Earnings Call Transcript - TD Q1 2021

Operator, Operator

Good afternoon, Ladies and Gentlemen. Welcome to The TD Bank Group Q1 2021 Earnings Conference Call. I would now like to turn the meeting over to Ms. Gillian Manning. Please go ahead, Ms. Manning.

Gillian Manning, Investor Relations

Thank you, operator. Good afternoon, and welcome to TD Bank Group's First Quarter 2021 Investor Presentation. We will begin today's presentation with remarks from Bharat Masrani, the bank's CEO. After which Riaz Ahmed, the bank's CFO, will present our first quarter operating results. Ajai Bambawale, Chief Risk Officer, will then provide comments on credit quality, after which we will invite questions from pre-qualified analysts and investors on the phone. Also present today to answer your questions are Teri Currie, Group Head, Canadian Personal Banking; Greg Braca, President and CEO, TD Bank, America's Most Convenient Bank; and Bob Dorrance, Group Head, Wholesale Banking. Please turn to Slide 2. At this time, I would like to caution our listeners that this presentation contains forward-looking statements, that there are risks that actual results could differ materially from what is discussed and that certain material factors or assumptions were implied in making these forward-looking statements. Any forward-looking statements contained in this presentation represent the views of management and are presented for the purpose of assisting the bank's shareholders and analysts in understanding the bank's financial position, objectives, and priorities and anticipated financial performance. Forward-looking statements may not be appropriate for other purposes. I would also like to remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results to assess each of its businesses and to measure overall bank performance. The bank believes that adjusted results provide readers with a better understanding of how management views the bank's performance. Bharat will be referring to adjusted results in his remarks. Additional information on items of note, the bank's reported results, and factors and assumptions related to forward-looking information are all available in our Q1 2021 report to shareholders. With that, let me turn the presentation over to Bharat.

