The Toronto-Dominion Bank (NYSE:TD) RBC Capital Markets Canadian Bank CEO Conference Call January 10, 2022 11:05 AM ET
Company Participants
Bharat Masrani – Chief Executive Officer
Conference Call Participants
Darko Mihelic – RBC Capital Markets
Darko Mihelic
Thank you and welcome back everyone to our session with TD Bank and we have Bharat Masrani, the CEO of TD here to have a discussion. But before we begin, I’ve been asked to tell you that Bharat’s comments today may include forward-looking statements. Actual results could differ materially from forecasts, projections or conclusions in these statements. Listeners can find additional details in the public filings of TD Bank Group.
With that out of the way, welcome Bharat to the conference. Thank you for joining us this morning.
Bharat Masrani
Nice to be here, Darko. Good to see you’re looking well and looking forward to a great discussion.
Darko Mihelic
Yes, great virtual discussion as — as be that as it may, right. So yes, given that the day started with the regulator thought, I feel compelled to sort of start every discussion on capital. And in your case, on a fully loaded basis, your common equity Tier 1 ratio really hit an extraordinarily high level at the end of the year; 15% — 15.2% on an otherwise regular basis. Now, what’s interesting on that front with you is, that’s an awful lot of excess capital. We know we’ve had some banks announce an acquisition and bring the ratio all the way down to 11. So, where do you want to operate your bank? 15% seems a little too high. Could you get it down to 11%? And how do you get it to a more optimal level? And — so first and foremost, what’s your optimal level? And how do you get there?
Bharat Masrani
Great question, Darko. Of course, we should talk about the strength of TD. I know, we said, but through this pandemic you’ve seen it really play out that when you have restrictions on capital actions, like we’ve had for the past year and a half or so; and you saw how quickly TD’s capital actually grew. So it just shows the earnings power and the way the business model works at TD. So that’s — I think it’s important to keep in mind because that we’ve talked about it in a theoretical sense but we’ve seen that play out; you know, this is the strength of the franchise, strength of the scale, the strength of the business model, and what it means to be a customer centric bank. So you know, we feel great about that.
I think with respect to capital; with the levels we have, it gives us tremendous flexibility to invest in organic and inorganic opportunities that might be out there. And, of course, with the level we have, you know, you could, without a doubt partake in an acquisition that can quickly use up some of this capital, or — you know, on the organic side, we’ve said that we will keep on investing, there is a consistent framework that I’ve talked about over many years that we like to invest in our stated [ph] strategies to grow share, we will always keep capital for opportunistic opportunities out there, we will have — use our capital where we think we have a capability gap. And of course, we look at M&A being a key sort of — blank of, you know, what we’ve done over many, many years. And when we go through that whole thinking, and if there is still capital left over, then we are not shy in buying back our shares; and we’ve done that consistently over the past few years. As you know, a few weeks ago, we announced our 50 million share buyback program in CIB which was approved last week.
So, you know, we have both, whenever we’ve said we would buyback, you know, generally we complete our buybacks, and that’s been a record aside. I like the position we are in, and of course, you know, yes, based on the way we see the economy and the risks out there, you should see us use it based on that framework going forward.
Darko Mihelic
But it still seems like there aren’t that many opportunities own organically left. I mean what we’ve seen is some — you know, some acquisitions have been made, seems like there may be a little bit of a pushback down south in the U.S. in particular, where there’s some difficulty in getting some M&A done. Are there opportunities big enough for you to actually use all of that excess capital or should we be start thinking about even more buybacks? Maybe perhaps another buyback after this one, maybe perhaps a special dividend? How — I mean, it’s just from a modeling perspective, as I look at the model, and I think about your earnings prospects, as you mentioned, you generate a lot of capital every year. Is it even possible to bring your capital ratio down and I’m still going to pin you down; where’s your optimal capital ratio do you think for running the bank?
