Earnings Call Transcript - TD Q3 2025

Operator, Operator

Good morning, everyone, and welcome to the TD Bank Group Q3 2025 Earnings Conference Call. I would now like to turn the meeting over to Ms. Brooke Hales, Head of Investor Relations. Please go ahead, Ms. Hales.

Brooke Hales, Head of Investor Relations

Thank you, operator. Good morning, and welcome to TD Bank Group's Third Quarter 2025 Results Presentation. We will begin today's presentation with remarks from Raymond Chun, the bank's CEO; followed by Leo Salom, President and CEO, TD Bank, America's Most Convenient Bank; after which Kelvin Tran, the bank's CFO, will present our third quarter operating results. Ajai Bambawale, Chief Risk Officer, will then offer comments on credit quality, after which we will invite questions from prequalified analysts and investors on the phone. Also present today to answer your questions are Sona Mehta, Group Head, Canadian Personal Banking; Barbara Hooper, Group Head, Canadian Business Banking; Tim Wiggan, Group Head, Wholesale Banking, and President and CEO, TD Securities; and Paul Clark, Senior Executive Vice President, Wealth Management. Please turn to Slide 2. Our comments during this call may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially. I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results. The bank believes that adjusted results provide readers with a better understanding of how management views the bank's performance. Ray, Leo and Kelvin will be referring to adjusted results in their remarks. Additional information about non-GAAP measures and material factors and assumptions is available in our Q3 2025 report to shareholders. With that, let me turn the presentation over to Ray.

Raymond Chun, CEO

Thank you, Brooke, and good morning, everyone. We had another strong quarter, which I'm looking forward to discussing in a minute, but first, I'd like to share my thoughts on the external environment. Global trade dynamics continue to be fluid. It was encouraging last week to hear the Prime Minister and President are intensifying their efforts to resolve ongoing trade challenges. However, there is still much work ahead with CUSMA or USMCA renegotiation set for next year. While Canadian companies have benefited from that trade agreement tariffs and especially sector-specific tariffs create business uncertainty and economic distortions with significant impacts to the most exposed sectors. Despite this, the Canadian and U.S. economies have shown resilience, though momentum has slowed. These remain early days. It will likely be a long road before the full impact of tariffs is well understood. This is a time for bold, decisive leadership that unlocks Canada's economic potential and strengthens our productivity and resilience. I'm encouraged by the federal government's focus on removing internal trade barriers, catalyzing major projects in partnership with indigenous peoples and diversifying export markets. This moment is an opportunity to build stronger, more resilient economies. At TD, we stand ready to meet that moment and work with governments and private sectors to strengthen communities across our footprint. And no matter how the external environment evolves, we'll be there to support our clients. It's a privilege to serve over 28 million households and businesses, and we will continue working hard every day to understand their needs and help them achieve their goals. With that, let's turn to the next slide. With 3 quarters of the year done, I am pleased with what we have achieved. We continue to act decisively to support TD's future. Our momentum continued this quarter. With TD's announcement of a strategic relationship between Fiserv and TD Merchant Solutions. This will simplify TD's portfolio and reduce costs, improving the bank's financial performance over time. It will also elevate the experience for our Canadian business banking clients delivering best-in-class solutions. We have continued to identify opportunities to innovate, to drive efficiency and operational excellence. Kelvin will provide more details on our efforts to structurally reduce costs across the bank in his remarks. As you know, the bank will host an Investor Day on September 29. We are very excited to share TD strategy and medium-term outlook with all of you next month. Before I turn to Q3 results, I wanted to personally thank Alan MacGibbon for his leadership and dedication to the bank. TD and I have greatly benefited from his many contributions and keen insights. I also want to congratulate John MacIntyre, who will become the Chair of TD's Board of Directors effective Monday. John's deep financial expertise will help him guide our Board in the coming years. He will continue to be invaluable to me and my leadership team as we work to deliver on our strategy and drive long-term value. Please turn to Slide 4. In Q3, the bank delivered a strong quarter with earnings of $3.9 billion and EPS of $2.20. We saw robust fee and trading income in our markets driven businesses and volume growth year-over-year in Canadian Personal and Commercial Banking. TD delivered positive operating leverage this quarter, reflecting strong revenue growth that offset elevated expenses driven by governance and control costs and investments to drive business growth. Impaired PCLs decreased quarter-over-quarter, reflecting strong credit performance, and we added to our performing reserves for policy and trade uncertainty, taking a prudent approach with almost $600 million in reserves added year-to-date. Ajai will share more details shortly in his remarks. The bank's Q3 CET1 ratio was 14.8%, reflecting strong capital generation in the quarter. As of quarter end, we were over halfway through our share buyback with 46 million shares repurchased for a total of over CAD 4 billion. Please turn to Slide 5. In Q3, we demonstrated disciplined execution across our businesses. In Canadian Personal and Commercial Banking, we delivered a strong quarter with record revenue, earnings, deposits and loan volumes. RESL volumes surpassed $400 billion, driven by strong performance across our distribution channels. We continue to deliver robust loan growth in cards. In this quarter, cards acquisition was the highest it's been in almost a decade. In the Business Bank, loans were up 6% year-over-year, reflecting growth across our Commercial business. We also saw record retail originations in TD Auto Finance. We delivered continued momentum in U.S. retail with core loans up 2% year-over-year. U.S. bank card balances were up 12% year-over-year, reaching a new milestone with USD 3 billion in balances. In our U.S. Wealth business, total client assets were up 12% year-over-year with mass affluent client assets up 26% year-over-year. This quarter, we made significant progress on our U.S. balance sheet restructuring. We completed the investment portfolio repositioning announced last October and achieved our targeted 10% asset reduction. The bank also continued to prioritize and execute on our AML remediation. Leo will provide more details in his remarks. In Wealth Management and Insurance, we delivered record earnings and assets in Wealth and strong underlying business performance in Insurance. TD Asset Management won key institutional mandates globally and domestically, and continue to take share in its growing ETF franchise. We had a strong quarter in direct investing with trades per day up 18% year-over-year as we continued to gain traction in partial shares in our Active Trader platform. TD Insurance delivered strong premium growth year-over-year and continued to enhance its client acquisition strategies. In Wholesale Banking, we continue to demonstrate the power of our broader platform, delivering over $2 billion in revenue for the third consecutive quarter. We are seeing broad-based revenue growth as market volatility normalizes in our capital markets and advisory businesses accelerate. Please turn to Slide 6. This quarter, we launched TD AI Prism, a significant step forward in our effort to harness the power of AI. TD AI Prism is designed to deliver greater client personalization through accelerated AI-driven insights and support client services and growth. And in TD Securities, we launched a Virtual AI Assistant, which queries our equity research library and synthesizes about 8,500 proprietary research reports, covering nearly 1,300 companies in seconds. This tool enhances the productivity and effectiveness of our front office institutional sales, trading and research professionals, enabling them to answer client inquiries with speed. We continue to invest in enabling capabilities such as trusted data and AI. We recognize that leadership in digital and mobile is absolutely critical. We are looking forward to sharing more about our strategies and investments in these areas at our Investor Day next month. Please turn to Slide 7. So before I turn it over to Leo, I want to thank our colleagues across the bank. Every day, you are working to deliver for our clients, drive shareholder value and build TD's future. Thank you for all that you do. With that, Leo, over to you.