Bharat Masrani, CEO

Thank you, Gillian, and thank you, everyone, for joining us today. It's been almost a year since the COVID-19 pandemic transformed our lives. As we continue to witness this uneven impact on the world around us and our own results, I'm proud of how the bank has managed through this period and of the resilience and commitment shown by our 90,000 colleagues around the globe. TD started the year strong as we continue to execute on our strategies in an uncertain environment. First quarter earnings were $3.4 billion, and EPS was $1.83, up 10% from one year ago. Provisions for credit losses declined significantly, reflecting an improving economic outlook as well as the impact of ongoing fiscal and monetary support for the economy and a sizable addition to our allowance for credit losses last year. While spending and payment volumes in our banking businesses remained below pre-crisis levels, fee income pressures eased, and deposit growth remained strong. Our wealth, insurance, and wholesale businesses had another banner quarter, reflecting continued high levels of customer engagement and market activity. These strong results further bolstered our balance sheet, with our CET1 ratio climbing 50 basis points to 13.6% and our liquidity coverage ratio ending the quarter at 139%. Overall, a powerful testament to the strength of our diversified business model. At TD, we believe banking serves a higher purpose, and we continue to fulfill ours, enriching the lives of our customers, colleagues, and communities. From the depth of the crisis last spring, the recovery that is now emerging, we've empowered our people to execute with purpose and impact on behalf of our customers and clients. We have helped facilitate government programs and remain a lifeline for so many households and businesses while providing ongoing support for our communities. We know the recovery is not yet on solid ground. COVID-19 and its new variants remain a reality. Many households are still struggling, and businesses, especially small businesses, will need additional support after these long months of disruption. It is too early to predict when we will see a full recovery, but we are encouraged by the progress on vaccination globally. As it proceeds, accompanied by effective testing and improving treatments, the foundation for a sustained recovery will continue to take hold. We are seeing the evidence already in rising consumer and business confidence, increasing customer activity levels, and a steepening yield curve. While we expect that households will maintain their high level of savings in the near term, there is significant pent-up demand to spend after these long months of inactivity as well as the capacity to do so. We will be there to advance the recovery, supporting our customers in good times as we did last year in those most difficult circumstances. In the meantime, we remain vigilant. Across the bank, we are maintaining and enhancing measures to protect and serve our customers and colleagues, adding new digital and advisory capabilities to deliver the financial services they need by supporting the recovery in all of our markets. We are also investing in a better future. We know that healthy economies require healthy communities and that an inclusive and sustainable recovery is the only path to long-term prosperity. That's why last fall, we launched an ambitious Climate Action Plan to support the global effort to achieve net zero emissions by 2050. We are also intensifying our focus on diversity, inclusion, and anti-racism, working to remove barriers and create opportunities for everyone to thrive. As well as continuing our internal conversation about what each of us can do, most recently through our Black History Month events and initiatives. In every community across our footprint, we're investing in new programs, bringing our financial resources, talent, and know-how to help solve problems and partnering with community organizations to build their resilience. This quarter, that included providing $10 million in grants to various organizations through the TD Ready Challenge to help them develop innovative solutions to address the inequities laid bare by the pandemic. Through the TD Ready commitment, we continue to make progress toward our target of $1 billion in giving by 2030. Collectively, we are putting the power of TD's proven business model to the service of a better future for everyone. We're also transforming the way we work today. COVID has led to accelerated change across our business and our footprint. Shifting customer demand, evolving aspirations, and economic realities are creating new challenges and opportunities, and we are meeting them head-on with new investments to improve the speed and agility of our operations, nurture and develop our talent, and grow our businesses. These forward-focused investments are already delivering concrete outcomes across the bank, strengthening our connections to customers and clients and seeding the next phase of our growth. Let me share a few highlights from each of our businesses. Our Canadian retail segment earned $2 billion this quarter. In the personal bank, the power of our omnichannel strategy was on full display as we generated very strong mortgage originations and checking account growth while maintaining our digital leadership. TD's banking app ranked first for customer experience, engagement, and adoption, according to App Annie, comScore, and Novantas. We made further enhancements this quarter, integrating AI into our offerings. In two recently launched use cases, eligible customers received personalized proactive advice based on their transaction patterns, including low balances and upcoming payments, providing further support for their financial well-being. Our business bank continued to be the number one CEBA lender, with nearly $10 billion in loans funded as of January 31. We also advanced our growth strategy this quarter, announcing the agreement to acquire Wells Fargo's Canadian Direct Equipment Finance operations. The transaction, which we expect will close in the first half of calendar 2021, subject to regulatory approvals and closing conditions, will expand our mid-market presence in this key business line and add scale in new geographies. In our wealth business, we had another strong quarter for customer acquisition and generated a record $12 billion in retail net asset growth across the franchise. In TD Direct Investing, customers are responding to the enhancements we've made to our industry-leading web broker platform, including expanded educational resources to help them build their investing knowledge. Addressing the growing demand for sustainable investing, TD Asset Management also added three new ESG ETFs to its product lineup. In our insurance business, our direct-to-consumer digital-first offering continued to drive strong customer acquisition and premium growth. Our U.S. retail bank earned $615 million this quarter. Core consumer checking growth remained exceptionally strong, up more than 30% from one year ago as customers continue to choose TD for their banking and savings needs. Reflecting our commitment to the small business recovery, we continue to facilitate access to the PPP program, accepting over 25,000 applications, representing $2 billion in funding, as round two of the programs is underway. Delivering more of the bank to our 9-million-plus commercial and consumer customers is central to our continued success in the U.S. market. To that end, we merged our corporate and specialty banking team with the commercial organization this quarter to strengthen our competitiveness in key industry verticals and drive further portfolio growth. Combining corporate and specialty banking's expertise in priority growth areas like asset-based lending, equipment finance, health care, and commercial real estate with our commercial bank capabilities in middle market community and small business lending will help us scale our core businesses and build a commercial bank of the future. We were also proud to see TD Auto Finance in the U.S. receive the highest ranking in dealer satisfaction among national non-captive lenders with prime credit according to the J.D. Power 2020 U.S. Dealer Financing Satisfaction Study. We booked our first share of net income from Schwab this quarter. It contributed $161 million in earnings, bringing U.S. retail segment earnings to $776 million or CAD 1 billion. Our wholesale segment had another strong quarter, earning $437 million as the investments we have made to broaden and deepen our client base and product capabilities enabled us to do more business across our global platform. In our Canadian business, we were proud to be the lead left book runner on Air Canada's $912 million share offering. In the U.S., we advised NASDAQ on its $2.8 billion acquisition of Verafin. From our new Dublin base, we acted as joint lead manager of the European Union Second Shore issuance, a dual tranche, 5-year and 30-year transaction with a total volume of €14 billion. It's the largest SSA transaction TD Securities has underwritten to date and highlights our continued growth and success serving our European clients. Overall, I'm very pleased with our start to fiscal 2021. As I look ahead to the balance of the year, I'm encouraged by the gathering evidence of a recovery and our ability to make the most of it. My confidence is reinforced by the power of our motto, the clarity of our purpose, and the strength of our people. I'll end by thanking them. Our people are our greatest asset. Through a challenging year, they cared for each other and our customers, sustaining and strengthening a winning culture. Together, we've come a long way over the past year. As one TD, we are well positioned to meet every challenge and continue to build a better bank. With that, I'll turn things over to Riaz.