Bharat Masrani
No. Like, you know, I mean, I think you — in earlier calls you talked about, you know, with 11% it makes sense. And I think your question started with that, yes, of course, it would make sense. Like, it would be way above what, what the minimum requirements are after you impose the decent [ph] buffer that was increased recently. So it would depend on our view at the time of what the economy looks like, what our credit profile might be, what risks we see in the marketplace. But then overall, you know, would you be comfortable at running at those levels? Yes, of course, we would be based on what we see in the economy, there might be times where we need to run it at a higher level because we think the economy has some weak spots and we need to make sure that we’ve got more than enough capital to withstand any shocks that might come out of that.
With respect to opportunities out there; Darko, you know, it’s hard to say, you know, every time people say that there are no opportunities, something does come up. In our case, the great position that TD is in, is that many years ago, when I was in the U.S., and you and I had lots of discussions then, there was no choice but to acquire because we were a subscale player, we were just starting out, and you needed a foundation, you needed a minimum sufficient amount of scale from which to grow. I’m happy to report that now, we are not subscale; we are a huge bank domestically in the United States, I think we’re the seventh largest or the eighth largest domestic bank, we’ve got a fantastic franchise on the Eastern Seaboard, we have a value proposition that is second to none, we call the World Bank. And if you look at the numbers out of our franchise in the United States, you look at checking growth, you know, customer growth; we might be on the Eastern Seaboard, we rank among the very best, nationally, in the United States.
So, the great thing with TD is that we don’t actually need to acquire just to get scale; we have the terrific scale, and we have now learned, it has taken us a long time to take advantage of our North American scale, and we keep on making good progress there. So I feel great, but that doesn’t mean that if something were to present itself that made strategic sense, financial sense, risk sense, and frankly, cultural sense, that’s important to us, we will look at it very seriously because it will accelerate our growth. And frankly, we’ve seen that, you know, in acquired entities, we’ve been able to bring tremendous value and accelerate that growth. So I don’t want to discount the possibility of acquisitions, notwithstanding some of the environmental things that you talked about. But on the other hand, if there are no acquisitions available, and I explained my framework, many times over, then we will not be shy to buy back our shares. And would it make sense for us to do another NCIB? In fact, in our history, you’ve seen us even upsize existing NCIB because it kind of made sense. So, you know, that, of course, is a great position for the bank to be in that we have such flexibility.
On special dividends; yes, I never say never. I mean, you know, circumstances could change, you know, we pride ourselves in adapting to the environment we find ourselves in, rather than hoping, praying, wishing that we go back to the good old days. But generally speaking, you know, intellectually, I’m not a big fan of special dividends, I think dividend should have some kind of relationship with your earnings power on an ongoing basis because I think it’s — that makes sense to me. And frankly, that’s the way you can maintain consistency and on your payout ratios overtime. So that’s the way we are thinking about it from that perspective, Darko.
Darko Mihelic
No, that’s great, thank you. And I only asked about the special dividend just because of the sheer amount of capital that you have. So, that’s great. And I want to sort of stick to the overall larger theme before I dive — because I want to dive into the U.S. One of the things that we — when we look at TD in 2021, we look at the performance. You know, after a few accounting adjustments, we had pre-tax pre-provision growth, around 3%, let’s say, but the group average is a bit higher. But one of the things that you’d mentioned was that you believe that your bank was built for recovery. So in thinking about that, and as we think about going forward into 2022, do you think that that in this sort of economic recovery should we think about your pre-tax pre-provision earnings growth as starting to creep higher from here and potentially getting better than peers? And how much of your confidence in terms of the built for recovery is based on higher interest rates because we know you’re quite rate sensitive? So long question, there is a lot of different mechanics in there. So parsing it together PTPP growth for 2022; stronger, is it just rates or is there more behind it from where you said?