Leovigildo Salom, President and CEO, TD Bank

Thank you, Ray, and good morning, everyone. Please turn to Slide 8. We've continued to make progress on our top priority, the U.S. AML Remediation Program. And we've now completed a series of important milestones. We have a strong AML leadership team in place, we've implemented tactical risk reduction measures, we've improved our investigative capabilities, we've launched a new transaction monitoring process and platform, we've deployed all planned scenarios to date on that new environment and are prepared to continuously add and make changes to meet emerging risks and trends. This quarter, we deployed our first machine learning models in our transaction monitoring environment. This tool will continue to improve the effectiveness and efficiency of our program allowing our AML team to focus their investigative expertise and intelligence. In addition, we've built out our governance over new business initiatives, including the establishment of a new financial crimes risk management subcommittee, dedicated to the assessment and oversight of financial crime risk of new business products and services. We've also launched new focus training for the first and second lines of defense related to suspicious customer activity associated with certain commercial products and services, coupled with the targeted role-based training and the enhanced bank-wide training, which I spoke about in the past. We are continuously uplifting and developing the knowledge and capabilities of our colleagues across the bank to be effective AML risk managers. At this point, we are where we thought we would be in our work and continue to expect that we will complete the majority of our management remediation actions by the end of calendar 2025. However, as we have said before, significant work, including important milestones, will continue into 2026 and 2027. I want to also clarify that when we say management remediation actions, we're referring to a broad set of actions that we believe need to be completed to strengthen our AML program. And as we have disclosed in our MD&A, these actions include activities such as design, documentation, data preparation, systems implementation of controls, testing and more. Finally, as we have noted previously and is customary for remediations of this nature, our U.S. AML remediation work is subject to ongoing review by the monitor and acceptance by our regulators, the DOJ and FinCEN. Now I'd like to give you an update on our balance sheet restructuring activities. Please turn to Slide 9. As you know, this effort has two critical objectives: first, to strictly comply with and maintain a buffer to the asset limitation, and second, to ensure that we can continue to serve our clients and communities as their needs evolve. We made meaningful progress against our objectives this quarter. At the end of the fiscal quarter, total assets were USD 386 billion, reflecting the deployment of proceeds from the loan sales to pay down bank borrowings. I remain confident that we will largely complete the loan sales we identified last October by the end of the fiscal year. And as we continue to focus on simplifying our business, we will be reducing identified additional loans over the course of fiscal 2026 and beyond. And with the execution of our loan reductions and paydown of short-term borrowings, we expect to modestly exceed the 10% asset reduction we guided to last October. With this asset reduction, the U.S. Retail segment could grow core loans at a rate consistent with our historical performance through the medium term without breaching the asset limitation. And this is without taking into account any incremental capacity that could be created through sale of up to $40 billion in non-HQLA securities. This quarter, we completed the investment portfolio repositioning program as announced back in October. In total, we sold approximately $25 billion notional for an upfront loss of $1.3 billion pretax. These actions are expected to generate an NII benefit in fiscal 2025 of approximately $500 million pretax. Collectively, these actions have enabled the U.S. Retail segment to improve return on equity, excluding Schwab, by 140 basis points since Q4 of 2024. We expect to continue to improve return on equity through the remainder of fiscal 2025 and into fiscal 2026. With that, I'll turn it over to Kelvin.