Riaz Ahmed, CFO

Thank you, Bharat, and good afternoon, everyone. Please turn to Slide 8. This quarter, the bank reported earnings of $3.3 billion and EPS of $1.77. Adjusted earnings were $3.4 billion, and adjusted EPS was $1.83. Revenue increased 2%, reflecting volume growth in the personal and commercial banking businesses, and higher wealth, insurance, and wholesale revenue, partially offset by lower margins in the retail businesses. Provisions for credit losses were $313 million, down $604 million sequentially, mainly reflecting lower-performing PCL. Expenses increased 6% year-over-year, primarily reflecting an increase in the retailer program partners, net share of the profits from the U.S. strategic cards portfolio from lower PCL, and U.S. store optimization costs. Please turn to Slide 9. Canadian retail net income was $2 billion, up 14% year-over-year. On an adjusted basis, net income increased 12% year-over-year. Revenue increased 1%, reflecting higher wealth and insurance revenue and higher loan and deposit volumes, partly offset by lower margins. Revenue was up reflecting higher transaction and fee-based wealth revenue, higher insurance revenue, and higher loan and deposit volumes, partly offset by lower margins. Average loan volumes rose 4%, reflecting growth in business and personal, including record residential real estate loan originations. Average deposits rose 21%, reflecting double-digit growth across all businesses. Wealth assets increased 7%, reflecting market appreciation and new asset growth. The margin was 2.65%, a decrease of 6 basis points from the prior quarter, reflecting changes in asset mix and the impact of lower rates. Total PCL was $142 million, down 43% sequentially, reflecting lower-performing and impaired PCL. Total PCL, as an annualized percentage of credit volume, was 12 basis points, a decline of 10 basis points quarter-over-quarter. Reported expenses increased 1%, and adjusted expenses increased 2%. Please turn to Slide 10. The U.S. Retail segment reported net income of $776 million. The U.S. Retail Bank's net income was $615 million, down 14% and primarily reflecting lower revenue and higher expenses, partially offset by lower PCL. Revenue decreased 5%, reflecting lower deposit margins and fees partially offset by volume growth and income from SBA PPP loans. Average loan volumes increased 5% year-over-year, mainly reflecting growth in business loans related to PPP originations. Deposit volumes, excluding sweep deposits, were up 28%, including 33% growth in core consumer checking, and sweep deposits were up 38%. The net interest margin was 2.24%, down 3 basis points sequentially. Total PCL, including only the bank's contractual portion of credit losses in the strategic cards portfolio, was $103 million, down 76% from the prior quarter. The U.S. retail net PCL ratio was 25 basis points, down 76 basis points from last quarter. Expenses increased 9%, primarily reflecting $76 million in costs associated with the closure of approximately 80 stores announced during the quarter. The bulk of the closures will occur in Q2 and will result in approximately $60 million in additional costs next quarter. The contribution from TD's investment in Schwab was $161 million compared with the contribution of $152 million from TD Ameritrade one year ago. Amortization of acquired intangibles and acquisition and integration-related charges associated with the Schwab transaction are reported in the corporate segment. Please turn to Slide 11. Wholesale net income was $437 million, an increase of 56%, reflecting higher revenue, partially offset by higher noninterest expenses. Revenue was $1.3 billion, up 25%, primarily reflecting higher trading-related revenue and higher loan underwriting and advisory fees. PCL increased by $26 million sequentially, reflecting an increase in impaired CCL relative to recoveries in the prior quarter. Expenses were up 9%, primarily reflecting higher variable compensation. Please turn to Slide 12. The Corporate segment reported a net loss of $197 million in the quarter compared with a net loss of $227 million in the first quarter last year. The year-over-year decrease reflects a higher contribution from other items, partially offset by acquisition and integration charges related to the Schwab transaction. The increase in other items primarily reflects higher revenue from treasury and balance sheet management activities this quarter and an unfavorable adjustment related to hedge accounting in the same quarter last year. Net corporate expenses were flat compared to the same quarter last year. Adjusted net loss for the quarter was $94 million compared with an adjusted net loss of $168 million in the first quarter of last year. Please turn to Slide 13. The CET1 ratio ended the quarter at 13.6%, up 50 basis points from Q4. We had strong organic capital generation this quarter, which added 37 basis points to CET1. Actual gains on employee benefit plans added 9 basis points and unrealized gains on fair value through OCI securities added another 5 basis points. The 5 basis point increase in CET1 was attributable to lower RWA, net of FX, primarily a function of lower credit and market risk RWA. As noted last quarter, OSFI's transitional adjustments for expected credit losses reclustered from Tier 2 to CET1 capital, previously subject to a 70% scaler factor, which declined to 50% for 2021 effective this quarter. This reduced our CET1 ratio by 14 basis points. The leverage ratio was 4.5% this quarter, and the LCR ratio was 139%, both well above regulatory minimums. I will now turn the call over to Ajai.