Bharat Masrani
Yes. So let’s — like you said, this is — a lot of issues you’ve covered up; so let’s start with each one of them. Let’s talk about the PTPP for a minute. Yes, you know, I think it was 3% for the whole year. But when we look at the shock of the pandemic and what happened to interest rates, you know, interest rates went instantly to zero, as you know; so that impact — yes, we are rate sensitive because we have a fantastic franchise, and we are huge deposit gatherer, big checking bank on both sides of the border. So obviously, you know, interest rate sensitivity — happy to have that, because it is not because we’re taking a view in mortgage [ph], it is because of the core part of our business which is to attract more customers and more of the checking relationship which is a key product, which is the anchor product to actually grow that relationship; so that is our business model and that is terrific. But when you have rates go down instantly to zero or year-over-year until that kind of goes through our rules through our numbers, you know, we are going to be seen as — wow, you guys are suffering more. So yes, for the year, particularly in the first half of the year, that effect was quite profound and you saw that in our numbers. But let’s look at what happened in Q4, because by that time this thing had rolled off quite smartly. And if you look at PTPP growth from a TD Bank Group perspective, from Q4 to Q4, we were up 10%. So it just tells you how this works from a core volume growth, customer engagement, you know, how that plays out in our number.
So, very happy with how this is playing out. We generally don’t talk about PTPP guidance for the future but I’m very optimistic as to how we are seeing volume growth, customer engagement, the type of customers we have made attracting to our franchise; so terrific in that regard. Now, I want to be mindful, you know, month, month and a half ago, nobody had heard of Omicron; so there could be an impact on that but you know, absent that that is hopefully not a dramatic impact that this does sort of fizzle out over the next few weeks or a month or so. But if you were to see that, you know, we like the momentum [Technical Difficulty] what happened to us from that perspective.
The dollars of additional NII were taken, and again, you know, that’s the — pressure is no doubt and some of it is transitory, I will not [Technical Difficulty] that you asked me. I think the way the year played out — but they’ll be coming out of it.
Darko Mihelic
And so, it sounds like there’s some momentum here on operating leverage, and you do — it could get really wide if we get a few rating options on the expense side. And again, you touched on it, inflation as well; how much is that creeping into your thought process on what you are expecting from expense growth in 2022 at TD?
Bharat Masrani
You know, we talk about positive operating leverage; you know, that is our — the way we absolutely want to have positive opportunities or to build out our one for a half of the year is not going to be looking that impressive. So, I think that’s the way you should look at it in predictable environment. We continue to invest; if you look at our capabilities, what we’re doing on the — grow our business, you know, we have more customers today than what we had yesterday, and I have every confidence we’ll have more tomorrow than what we have today; and that happens to that investment cycle. So, are there going to be opportunity [Technical Difficulty] expense, you should look at expenses in three categories. One is required to run our shop; the second one is, of course, we want to make the necessary investments to continue to grow our franchise; and the third category is that, you know, when we have more flexibility, you know, what if — can we defer some of those expense growth. So we have that flexibility and whether we would exercise it or not would depend on our view on [Technical Difficulty] the next three months or six months because that’s not the way we are running the bank; we’re running a bank on a consistent basis for the long-term creation of value, and you’ve seen that from us consistently, and that’s how we should look at TD.
Darko Mihelic
Okay, great. I wanted to touch on Canada. One of the things that we saw last year was, I would say, starting off the year, slightly lower than peer group growth in mortgages but it accelerated throughout the year. And so as I think about going into 2022, in a period of rising rates, how do you see — I mean, you’re large mortgage lender, obviously, in Canada? How do you see the mortgage market playing out? And how do you see your performance, in particular? Do you think you can get back up above industry average mortgage growth rates in 2022?