Kelvin Vi Luan Tran, CFO

Thank you, Leo. Please turn to Slide 10. TD delivered a strong quarter. Total bank PTPP was up 13% year-over-year after removing the impact of the U.S. strategic card portfolio, FX and insurance service expenses. Revenue grew 10% year-over-year driven by higher fee income and trading-related revenue in our markets driven businesses and volume growth in Canadian Personal and Commercial Banking. Expenses increased 13% year-over-year with approximately 1/4 of the growth driven by variable compensation, foreign exchange and the impact of the U.S. strategic card portfolio. Impaired PCLs declined quarter-over-quarter, reflecting strong credit performance. Performing provisions reflect additional overlays for policy and trade uncertainty. Please turn to Slide 11. As you know, we are undertaking a restructuring program to reduce structural costs and create capacity to invest to build the bank of the future. We expect to incur total restructuring charges of $600 million to $700 million pretax over several quarters. In Q3, we incurred restructuring charges of $333 million pretax. The restructuring program is expected to generate savings of approximately $100 million pretax in fiscal 2025, and annual run rate savings of $550 million to $650 million pretax. Cost savings will be driven by workforce and real estate optimization, asset write-offs and business wind down and exit as part of the strategic review. We continue to expect fiscal 2025 expense growth, assuming fiscal 2024 levels of variable compensation, FX and the U.S. strategic cards portfolio to be at the upper end of the 5% to 7% range, reflecting investments in governance and control and investments supporting business growth, net of expected productivity and restructuring savings. We have delivered strong results year-to-date, and we are evaluating opportunities to further accelerate investments in our business to drive future growth. We look forward to sharing more at our upcoming Investor Day. Please turn to Slide 12. Canadian Personal and Commercial Banking delivered a strong quarter with record revenue, earnings, deposits and loan volumes. Average deposits rose 4% year-over-year, reflecting 4% growth in personal deposits and 6% growth in business deposits. Average loan volumes rose 4% year-over-year with 3% growth in personal volumes and 6% growth in business volumes. This quarter, housing market activity improved compared to the prior quarter, and our RESL strategy delivered both sequential volume growth and margin expansion in competitive markets. Net interest margin was 2.83%, up 1 basis point quarter-over-quarter, primarily driven by higher loan and deposit margin. As we look forward to Q4, we again expect NIM to be relatively stable. Expenses increased, reflecting higher technology spend and other operating expenses. Please turn to Slide 13. U.S. Retail sustained business momentum and made significant progress on balance sheet restructuring. Deposits, excluding sweeps, were stable year-over-year, and were up 2%, excluding targeted runoff in our government banking business. Core loans grew 2% year-over-year, reflecting continued strength in bank card, home equity, middle market and small business. Net interest margin was 3.19%, up 15 basis points quarter-over-quarter reflecting the impact of U.S. balance sheet restructuring activities, normalization of elevated liquidity levels and higher deposit margins. As we look forward to Q4, we expect NIM to moderately expand. Expenses increased USD 199 million or 13% year-over-year, reflecting higher governance and control investments including cost of USD 157 million for U.S. BSA/AML remediation this quarter and higher employee-related expenses. While investments will fluctuate from quarter-to-quarter, we continue to expect U.S. BSA/AML remediation and related governance and control investments of approximately USD 500 million pretax in fiscal 2025. We expect similar investments in fiscal 2026. Overall, U.S. Retail expense growth is expected to be in the mid-single-digit range in fiscal 2026. We remain focused on productivity initiatives to help fund investments in our core franchise. Please turn to Slide 14. Wealth Management and Insurance delivered strong underlying business performance. In Wealth Management, market appreciation, coupled with strong account origination drove record assets this quarter. Direct Investing had a particularly strong quarter. We saw a significant increase in trading volumes led by our active trader clients with volumes up 23% year-over-year and increased deposits. We have continued to invest in our insurance business. This quarter, while lower cat activity provided a benefit, the performance underscores the strength of our business and the ability to deliver profitable growth. Expenses increased this quarter, reflecting higher variable compensation commensurate with higher revenues and increased technology investments. Please turn to Slide 15. Wholesale Banking delivered a strong quarter driven by broad-based revenue growth across Global Markets and Corporate and Investment Banking and our pipeline of future deals remains robust. We continue to demonstrate the industrial logic of the TD Cowen acquisition. Expenses increased, reflecting higher technology, front office costs, variable compensation and spend supporting regulatory and business projects. Please turn to Slide 16. Corporate net loss for the quarter was $164 million a smaller loss than the same quarter last year, reflecting higher revenue from treasury and balance sheet activities, partially offset by higher net corporate expenses, which were primarily driven by higher governance and control costs. Please turn to Slide 17. The common equity Tier 1 ratio ended the quarter at 14.8% down 5 basis points sequentially. We delivered strong internal capital generation this quarter. The bank repurchased 16 million common shares under its share buyback program in Q3 which reduced CET1 by 25 basis points. Our average LCR for the quarter was 138%. The bank is now operating at normalized liquidity levels. With that, Ajai, over to you.