Ajai Bambawale, Chief Risk Officer

Thank you, Riaz, and good afternoon, everyone. Please turn to Slide 14. Gross impaired loan formations were 16 basis points, stable quarter-over-quarter at a cyclically low level, reflecting the ongoing impact of bank deferrals and government economic support programs. Please turn to Slide 15. Gross impaired loans were €3.06 billion or 42 basis points, stable quarter-over-quarter. Please turn to Slide 16. Recall that our presentation reports PCL ratios for gross and net of the partner share of the U.S. strategic card credit losses. We remind you that credit losses recorded in the corporate segment are fully absorbed by our partners and do not impact the bank's net income. The bank's pre-sales in the quarter were $316 million or 17 basis points, representing a 15-year low, reflecting the ongoing impact of bank deferrals and government economic support programs and a performing allowance release. Please turn to Slide 17. The bank's impaired PCL increased $106 million quarter-over-quarter, primarily reflected in the U.S. credit card portfolios and largely recorded in the corporate segment. Performing PCL decreased $711 million quarter-over-quarter, largely due to lower provisions in the commercial lending portfolios and allowance releases in the consumer-lending portfolios. Please turn to Slide 18. The allowance for credit losses decreased $437 million to $8.9 billion quarter-over-quarter, reflecting the impact of foreign exchange, resolutions of impaired growth in the wholesale segment, and performing allowance releases in the consumer-lending portfolio related to improvement in our macroeconomic forecast and planned credit attributes, partially offset by the large management overlays to address ongoing elevated uncertainty. Now to summarize the quarter. Free CapEx metrics, including gross impaired loan formations, gross impaired loans, and the provision for credit losses were all at cyclically low levels this quarter. Going forward, we may see credit results vary by quarter as the ultimate magnitude and timing of the pandemic-related credit impact remains uncertain, and there is a wide range of possible outcomes. To conclude, we are well positioned to manage through these challenging times given the significant addition to our allowance last year, our strong capital position, and broad diversification across products and geographies. With that, operator, we are now ready to begin the Q&A session.

Operator, Operator

And our first question is from Paul Holden from CIBC.

Paul Holden, Analyst

I have a couple of questions for you. I guess, related to expenses. So you highlighted the branch optimization in the quarter and the costs that you are going to run through this quarter and next quarter related to that. What I want to ask you about is what is the expected cost savings on the other side? Will that flow through? Will that be offset by ongoing investments in technology or otherwise? And then where do you think you can ultimately take the efficiency ratio for the U.S. banking segment over time?

Gregory Braca, President & CEO, U.S. Bank

I am. I am. Paul, can you hear me? I hope. Good. Well, thank you for the question. So yes, I do appreciate it. We did have a notable item, obviously, in the quarter for a store restructuring. And obviously, it was a larger impact to the number of stores that we will be closing relative to the normal pruning we would do annually for the last several years. So we've announced that we will be shutting down 82 stores, and the impact of those 82 stores, given the IFRS accounting rules for the charge for the real estate for the closure of those stores, will be charged from the couple of quarters between the time of its announcement and the time they're actually closed. So obviously, once we announce those closures, we have a 90-day disclosure period and all sorts of regulatory check boxes that we must include, and the stores will be closed later in April. So you'll also see an impact of that, as you noted, in the second quarter. The way I think about those is really the view of how do we see our network from Maine to Florida over the next several years, which are the stores that we believe were either redundant or that we could optimize with other nearby locations. And how do we think about harvesting that expense save and really making sure we're reinvesting that back into the business for further growth. As we've been talking about for the last several quarters, really for the last several years, investing in digital platforms, on the consumer side, small business initiatives, and certainly, growth in our commercial and wealth businesses. I think the one thing that COVID has taught us is that our customers want access to us, but they want it always. They do want physical, and we're seeing many of our customers return to the store. We're bullish on that. You'll see markets in future years where we continue to invest in new stores. But what you're also seeing is the need for investment in digital and digital capabilities, and we're doing just that.

Paul Holden, Analyst

Okay. And then the second part of the question was sort of the longer-term outlook for the efficiency operating efficiency ratio in U.S. banking.

Gregory Braca, President & CEO, U.S. Bank

Yes, yes. So there are obviously two parts to that, and I'll let Riaz jump in if he wants to add anything to this. The efficiency ratio over the last several quarters has crept up, but that's mostly because of the revenue line. As you've noticed, if you back out the notable item here for the stores, the way we like to think about it is we're running something close to breakeven expenses from a year-over-year, and those numbers will obviously bump around from quarter-to-quarter depending on initiatives. The efficiency ratio will come back down as we see volumes come back up. As we see any relief on the rate side or we continue to grow out a bit from a volume perspective. I think if you went back pre-COVID, you would see the efficiency ratio in the low-to-mid 50% range. I don't know, Riaz, if you have anything else you want to add to that?

Riaz Ahmed, CFO

No, you’ve covered it, Greg. I think, Paul, as we see rates starting to normalize again, I think it's entirely possible to get back into the low 50%.

Operator, Operator

And the next question is from Meny Grauman from Scotiabank.

Meny Grauman, Analyst

Riaz, when I do the straight math on your PTPP earnings, it looks like it was down 4% year-over-year, but I'm wondering how you think about it? Specifically, I'm curious about the impact of the strategic card portfolio on this calculation and also on the leverage ratio.