Bharat Masrani
Firstly, you know, it’s a great business, love our position in the marketplace. In fact, you say that, you know, maybe we had a slow start and yes, we did. But for the year, you know, we had record originations in ’21; I feel great about that. If you look at sequential growth even stronger because of — you know, I think the point you made, and maybe we started very quickly. We continue to make investments, we have over the past few years, you know, homeowners journey comes to mind, which is an end-to-end digital offering there. You know, on account management, on renewals, we’re using new techniques on how do we provide the precise advice in the moment that is personalized. But we’ve also made investments in building out offerings; if you look at FlexLine [ph], you know, we talked about mortgages and Hillocks [ph], a combined product; our vision is enviable in that product, you know, we continue to do very well. And I expect that to continue into 2022.
Darko Mihelic
And maybe just shifting gears and thinking about the U.S. business now. We’ve just had somebody new step into the role, Leo Salom is now managing the U.S. business for you. I’ve known Leo for quite some time and I know he’s — he was — comes from a wealth background. Is that — is there — should we think about that going forward? Is he going to bring more of a wealth focus to the U.S. business on a go forward basis?
Bharat Masrani
No, I think — you know, I’m glad you mentioned him. He might be new to the to the U.S. business, but he’s not new to TDs; he’s been with us for many, many years and does a great job. And by the way, regarding Leo, you know, before he became a wealth banker, he was a personal and a commercial banking expert at other institutions prior to joining TD; so it’s not a new business to him. I think it’s important because you could ask the same question about Canada with Michael Rhodes. This is not to be viewed as a change in strategy for the bank, absolutely not; we’re very happy with our strategy. Leo is a terrific executive, as is Michael, as are others. And this is you know, giving more development opportunities as folks retire and move on to other roles, and that’s how you should look at it.
Having said that, you know, Leo, because of his bias on wealth, do I expect him to perhaps spend a few more minutes every day thinking about wealth, and then he might have otherwise? Absolutely, but that doesn’t mean that we are looking at a major change in direction; wealth in the U.S. has been a key sort of, you know, strategic imperative for us, it’s not an easy business to build out but feel very happy as to where we are in our journey. We are going to be hiring, and I think it has started already, I don’t know exactly where we are on a precise number, but we indicated we’re going to hire 150 to 200 advisors right through our network there, that’s a critical investment for us. And frankly, a slight tweak to our model to have that offering coming through our stores as well. And having those advisors available at the moment when customers are there is critical. Now these are meant to, you know, which is what the customer requirement is on the wealth side in our footprint from Mainfield Florida [ph], is vanilla products, EPS has a TD wrapper around it. So, you know, I’m expecting good outcomes through that initiative which has been in the works for the past two or three years.
Darko Mihelic
And how does that evolve with the Schwab relationship, if at all, going forward?
Bharat Masrani
Schwab relationship is terrific, you know, this is a stand up well, for us, this is a strategic investment for the bank. We are proud owners of 13.5% of the company, we have a long-term deposit arrangement with Schwab, we use platforms that are critically important for our businesses, and we continue to explore different ways of how can we expand this relationship. But in apart from it being advantages for TD or Schwab in those relationships, we also want to make sure that it makes sense for our customers, you know, that becomes a big, big consideration as to what do our customers want and what offering would make sense. So very happy with that relationship, it is working remarkably well for us. And we like how that has turned out since our involvement with that terrific player, you know, one of the largest and the highest profile and a great, great business model in the United States.
Question-and-Answer Session
Q – Darko Mihelic
Okay, great. Maybe at this point, I’m going to turn over just a couple of questions from the floor that we’re getting through the Slido App [ph]. The first question coming from the audience is, why did you not go into the buy-now-pay-later space in the U.S.? Or maybe it’s asked slightly differently; would you consider going into the buy-now-pay-later space in the U.S.?