Ajai K. Bambawale, Chief Risk Officer

Thank you, Kelvin, and good morning, everyone. Please turn to Slide 18. Gross impaired loan formations were 26 basis points, an increase of 5 basis points of $402 million quarter-over-quarter. The increase was largely recorded in the Wholesale Banking and U.S. Commercial Lending portfolios related to a small number of borrowers across a number of industries. Please turn to Slide 19. Gross impaired loans increased $468 million quarter-over-quarter to $5.33 billion or 56 basis points. The increase was largely reflected in the Wholesale Banking and U.S. Commercial Lending portfolios. Please turn to Slide 20. Recall that our presentation reports PCL ratios, both gross and net of the partner share of the U.S. strategic card PCLs. We remind you that U.S. card PCLs recorded in the Corporate segment are fully absorbed by our partners and do not impact the bank's net income. The bank's provision for credit losses decreased $370 million or 17 basis points quarter-over-quarter to 41 basis points. The decrease was recorded broadly across the Canadian and U.S. consumer and business and government lending portfolios and reflective of strong underlying credit performance and a smaller current quarter performing build. Please turn to Slide 21. Impaired PCLs were $904 million, a decrease of $42 million quarter-over-quarter, driven by the Canadian Personal and Commercial segment. Performing PCL was $67 million, a decrease of $328 million quarter-over-quarter. The decrease reflects a smaller current quarter build for policy and trade uncertainty. Please turn to Slide 22. The allowance for credit losses was $9.7 billion, an increase of $116 million quarter-over-quarter, reflecting additional performing reserves relating to policy and trade uncertainty and higher impaired allowance associated with a few impairments in the Wholesale Lending portfolio. Now in summary, the bank exhibited continued strong credit performance this quarter evidenced by a sequential reduction in impaired PCLs. While underlying credit performance remains resilient, we've conducted a further review of our lending portfolios considering ongoing policy and trade-related risks and have added incremental reserves this quarter. In aggregate, our policy and trade-related reserves are now approximately $600 million, and we are prudently reserved for a dynamic economic environment. While there are many potential scenarios that could play out in terms of the economic trajectory and credit performance, I expect fiscal 2025 PCL results to fall within the range of 45 to 55 basis points I offered at the start of the year. Looking forward, TD is well positioned to manage through this period of uncertainty considering our prudent provisioning, broad diversification across products and geographies, our strong capital position, and our through-the-cycle underwriting standards that have served us well through challenging conditions in the past. With that, operator, we are now ready to begin the Q&A session.

Operator, Operator

The first question is from John Aiken from Jefferies.