Riaz Ahmed, CFO

Yes. Thank you, Meny. Look, I think there are three things that you should look at when considering PTPP and operating leverage. First is the currency impact. If you simply take our expenses for the U.S. segment from Canadian dollars to source currency, that would be the first adjustment that I suggest would be worth looking at. Secondly, I think the store closure costs that Greg just mentioned, to the extent that one can think of those as one-time costs, I don't think they should, in our view, factor into PTPP or outside of leverage. And then the strategic card portfolio, which I'll just walk through in a second. The component of the payment that we make to the retailer, as that goes to change in PCL, should also perhaps be adjusted out of those calculations, to the extent that we're trying to figure out what pretax pre-provision earning are. If you look at it on that basis, on a year-over-year basis, our PTPP actually grew by just under 5%. On a quarter-over-quarter basis, the growth is mid-6%, so quite a bit better than what the headlines would look at the top of the house and the way you look at it. With regard to the strategic cards portfolio and the PCL relating to that, if you look on Page 26 of our slide, we have, for the last few quarters, laid out an example: if you had a credit card portfolio for $1 billion that earned a revenue of $150 million and has a PCL of $50 million, so that the risk-adjusted profit was $100 million. If the sharing arrangements were such that we retain 20% of the risk-adjusted profit and pay the retailers 80% of that, then from a GAAP perspective, we would record revenue in the financial statements of $150 million, PCL of $50 million, noninterest expenses for the portion that we paid to our retailer partners of $80 million, so we retain $20 million. In the segment accounting for U.S. Retail, we record a net share of that. Retail revenue would be $30 million. PCL would be $10 million, and net income would be $20 million. In the corporate segment, we record revenue that our retailers enjoy from that portfolio as $120 million, their share of the PCL at $40 million, and the amount that we paid to them in noninterest expenses is $80 million. If it turns out that in a subsequent period, revenue was still $150 million, but PCL were zero, then you would get in the corporate segment is revenue of $120 million for the retailer partner share, PCL of 0, the net payment would be $120 million. Our noninterest expenses would go up by $40, reflecting the component of the retailer share of the PCL reduction. When looking at it on that basis, Meny, which I think is the right way to look at it, our PTPP has actually been quite strong quarter-over-quarter and year-over-year.

Meny Grauman, Analyst

Just as a follow-up on that, what kind of pretax pre-provision growth do you expect to have for the year as a whole? Under your calculation that 5%, as you mentioned, is that something that can be sustained throughout the rest of the year? How do you view that in fiscal '21?

Riaz Ahmed, CFO

I think if you look at fiscal '20, what we have highlighted is the fact that we have a diversified and an integrated business model in U.S. Retail banking and Canadian Retail banking. Where in Canada, in particular where margins have compressed, we have seen the benefit of that coming through the wealth and insurance revenue. We position our bank against our Canadian Retail customers in a holistic way that somebody may have checking and savings accounts so it's, and credit cards and mortgage is carried. They may also have wealth products with Leo, and they may be buying their home and auto insurance from us. We were thrilled with the fact that through 2020, Canadian Retail net income after tax grew by 12% year-over-year, which is just a stunning accomplishment in my view, in how customers trust us and how our customer acquisition engine is working. Of course, we had very strong wholesale revenues in a period when interest rates have been very low, and customers have been taking advantage to complete their financings and their M&A activities. We really tend to highlight the diversification in our business model and its customer centricity.

Operator, Operator

Next question is from Gabriel Dechaine from National Bank Financial.

Gabriel Dechaine, Analyst

So a quick clarification here. Riaz, the IDA agreement with Schwab, I think, the new fee structure kicked in at the end of last quarter. So this would be the full effect reflected in your results for this quarter?

Riaz Ahmed, CFO

Yes, that would be correct. Because the transaction closed on October 6, yes.

Gabriel Dechaine, Analyst

Starting July 1, Schwab will begin transferring approximately $10 billion a year to their balance sheet from those deposits. However, due to the significantly higher deposit amounts, reaching the $50 billion minimum level will take a lot longer. Is this the correct way to understand the situation now?

Riaz Ahmed, CFO

Yes, that's right. I think from the time that we announced the transaction to the time that we closed, there was a significant increase in IDA balances. You are right that those balances from closing to $50 million will become longer. In this first period on July 1, after closing, Schwab can take those as they wish. The amount or the balances as of closing, minus plus $10 billion. The difference between the balances and $10 billion minus the amount of closing is what they can take on July 1.

Gabriel Dechaine, Analyst

Okay. I may have to follow-up on that, but I got it just a bit. Now a question for Greg. Obviously, the U.S. has a new administration now. They have a new head of the CFPB as well. I'm just wondering what you're thinking these days when it comes to potential regulatory actions that could have a negative impact on your fee income line similar to what we saw after the financial crisis if there's any whispers of actions taking place there? And even if there's not, are you taking another look at how you your fee structures in the U.S. and how you're charging for certain services there and how that might evolve over the next year?

Gregory Braca, President & CEO, U.S. Bank

Thank you for the question. Certainly, a lot going on in the U.S. these days that we all continue to watch. But what I would just remind everyone is that whether it was the last administration or eight years before that or even before that, we found a way to continue to grow the bank, add customers, grow revenue, grow the bottom line, and take share to service our customers and stack up better J.D. Power awards that we so much love behind my desk and do those sorts of things. That's our continued plan, regardless of the environment. I think one of the things that we get called out for is some of our fee income drivers. One of the things we're keenly focused on, given the maturity of the bank that we're building real-time is how do we find other ways to grow fee income. The good news is we believe we have terrific upside across the U.S. and across segments, certainly in wholesale, certainly in our wealth business that we're collaborating on. How do we leverage this new partnership with Schwab? How do we do more in our traditional everyday middle market, in commercial banking businesses, small business, and treasury management? Yes, I mean, there will be puts and takes with every change that occurs. But we believe we will find ways, most importantly, to add new households and new customers that will blunt any one particular area.