Bharat Masrani
Well, we look at anything that is developed in the marketplace, you know, we are a major player, we do have in our retail guard services; so this is where we do private label, you know, credit card business with many retailers. With one of them, we actually have come up with a — you know, at the point of sale, buy-now-pay-later type of an offering. So we see how that is playing out, you know, what kind of take up we are seeing; but this is an area we keep on looking at on an ongoing basis to see whether this makes sense for the bank. Happy to report for card businesses, you know, we do have for the MD&A platform in Canada, already an installment plan, you know, if that’s what our customers wanted for the TV, Visa cards, you know, that such a capability will be rolled out in the current year — in the current fiscal year. So we are looking at this on an ongoing basis, see what customers really want, how is this going to evolve, both from a market acceptance perspective and a regulatory perspective that is going to be a key part of our consideration set. So it’s an area that we are watching, we are already in it in different forms, but you know, how extensive or how pervasive this becomes as part of the payment ecosystem is a place to watch, you know. I don’t think there is a real sort of agreement as to how this is going to evolve but if it becomes a major part, rest assured, TD will be a major player in it, and we keep on looking at it from that perspective.
Darko Mihelic
Okay. And another question from the floor. Do you see open banking as a threat or an opportunity? How are you positioned?
Bharat Masrani
I think open bank depends on how it is rolled out. So, what’s going on in the U.S. you know, very happy with it, we are part of the — I think the 20 banks have come together there and formed something called a co-hub [ph], which effectively can share banking data in a safe secure and you know, they’re even respecting privacy rules, and I think that’s the way to go, it’s an industry solution, and very happy. And I think in that respect it could be advantageous for TD because it is done in that manner, it is not putting customer data or cyber-type of risk, or not having inadequate consents down the road, and that does harm to a relationship, and frankly, can cause major sort of macro issues as well.
Now, I’m hoping a similar model appears in Canada. I know Canada, you know, the government is — the Department of Finance is looking at what model might make sense. As long as it is done in a safe and secure ways through APIs, and not through screen-scraping; and again, proud to say TD does not partake in that. And so, it is important for us that this is done in that manner, without consent from our customers and consent that that has a little more detail to it as to what kind of information to share for how long in the light [ph]. If it’s done in that manner, I think it’s an advantage and it’d be a good thing for the industry and for TD as well. If it’s done where there is unsafe practices, where consents are not clear, then I think you’re creating a systemic issue that will require a cleanup down the road, and that will not be good for anybody.
Darko Mihelic
Okay, thank you. I think we have time for one more question from the floor. This question was up voted; so it’s — with plans to add advisors in the U.S., are there plans to grow the advisor base in Canada as well? So — and I think really what that means is, I mean, you’ve identified pure numbers in the U.S. of how many want to hire; is something like that, similar like that in the works in Canada or apart from just regular advisor growth?
Bharat Masrani
So in Canada, you should think of our — we and Teri Currie was talking about it three or four years ago, you know, our pivot to Future Ready. You know, if you look at traditionally, TDs brand was terrific from a service proposition, the wow factor; and then we pivoted. So, how do we pivot in our branches, and in all our channels? How do we go from terrific service proposition to service and advice, and Future Ready is what we worked on for our business in Canada? So we look at the advice business in Canada, you kind of — you can split it into three; we’ve got the IAS which — investment advisors that are — that will sell anybody’s product, they are the ones who are advising customers, etcetera; then you’ve got financial planners which are attached to all our branches in Canada, and they bring specialized knowledge; and then you have branch personnel that also provide advice. And so Future Ready was an initiative to make sure that we are doing the right things in each of these touch points depending on customer need, the size of their relationship, what products might make sense, what kind of training, what kind of technologies should be made available to them.
So in Canada, we feel great as to what we’ve done, if you can look at the growth in our wealth business because of this pivot and how we become the destination for advice in Canada, it’s just been remarkable. So in Canada, you should look in, we will continue to invest, we are continuing to have more financial planners, more financial advisors in our branches, and that continues. So nothing that I said about the U.S. should mean that there is a difference in Canada; no, we will continue to do that. We think we’ve got tremendous opportunity given our franchise, and feel very happy about how we can grow that part of the business which is already showing remarkable growth.