John Aiken, Analyst

Leo, thanks for the update in terms of the AML remediation, the balance sheet restructuring. A question for you, though. In your prepared commentary, you talked about the lending portfolio could grow over the next couple of years without reaching the restriction. Not putting too fine a point on this, but are we expecting to see an inflection point at some point in 2026 and actually start to see the loan balances grow in the U.S. portfolio?

Leovigildo Salom, President and CEO, TD Bank

John, thanks for the question. Just to break it down, we did provide this disclosure. We've already reduced the overall balance sheet by about $17 billion. We've got an additional $18 billion on a spot basis that we've identified for runoff and/or selective repricing. So that will be largely the work that we'll be doing over the next few quarters into 2026. I would expect that you'll still see from a headline standpoint that we'll see some contraction in the book through most of 2026 with an inflection point towards the end of the year. The areas where we are experiencing really good strong growth and Kelvin highlighted some of these. In our bank card business, I'm really pleased we've been consistently delivering double-digit growth in terms of overall credit card proprietary growth. Likewise, we saw home equity balances grow by 9%. So solid performance there. And even in the Commercial segment, which is given the uncertainty in the marketplace has been experiencing a bit of a wait-and-see kind of dynamic. We're seeing decent growth there. Small business was up 5%, our mid-market and specialty businesses were up 6%. So I think we're seeing the core underlying growth taking place. But to your point, we'll still have a runoff scenario for the better part of 2026 as we try to get to the fighting weight size for the U.S. business.

Gabriel Dechaine, Analyst

First question, just to follow up on that one. So you've mentioned the loans we're discussing in the U.S., the exits, and runoffs, which amount to $17 billion to date and $18 billion identified for similar treatment. Is that something you are considering? And does this encompass the entire program as you envision it now, because there seems to be more planned for this year and even beyond 2026? Is this capturing your complete outlook?

Leovigildo Salom, President and CEO, TD Bank

Thanks for the question, Gabe. I'd say that is the entirety of the program. That reflects not only what we announced back in October, but it also includes the product of the strategic reviews that we've conducted over the past 2 quarters.

Gabriel Dechaine, Analyst

Okay. Great. From a modeling perspective, I understand these portfolios are not uniform, but when deciding to exit them, return on equity is the key factor, with risk also playing a role. Overall, will these affect your margins positively or negatively and will your risk increase or decrease due to the nature of these portfolios? I believe the correspondent mortgage might have low margins and low loan loss, but the other parts of the program could have different characteristics.

Leovigildo Salom, President and CEO, TD Bank

No, Gabe, that's correct. The two main criteria we considered were first, ensuring that the portfolios were profitable and contributed positively to return on equity. Second, we assessed whether these portfolios were central to our franchise, meaning we aimed to lend to clients where we could fully serve their needs rather than engage in just isolated lending relationships. All the portfolios we selected fit within this framework.

Gabriel Dechaine, Analyst

Okay. Next question is on expenses and expense management. Just to clarify, the USD 500 million in AML remediation costs, those direct expenses, are part of the U.S. P&C segment, correct?

Kelvin Vi Luan Tran, CFO

Correct.

Gabriel Dechaine, Analyst

Okay. My hopefully, more intelligent question is, are there additional indirect costs that are I mean, seemingly tied to this issue as well? Because in Wholesale Banking, I see good revenue growth, but then expenses were up more spend supporting regulatory and business projects. And then in the Corporate segment, sounded like governance and control costs were noted. I'm just wondering if there's additional inflationary pressures that are starting to affect other segments.

Kelvin Vi Luan Tran, CFO

Gabe, it's Kelvin. Why don't I take that first. Yes. So overall, the majority of the year-over-year expense growth is governance and control related. You've already know that part of that is in Leo's business, and we've also taken this opportunity to uplift or uplift our governance and control cost across the bank where we see feasible. And so maybe I'll pass it onto Ajai just to give you a few examples of those. And then to Tim on the investment that he's making in his business.

Ajai K. Bambawale, Chief Risk Officer

Yes. So I'd say with respect to second-line risk functions that are under my purview. The main area we're investing in is AML. So not just U.S. AML, but we're very much investing in enterprise AML as well. And as I've said on earlier calls, there are other risk programs that we're investing in. A good example of that is fraud. Another good example is Cyber. Compliance is the third example I would share with you. So we are investing in other risk programs as well.

Tim Guest Wiggan, Group Head, Wholesale Banking

And Gabe, from a wholesale perspective, you mentioned the revenue. We are aggressively scaling our wholesale business. So as you've seen, in this quarter, we did $2 billion of revenue. And the way I would describe that, we essentially matched Q2 in revenue, which included the $184 million from Schwab that we disclosed. So that involves investment across global markets, capital markets as well as investment banking. But to follow on Ajai's point, we also need to make foundational investment in our risk and control platform to allow us to scale within risk appetite and properly manage our risk. But I think we are well on track with our stated goals and the results are showing that our strategy has paid out.