Operator, Operator

Our next question is from Ebrahim Poonawala from Bank of America Securities.

Ebrahim Poonawala, Analyst

I had this question around credit card lending. One, could you take us back to your expectations on when credit card growth comes back, both in the U.S. and Canada? Secondly, talk to us regarding the risk from these buy-now-pay-later companies which are emerging. You are a partner with Target but Target's kind of partnered with one of them called Affirm. I am just trying to get a sense, Bharat, like, do you see these new companies as a risk to credit card lending and to your business? And to what extent do you see that risk?

Bharat Masrani, CEO

Ebrahim, this is Bharat. I'm going to pass it on to Teri to talk about the Canadian business, and then Greg perhaps can comment on the U.S., and then I'll come back and provide you an overall view. So Teri can you...

Theresa Currie, Group Head, Canadian Personal Banking

Okay. Thanks, Ebrahim. Let me start with the strength of the cards business in Canada. In the more immediate term, we've seen customer liquidity resulting in pay downs. We've seen the COVID impact of lockdowns, and January is seasonally a lower volume period. That said, I look at a couple of aspects in thinking about the business and its potential to talk to the pent-up demand once the economies reopen and activity resumes. From an acquisition standpoint, if you think about the Canadian cards business and you think about half of our customer base as travel and luxury and half of both as other categories of spend such as everyday spend and cash back, we invested over the last number of years and have a very strong lineup against cash back, and that's performing well year-over-year despite the circumstances. We have a very strong partnership with Amazon that is paying big dividends for us and our customers since the launch of that partnership and there's more opportunity there. Larger ticket purchases in the travel and luxury space have the opportunity to come back, and we have our fantastic partnerships that we launched in November with Air Canada. In fact, in January, our TD Aeroplan Infinite Visa Card was named the best airline card in Canada. Along with our proprietary travel offering, this positions us, I think, across the board, incredibly well as demand returns. The other piece to think about that is while we have better line of sight now into the economic circumstances, some of the acquisition strategies that we had on pause in 2020, we've resumed them both, and that will allow us to build balances even during the period where the activity has not returned. Overall, when I look at the strength of our offering, obviously, we don't know the timing of the rebound, but I believe we're well positioned for the pent-up demand. Maybe just a comment on buy-now-pay-later. We have, in our MD&A portfolio, post-purchase capabilities in terms of customers being able to put in installment plans, and there are, in the U.S., and maybe I'll pass to Greg on point-of-sale capabilities in this regard.

Gregory Braca, President & CEO, U.S. Bank

Teri, thank you. I would just say we certainly saw balances come down from their peaks one year ago, Ebrahim. As the economy begins to heat back up and things begin to open back up, we're certainly hearing a lot of anecdotal data from that. We're getting feedback from the folks that are on the economic side and our customers directly and businesses. There's certainly pent-up demand to return to a more normal state. As that activity picks back up again, we'd expect to see card volumes follow suit as folks can get out and about again, especially from a travel and leisure standpoint, certainly from a restaurant standpoint in some geographies. What I would just tack on to the buy-now-pay-later point is that we're already in that business effectively. We have a business called Retail Card Services as part of our portfolio. It's a couple of billion-dollar portfolio, and we partner with national retailers and provide point-of-purchase finance. It's a business we're certainly staring down. But it's a business we’re already in.

Bharat Masrani, CEO

And Ebrahim, this is Bharat. I mean, there's no need for me to add more than what you've already heard. Overall, our cards business is a key business for us. It's a very important business, and we're thrilled with how our business has evolved in Canada. As you know, what we've become, yes, we are heavily travel-oriented, which when you get out of this pandemic may turn out to be an advantage once again. Some of the other work the teams have done in over periods has been very useful through this period. In the U.S., our business is very young. Yes, we have these partnership deals. What Greg and his team are really working on is a bank card offering that is growing quite well. These are the TD branded cards through our retail network there, so overall, a very important product. Yes, it's evolving; the whole payment space is evolving very fast. Rest assured, we are keeping up with all those trends, and where appropriate, we're making the investments to make sure that we have those capabilities. Given our brand, I expect us to have our fair share of the market.

Operator, Operator

And the next question is from Doug Young from Desjardins.

Doug Young, Analyst

I guess this question is going to be for Teri. Riaz, I think has mentioned it in his remarks. Just the strength in the wealth and the insurance side was very noteworthy. I would have expected the P&C insurance to have a really good quarter given everything that we've seen, and there's some publicly traded comps that we can look at. But it looks like the wealth business was actually the bigger contributor. Anyway, Teri, I'm just hoping you can dig a little bit more into what you saw. Maybe if you can parse out some of the pieces, that would be helpful.