Darko Mihelic
Okay, great. Maybe I’ve got time for one more. So why don’t we just throw one more in. This is an interesting question. So — again, goes to Leo, with Leo Salom managing the U.S. business, can we expect to see any co-branded wealth products with TD and Schwab? And I’m assuming that that question means in the near future?
Bharat Masrani
Listen, I — you know, I think — you know, let’s look at opportunities out there as to what might make sense if there is a need in the market of a particular product, and we need to work from a different perspective than what we might have done before; we’ll look at it seriously. But I think these things should — are something that, you know, from a long-term perspective, what makes sense for our customers, what’s the brand positioning, what does the brand stand for? All those things matter to us. You know, it’s hard for me to right now say we’ll do co-brand this and co-brand that; we’ve been quite happy to co-brand on the credit card. That has worked very well for us, we have a retail card service business that we like in the U.S. with this major relationships we’ve target at Nordstrom that we are very happy with. So the great art side, you know, we’ve been — we’ve gotten ourselves very comfortable; there is a business model that makes sense for us, the risk sharing is wonderful. And then, it works from a balance sheet perspective and a return perspective as well.
On the wealth side, I think it’s a different situation; we are fairly new to the retail wealth business in the U.S. So we would want to make the assessment as to what makes sense for our customers before making pronouncements that this is what we will do and this is what we will not do. So, you know, give us time; I think we will overtime. Once we become more mature, you know, have a better view on what is precisely good for our customer base, which we — by the way, we have 10 million Americans with TD; TD Bank America is most [indiscernible] being. So I think that the wealth, the mass affluence segment is very important to us, is very valuable to us, and a huge opportunity. But we want to do what is right for the customer base overtime and feel very happy as to where we are today. And then, give us more time as to how we do more with the customer base going forward.
Darko Mihelic
Okay, great. So, we’re going to butt up against the end of our time together. And like I’m doing with every CEO, I’m going to turn the floor over to you and just ask you for what are the key messages that you want shareholders to take away today about TD?
Bharat Masrani
I think, Darko, firstly, thanks for having me. This has been terrific, great discussion, great points that have been raised. At TD, all I’d say is the core part of our strategy is we are a proven business model. And I think what this pandemic is thrown against us has shown the strength of TD, not only is it a proven business model but we’ve been able to show as to the earnings, potential of the bank, the earnings engines that we have, the scale businesses, the market share, and the value proposition from a brand perspective for our customers. And that’s why you see the buildup of capital, I think it was an underappreciated part; you know, we used to talk theoretically, in the strength of TD and how much you can actually generate through earnings and buildup capital. I think the pandemic showed that we can do that, and quite frankly, do that in a fairly quick manner.
And then, of course, our purpose matters to us, the customer centricity critical to us as to what it means; and then of course, making investments for the future. So I think what we say, we are really custom-made for this recovery, we mean it; I think, you know, with the pent-up demand, you know, what the scale — we have the brand we have; so feel very optimistic about the future. Yes, there will be ups and downs, don’t want to declare victory against any virus, this year could be more difficult than perhaps people are anticipating, credit losses may normalize, there might be other factors that play so hard to precisely, say exactly what’s going to happen quarter-over-quarter, but feel very good over the medium-term, as you know, what the prospects are as we emerge from this pandemic because that’s the strength of TD, and we’ll be able to see that with firmer interest rates and a general economic growth cycle that we will likely be in.
Darko Mihelic
Okay, great. Well, thank you for that. That’s going to wrap up this session. Bharat, thanks again. We’ll talk soon, and I’ll leave it there. Cheers.
Bharat Masrani
Thanks very much. Thank you. Bye, bye.
Darko Mihelic
Okay. With that, we’ll wrap up the session and we’ll head into our keynote speaker next. See you shortly.
Source: seekingalpha.com