Gabriel Dechaine, Analyst

I'm sure we'll discuss that in more detail in September. Regarding the buyback, I understand there are both the number of shares and the dollar amount to consider. The stock price has increased since the buyback program was announced. However, if I look at the number of shares, it was over 30 million in the last quarter and around 15 million this quarter, unless I'm mistaken. Are you still committed to the full $8 billion amount?

Raymond Chun, CEO

Thank you for your question, Gabe. It's Ray. Yes, we are still planning to utilize about $8 billion from the Schwab sale proceeds for our current NCIB. We have made significant progress this quarter, repurchasing 16 million shares, bringing the total to around 46 million shares bought back since we announced the $4 billion program through the end of the quarter. However, the pace of the buyback may be influenced by market conditions. We did increase our repurchase activity in Q2 when we noticed a dip in share price. We are fully committed to completing the $8 billion buyback we announced.

Matthew James Lee, Analyst

Maybe just on the capital market side, activity finally seems to be picking up on the C&IB front. How does the addition of an integration of Cowen improved your approach to winning investment banking mandates, particularly in the U.S? And then should we expect capital markets to be a bigger growth driver for you this cycle than maybe how TD has looked in the past?

Tim Guest Wiggan, Group Head, Wholesale Banking

Yes. Thanks very much for the question. I would just say you should absolutely expect continued growth in capital markets. To give you a longer-term view of revenue, I'll just take you back to fiscal 2022. So that was the last full fiscal year prior to the TD Cowen acquisition, where we were doing on a quarterly basis, about $1.2 billion of revenue. In Q4, we guided to an expectation that we could take that to $1.8 billion per quarter in this fiscal year. And quarter-to-date, as you've seen, we're actually coming in at $2 billion. And I would say, much like you've seen from other banks, over the course of the last few months, the first half of the year was about monetizing volatility, which I think we did very well. But as we look at Q3, we've had a meaningful pickup in CIB. And within that, you would have obviously advisory equity capital markets for us specifically is a much bigger contributor and a lot of that is just as a result of the mix and being more exposed to U.S. equity capital markets activity. We also saw leverage finance pickup. So overall, as I said earlier, we are seeing the benefits of the broader platform and continuing to scale and invest to become a top 10 North American dealer.

Ebrahim Huseini Poonawala, Analyst

I guess just a few questions around expenses. And maybe, Leo, with you on the U.S. side. Just making sure I'm hearing you correctly. There's another, I guess, $18 billion of loans that are going to run off next year. Expense growth is going to be mid-single digits in the U.S. segment. All of that obviously speaks to some version of negative operating leverage in that business for next year as well. And sorry if I missed it, but remind us, I feel like the control costs, AML costs were in the run rate this year. So when you think about just the drivers of expense growth relative to kind of the balance sheet runoff that's taking place, how should we think about that in terms of just the U.S. segment profitability looking out next year?

Leovigildo Salom, President and CEO, TD Bank

Yes. Ebrahim, good to hear from you. Maybe if I could just frame first expenses, and then I'll come back to sort of overall profitability. From an expense standpoint, as Kelvin guided, we are confident with our spend pattern against the AML program. So we will come in at the $0.5 billion number for the 2025 year. And we believe that, that number will look similar in 2026. So I think we've got some degree of consistency there. I think from an expense standpoint, I would expect the fourth quarter just in terms of where we'll land, to be somewhat similar in terms of the absolute level of expense that we saw in the third quarter, and that reflects the slightly higher AML spend pattern just in terms of the calendarization from the first half of the year to the second half of the year, and that number, obviously, in any one given quarter could bump around. I think the piece that we did share with you is that we are guiding to a mid-single-digit expense growth for 2026. And what that reflects is that while we still will have elevated remediation expenses, somewhat in line with what we've seen in 2025, you'll start seeing the benefit of the productivity efforts that we've announced in previous calls, and just the deliberateness around the choices that we're making. Productivity is important because we want to continue to not only remediate but also invest in the franchise in those areas that we think have significant growth. To your point, with regards to overall profitability, we still believe that between the work that we've done on the bond repositioning, the tractor on rate versus off-rate profile, the work that we've done to reduce excess liquidity, notwithstanding that we're going to have some headwinds related to the runoff of the $18 billion that we'll still have a strong revenue dynamic in 2026. And that, coupled with the disciplined profile and expenses would lead us to a year of NIAT growth, and we'll provide a little bit more texture and guidance during the Investor Day call in late September. But long-winded way of saying, I'm still constructive with regards to the outlook for 2026.