Theresa Currie, Group Head, Canadian Personal Banking

Certainly. Thanks for the opportunity, Doug. Let me start with insurance since you started there. We've been investing in this business, and we have both a phone capability, but it's probably industry-leading end-to-end capability in this business that we've been investing in. So we've had strong business growth quarter over quarter and year-over-year, a good claims experience. We've been able to manage also helping customers as they've gone through this difficult time. What I would say is that the other element of this business that's unique is our collision centers across the country for the auto business when our customers do have an accident. There are often times TD Centers that can help make that a better experience for those customers. So we've been investing in our capabilities. We are doing a great job as an online insurer. I think we've got the business model and capabilities and customer experience for the future. In Q1, we had record earnings in that business. On the wealth side, obviously, there's strength across the board; we did have the highest wealth asset levels on record across the Wells and my businesses. Our mutual fund results were very strong. Trading levels continue to be at record levels. It’s possible that some of that trading activity could become more normalized, although I think we will continue to see new investors in this space. I believe we've got best-in-class capabilities, not only for them to understand what they're doing. Our education and learning capabilities are helping our investors to understand what they're doing, and we feel strongly about that capability being available for them. Just their ability to interact with us digitally with their advisers or as a handoff from our branch colleagues, we feel like we've got great capability there. We've been adding advisers for Wealth and in my business in the personal bank. Through our TD Ready Advice strategy, we really work hard, as One TD, to help our customers who are often sitting on more liquidity than they had planned for, to invest with us for the long term and help them do that in a way that they feel confident. We have goals available for self-directed investors to look at setting up low fee solutions to their goal planning so it’s very comprehensive. One of the real strengths of TD, as we've mentioned, is our One-TD approach, and I can tell you that with COVID, while we needed to manage how many colleagues can be in our retail branches, the colleagues in both Leo's growth business and Paul's business in banking have really been working hard to get back into our stores with our branch bankers because that's where the magic happens.

Doug Young, Analyst

And Teri, just a follow-up. You've never mentioned how much your online brokerage business contributes to wealth. I would imagine that's where a lot of strength came through or the broker growth of the business?

Theresa Currie, Group Head, Canadian Personal Banking

So clearly, the online trading, which is reported in our wealth segment, was a strong contributor, but Leo and we all pay close attention to the other part of this business, and they're doing nicely as well.

Gregory Braca, President & CEO, U.S. Bank

Sure. So it is good to see that stabilize. But like we've been saying, the pressure that has been on is because of rates, but it's also the mix of the business. We believe we're growing good fundamental deposits, and we're going to continue to do that. We want to take share in the deposit base business. What I would add on to your question, though, more directly? Yes, you've got some PPP that's in that NIM number, which contributes a little bit to it. But you're also seeing positive margin on the loan growth side. Positive margins on the loans we’re putting on the books is also helping. Good news story on that front.

Operator, Operator

Our next question is from Nigel D'Souza from Veritas Investment Research.

Nigel D'Souza, Analyst

I wanted to touch on wholesale banking. It looks like you had another strong quarter for trading net interest income. I was wondering if you could provide some color on how you think that would perform in a rising yield environment. The steepening of the yield curve—do you see that as a tailwind, a headwind, or is that neutral or not that material for trading NII in that segment?

Bharat Masrani, CEO

Bob, are you on the line?

Robert Dorrance, Group Head, Wholesale Banking

Yes. I am, Bharat. Nigel, I would say there are pluses and minuses on that. The steepening of the yield curve definitely helps on the corporate NII and other things related to securitizations, etc. It can have temporary negative impacts on some of the shorter-term trading businesses, but net-net I think it will be more neutral.

Operator, Operator

Our next question is from Scott Chan from Canaccord Genuity.

Scott Chan, Analyst

Maybe Greg, just a clarification question. Is there going to be—did you state that there would be an additional $60 million in costs hitting the P&L on the branch closures that you announced today?

Gregory Braca, President & CEO, U.S. Bank

Correct. And that will take effect in Q2.

Scott Chan, Analyst

Okay. As you get this exercise in the U.S., I've noticed your Canadian branch count has been pretty stable over the past, call it, two years. Is there any opportunities with COVID to rationalize the branches in the Canadian network?

Theresa Currie, Group Head, Canadian Personal Banking

Yes. Let me talk about branches. Scott, thank you. Our operating context is very different in the U.S. versus Canada. We, like Greg, look at the network on an ongoing basis, thinking about where we might merge, where we, importantly, would open new locations or relocate branches. What I would say in Canada—I mentioned the strength of One TD—and also, Greg mentioned this—our customers every channel manage to our customers. You will see some more modest activity in Canada, more analogous to what we would see from ongoing assessments. Our branch network is primarily urban. In priority urban markets, we have just over 170 billboard locations that drive strong brand recognition and the ability to house our partners to meet customer needs across all of the TD channel and business needs. Throughout the pandemic, even at times like we're experiencing with lockdowns, customers are coming into the branch and we're meeting their needs. We think we’re pretty well positioned as we think ahead.

Operator, Operator

Our next question is from Ebrahim Poonawala from Bank of America Securities.

