationship and it’s working well right now.
Unidentified Analyst
Just to wrap up here on margins, let’s we talked about deposit mixed trends. We’ve talked about loan, mixed trends. Your messaging has been, and right, you’ve coming from a background where TD’s Canadian bank has been outperforming peers as far as margin performance goes, but you have guided to moderation. What’s – can you put a finer point on that?
Michael Rhodes
Yes, so I mean, so you imagine there are lots of factors that go into margin. And on the lending side, on particularly the resol [ph] business, when you have a variable rate book, when rates are going up, you get some compression in the margin. When rates are stable, that expands. And so you have that dynamic on a credit card book when rates are going up, you have be able to kind of fund it through, through a ladder and some of the old funding rolls off, new funding goes on, and that’s more expensive. So you have all those factors.
And then certainly on the depository side we have a combination of the term, non-term mix or the core term mix, which you hear about. The flip side you have are our tractors or bond –our investment ladder kind of rolls off and some old assets get replaced by other assets. And so you have all these factors kind of coming into play, which is why you recall in the first quarter earnings that Kelvin used the word bouncing around. And so, that’s kind of the narrative, bouncing around in terms of the name. And so I’m not, changing our narrative with respect to what’s going on there, but there are a lot of factors underneath here.
Unidentified Analyst
Well, we’ve hit the triple zeros. My stomach’s grumbling, that means it’s lunchtime. Thanks Michael again.
Michael Rhodes
Appreciate it. Thank you
Question-and-Answer Session
Q -
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The Toronto-Dominion Bank (TD) NBF 21st Annual Financial Services Conference Transcript