Ebrahim Huseini Poonawala, Analyst

That's helpful, Leo. If I understood you correctly, you expect to complete all the AML remediation work by the end of the year? If that’s the case, my understanding of how U.S. regulators operate is that they might monitor this for one, two, or three years. If you finish by the end of this year and there are no issues in the following one or two years, how do you view the timeline you initially suggested extending to 2028? How should we consider the possibility of removing that asset cap during that period once everything is completed and in the subsequent 12 to 24 months?

Leovigildo Salom, President and CEO, TD Bank

Yes. To clarify, we believe that most of our management actions, which represent the first stage of our remediation efforts, will be completed by the end of 2025. However, some longer-term items will extend into 2026 and 2027, meaning that the program will not be fully finished in 2025. Additionally, once we complete a management action, there are several stages we must still go through. Internally, we have a challenge process involving both the first and second lines, and all our programs will undergo an internal audit validation process. The monitor will oversee governance, and finally, the regulator will assess the sustainability of the program to ensure it meets expectations. I am confident in our progress on the remediation plan, but I want to be cautious about the timing regarding the asset cap, as we don’t have control over those aspects. Our focus is on developing a robust program as quickly and thoroughly as possible.

Sohrab Movahedi, Analyst

Okay. I wonder if I could just ask Tim a little bit more on Wholesale Bank. I think you mentioned, Tim, that there are some investments that are taking place to accommodate a top 10 type, I suppose, aspiration in North America. I see a big increase in, for example, full-time equivalent or employee count. Some of it, I suppose, is seasonal. But can I get a sense of as you think about whether you're trying to go, how much more investing and spending needs to take place? And when do we expect to see the fruits of that, so to speak, on a sustained basis?

Tim Guest Wiggan, Group Head, Wholesale Banking

Thank you for the question. Regarding full-time equivalents, that is definitely seasonal. Looking ahead over the next year or the medium term, we don't anticipate a significant increase in our FTE count. We will provide more detail about our investment strategy at the upcoming Investor Day. This year, we are seeing all aspects of expenses impacting our performance. For instance, our convertible platform, which we just launched a year ago, is making a significant contribution to our equity and equity-linked rankings and requires investment. We are also expanding our U.S. Prime business, which is experiencing over 20% growth, with more strategies to be rolled out. Although the net number of employees we've added is neutral, they bring valuable expertise in their fields, though there is a J-curve effect to consider. Additionally, all of this investment is being made within our risk appetite. We are also making a substantial investment in our risk and control platform, which is part of a multi-year program. Therefore, I am confident that as revenue continues to grow and expenses stabilize over the medium term, we will meet our targets, which we will discuss further next month.

Doug Young, Analyst

I have a question for Ajai regarding two aspects of credit. There has been an increase in gross impaired loan formations in U.S. Commercial, which I believe you mentioned. However, there's also a release of performing loan allowances in the U.S. I am trying to understand the connection between these two situations and would like you to elaborate on where the release originated. Additionally, you mentioned about $600 million in expert credit judgment related to risks associated with trade policies in your performing loan allowances. Can you provide more details on that? Was that amount zero last year and how has it changed over time? I also have a follow-up question.

Ajai K. Bambawale, Chief Risk Officer

Yes. So again, there are multiple parts to your question. So let me try to answer each one of them. You mentioned higher GILs. And yes, we saw higher GILs. Some of it came from wholesale and some from the U.S. In wholesale, there were really 4 borrowers. One was in telecom and cable, 2 in professional and other and 1 in transportation. There were a few impairments on the U.S. Commercial book. 3 of them were CRE, and I would call those pretty much expected. And there was 1 in C&I in the industrial construction and trade contractor space. I don't necessarily view this as a trend, but you're right in pointing out the numbers, the GIL numbers did go up. If I look at U.S. impaired PCLs. U.S. impaired PCLs went up because of these impairments and the related reserves. And then you're correct in pointing out that on a performing basis, performing PCLs in the U.S. came down and there was, I would call it, a small release. And the main driver of that small release was the macro change in the macro environment in the United States. And my final comment on that would be that I have seen this variation quarter-over-quarter. And it's not every quarter that the impaireds in the segments would move in the same line. So it's not an unexpected event from my perspective. And let me turn to the $600 million. So we've actually built $600 million over 3 quarters, okay. We started building in Q1, then we had the big build in Q2. What we did this quarter was we actually went and refreshed all the work we did last quarter and went deep into understanding the borrowers that were most sensitive to tariffs. And when we did this work, so that's non-retail, when we did this work, we looked at the potential impact on their financials, whether it was revenue or cost of goods sold. That gave us an idea of what potential migration should occur. Could it be one notch could it be two notches? And we use that potential migration to determine what the allowance would be. And this quarter, because that number was slightly higher, we took a little more against business and government lending. What we've also done is we've been looking at the consumer portfolios over these 3 quarters. We're looking at the potential impact of inflation and higher rates on consumers. So this quarter, we actually added a little bit for the consumer books as well. So if I take that total $600 million, approximately $410 million is for business and government and $190 million is for the consumer sector. So again, I'll just end by saying I'm very comfortable with where we are at. We've done a lot of work to determine what the overlay should be. I think you know this uncertainty still exists, and it's going to continue for a while, but I feel we're well positioned. We're sitting at 103 bps reserves, and I'll leave it at that.