Ebrahim Poonawala, Analyst

I guess, just another question, Bharat, in terms of strategically on M&A. I mean, you're sitting on a pile of capital at 13.5%. We've seen transactions happen in the U.S. in the banks and the non-bank space. But TD has generally been historically very opportunistic in terms of capital allocation. Just talk to us in terms of when you look at the U.S. market today, do you—what's your appetite in terms of acquisitions? Does that all have to wait till we get the green light from the regulatory body to actually deploy capital?

Bharat Masrani, CEO

Thanks for the question, Ebrahim. No change in our outlook. I think I've said this many times before, we certainly are open to acquisitions in the U.S. market and in the Canadian market as well, I might add. The way we think about it is anything we do has to make strategic sense, financial sense, timing sense, etc. We are open, and if a compelling opportunity were to present itself, we will look at it very seriously. As you said, we have flexibility because of our strong balance sheet and capital levels. We would seriously look at anything we found compelling. However, the important point is that we are not strategically challenged. Our U.S. business is of scale, and we want to be in the market with the size and reach and the brand recognition that we have. So it's not that we are spending all our time thinking about how to spend our capital looking for acquisitions. But on the other hand, if there is something that makes strategic sense and financial sense, we will look at it very seriously.

Operator, Operator

And the next question is from Mario Mendonca from TD Securities.

Mario Mendonca, Analyst

Riaz, if we could just fast forward three months, and I listened to your estimation for the partner's share pretty carefully. If we apply that explanation to three months from now, would it be correct to say that unless PCLs in the partner share increased significantly, what we saw this quarter in terms of the difference between operating leverage and pretax pre-provision earnings growth will be far more significant than next quarter? Specifically, because of this significant increase in performing loan PCL in Q2 2020, related to the partners, I just set us up for another really uncomfortable-looking headline number unless we're willing to go to the mental gymnastics of this partners card. Again, are we just set up for another really tough headline number?

Riaz Ahmed, CFO

Yes, Mario, you'd be correct about that. As I highlighted in my remarks, the reason we call out the strategic cards portfolio is just always to keep reminding you of that. On Page 12 of our sub-pack, where we show you the corporate segment results, the PCLs there are virtually all in relation to the partner share of the credit card portfolio. You can see the expenses that move with that. It gives you a decent explanation. Every quarter, as we think about PTPP in operating leverage, as I mentioned, our diversified model means that when margins come back, perhaps other income in wealth, etc. might be lighter. If you keep reminding yourself to add back the change in the allowance in the corporate segment to your calculations, you'll find that actually it's much, much more consistent, and you'll rid yourself of this pain in calculating this. Maybe we’ll take the opportunity, we'll consider taking the current calculations and posting them on our website.

Mario Mendonca, Analyst

Right. Because I've built it for myself to understand it, but by no means, something that you can do sort of off-the-cuff. Yes, anything you can do next quarter to make it clear for us would be appreciated.

Riaz Ahmed, CFO

Yes. We'll consider taking that opportunity to clarify further in the next report.

Operator, Operator

Thank you and our last question is from Meny Grauman from Scotiabank.

Meny Grauman, Analyst

Just a quick question. Teri, I think it was maybe Q4 to Q3, you talked about having fewer branches open than three of your core competitors. Is that all back to normal now? I just wanted to check in on that in terms of the status of the branches, especially relative to peers?

Theresa Currie, Group Head, Canadian Personal Banking

Thanks, Meny. Yes, we're pretty much reopened. There are foes and twosies, and I'm certain that, that would be the case across Canada for our competitors as well in terms of this incidence that happened, health-related. Overall, and probably a good time for me to recognize the fact that we are all, I think, looking ahead of what we're seeing in the global vaccination success, with success in enhancements to treatment and testing enhancements—those are all great things for us to think forward personally and for our businesses. It's good to remember that our frontline folks have been throughout almost a year now and continue to be, still dealing with a variant in the virus and some of the constraints, ensuring their own and their customer's safety. It’s a good time for me to thank them for what they do on behalf of our business and on behalf of Canada.

Operator, Operator

There are no more questions in the queue at this time. I would now like to return the call to Mr. Bharat Masrani for closing remarks.

Bharat Masrani, CEO

Thank you very much, operator. Wow, Ajai, no questions for you. I should say to both Mario and Meny, those were great questions on the partnership. I know it is counterintuitive that when our expenses go up stemming from our payment to our partners on the credit card portfolio, that's a good thing. I know that's counterintuitive. As Riaz said, we will provide more explanation of that in the future, so it's more clear for all of you. Overall, I'm very happy with the start of our fiscal year. Yes, it's too early to declare victory against this tragic and terrible pandemic, but I think given that the vaccines are rolling out, there will be bumps in the road going forward. Overall, I'd say we are headed in the right direction. I would like to take this opportunity, as Teri just said, to thank our 90,000 colleagues around the world. They keep on delivering. Regardless of the environment, they keep on delivering for all of our stakeholders, including our shareholders. Thank you. Thank you for everything you do for TD and our shareholders. With that, folks, nice to have spoken to all of you and look forward to ongoing engagement through the quarter or at quarter-end, 90 days from now. Thanks very much.

Operator, Operator

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.