Doug Young, Analyst

To follow up on that, how much of the $600 million, which includes $410 million for business and government and $190 million for the consumer sector, is attributable to Canada? I would assume most of it is from Canada.

Ajai K. Bambawale, Chief Risk Officer

Yes, we haven't disclosed that, but I can tell you a fair bit is Canadian P&C, and the balance is U.S. based, some for U.S. retail, and there's some for Wholesale.

Doug Young, Analyst

And then just in a real-life example, like what is that $600 million. So if we had a breakdown in USMCA. Like that is what this is there for, it doesn't cover, obviously, everything that would happen, but it provides you a cushion in anticipation of that, is that how to think of that $600 million?

Ajai K. Bambawale, Chief Risk Officer

We have made certain tariff assumptions for Canada and the United States. We are using these assumptions to analyze our portfolio and determine the potential impact. It is important to clarify that our assumptions could change. If tariffs increase beyond our estimates, we will need to build more reserves; if they decrease, we will release reserves. If the tariffs align with our assumptions, as our portfolio shifts, we will utilize the reserves we have built.

Leovigildo Salom, President and CEO, TD Bank

Well, Doug, thanks for the question. We will be providing more clarity regarding our return on equity target at the Investor Day, so I won't discuss that at this moment. It's a combination of factors. We are clearly reducing parts of the portfolio that we don't believe enhance our return on equity profile. However, much of the benefit from that RWA reduction is still flowing through the balance sheet. The current improvement is due to better overall operating results, with three consecutive quarters of NIAT growth from last year's fourth quarter to now. This has enabled us to achieve a cumulative improvement of 140 basis points when excluding Schwab. I believe we are executing as planned. I hope you recognize that our current performance, with earnings of $695 million this quarter, gives insight into what the outlook could be for 2026. So right now, it's primarily an earnings story, supported by selective changes on the balance sheet. You will see more impact from the balance sheet next year as we finalize the overall U.S. balance sheet restructuring.

Sohrab Movahedi, Analyst

Tim Guest Wiggan, Group Head, Wholesale Banking

Yes, thank you for the question. You should definitely expect continued growth in capital markets. To provide a longer-term perspective on revenue, let's reflect on fiscal 2022, which was the last complete fiscal year before the TD Cowen acquisition, where we generated about $1.2 billion in revenue quarterly. In Q4, we anticipated that this could increase to $1.8 billion per quarter in the current fiscal year. Currently, we're actually seeing $2 billion quarter-to-date. As you've observed from other banks, the first half of the year was focused on capitalizing on volatility, which we managed effectively. Looking ahead to Q3, we have experienced a significant uptick in Corporate and Investment Banking. Specifically, advisory services and equity capital markets have become substantial contributors, largely due to our increased exposure to U.S. equity capital markets activity. We have also seen growth in leveraged finance. Overall, we are benefiting from our broader platform and continue to scale and invest to achieve our goal of becoming a top 10 dealer in North America.

Doug Young, Analyst

The next question is from Ebrahim Poonawala from Bank of America.

Ebrahim Huseini Poonawala, Analyst

Leovigildo Salom, President and CEO, TD Bank

Doug Young, Analyst

There are no further questions registered. At this time, I will turn the call back to Mr. Raymond Chun.

Raymond Chun, CEO

Well, thank you, operator, and thank you, everyone, for joining us today. We appreciate as always the questions and your comments. And let me just wrap by saying that TD has delivered for its stakeholders in Q3, 10% revenue growth, positive operating leverage, strong credit performance. So on that note, we wish all of you a good long weekend. Look forward to speaking with all of you again real soon at our Investor Day on September 29. Thank you.

Operator, Operator

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