Earnings Call Transcript - TD Q4 2023

Operator, Operator

Good afternoon, everyone. Welcome to the TD Bank Group Q4 2023 Earnings Conference Call. I would like to turn the meeting over to Ms. Brooke Hales. Please. Go ahead, Ms. Hales.

Brooke Hales, Investor Relations

Thank you, operator. Good afternoon and welcome to TD Bank Group's fourth quarter 2023 investor presentation. Many of us are joining today's meeting from lands across North America. North America is known as Turtle Island by many indigenous communities. I am currently situated in Toronto. As such, I would like to begin today's meeting by acknowledging that I am on the traditional territory of many nations, including The Mississaugas of the Credit, the Anishnabeg, the Chippewa, the Haudenosaunee, and the Wendat Peoples, and is now home to many diverse nations, Metis, and Inuit Peoples. We also acknowledge that Toronto is covered by Treaty 13 signed with The Mississaugas of the Credit and the Williams Treaties signed with multiple Mississaugas and Chippewa bands. We will begin today's presentation with remarks from Bharat Masrani, the Bank's CEO, after which Kelvin Tran, the Bank's CFO, will present our fourth quarter operating results. Ajai Bambawale, Chief Risk Officer will then offer 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 Michael Rhodes, Group Head, Canadian Personal Banking; Barbara Hooper, Group Head, Canadian Business Banking; Raymond Chun, Group Head, Wealth management and Insurance; Leo Salom, President and CEO, TD Bank, America's Most Convenient Bank; and Riaz Ahmed, Group Head, Wholesale Banking. Please turn to slide two. 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 applied 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, such as adjusted results, to assess each of its businesses and to measure overall Bank's 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 use of non-GAAP and other financial measures, the Bank's reported results, and factors and assumptions related to forward-looking information are all available in our 2023 Annual Report. With that, let me turn the presentation over to Bharat.

Bharat Masrani, CEO

Thank you, Brooke, and thank you, everyone, for joining us today. Before I begin, I want to say how saddened we are about recent events in the world and close to home. TD has contributed CAD1 million to support urgent humanitarian aid in Israel and Gaza, as well as to local organizations in North America that combat the rise of racism and hate. At TD, we stand against anti-Semitism and Islamophobia. Over the past several days, it has been encouraging to see the release of some hostages and pause in the fighting. As this situation evolves and with the war in Ukraine, now well into the second year, we hope and pray for peace. I also want to acknowledge our colleagues, customers, and neighbors impacted by the Lewiston shooting in Maine last month. TD contributed CAD200,000 to help those affected. We are the largest bank in the state. We know that Mainers are resilient and the bank will continue to support the community to overcome those painful events. Let's now turn to our fourth-quarter earnings. Q4 was a mixed quarter for TD. While expenses were elevated and we saw weaker results in our Wholesale Banking segment, fundamentals remained strong across our retail businesses. Earnings were CAD3.5 billion and EPS was CAD1.83. Revenue grew 8% year-over-year, reflecting margin expansion and loan volume growth. The contribution from TD Cowen and the strength of our diversified business model. PCLs were higher as credit continued to normalize as expected. This quarter expenses increased, driven by variable compensation and the inclusion of TD Cowen. More generally, we recognize that the bank's cost base is higher than it should be. We're undertaking a broad-based restructuring program to deliver efficiencies and drive profitability across the enterprise. As Kelvin will describe in more detail, the program includes real estate optimization, asset impairments as we accelerate transitions to new platforms, and a 3% reduction in FTE through attrition and targeted actions to create capacity to invest for future growth and limit the impact on our people. While we are focused on expenses, we are pursuing meaningful revenue opportunities across our businesses. We outlined our strategies to accelerate growth in our Canadian retail businesses at our recent Investor Day and the acquisition of TD Cowen provides additional capabilities for TD to grow its investment bank. In U.S. Retail, our brand footprint and deep customer relationships provide a robust foundation for continued growth. As you'll hear from my colleagues, we are already executing on these opportunities across the bank. The bank's CET1 ratio was 14.4%, reflecting organic capital generation and the impact of almost 38 million common shares bought back during the quarter. With heightened uncertainty in the economy and the markets, TD is in a position of strength. We have the capacity to return capital to shareholders, while continuing to invest to drive growth across our businesses. We remain confident in the earnings power of our franchise, and today declared a CAD0.06 dividend increase, bringing our dividend to CAD1.02 per share. And last month, we introduced TD Invent, the bank's enterprise approach to innovation. This will build on our track record of innovation, including the recently redesigned TD mobile app, which first launched in the U.S. and then in Canada this quarter. TD's Digital Strength continues to receive recognition, with Global Finance recently naming the bank the best consumer digital bank in North America for the third year in a row. We are also leveraging advanced technologies including AI, and have been granted 55 patents relating to AI inventions since 2018. This quarter, our in-house AI team Layer 6 won the Annual ACM RecSys Challenge for the third time. Let me now turn to each of our businesses and review some highlights from Q4. In our Canadian Personal and Commercial Banking segment, earnings were CAD1.7 billion, down 1% year-over-year, and PTPP was CAD2.7 billion, up 7% year-over-year. In a challenging environment, we saw strong momentum across our businesses, with loans and deposits up 2% and 1% quarter-over-quarter, respectively, and NIM expansion of 4 basis points. In the Personal Bank, Everyday Banking delivered a record quarter for New to Canada accounts, as TD continued to make progress towards our medium-term target of 50% growth in New to Canada acquisition outlined at our recent Investor Day. In credit cards, we delivered strong volumes in Q4 and record spend for the year. And Rewards Canada Readers recognized TD with more rewards in 2023 than all other card issuers combined, with the bank taking first place in four of seven categories. In Real Estate Secured Lending, the bank continued to deliver market share gains and to help Canadians invest tax-free for a down payment on their first home. This quarter, TD launched the First Home Savings Account. The Business Bank grew loans by 9% year-over-year. In small business banking, we are focused on helping clients refinance their CEBA loans in advance of the upcoming partial forgiveness deadline. And the bank continued to execute on its One TD strategy, more than doubling the number of senior private bankers co-located in our commercial banking centers over the last two quarters. Turning to the U.S., U.S. Retail Bank earnings were $800 million, down 17% year-over-year, and PTPP was $1.1 billion, down 13% year-over-year. Expenses increased 6% year-over-year, reflecting higher legal and regulatory costs and continued investments in our franchise, and credit continued to normalize. However, we saw operating momentum with net interest income up 1% quarter-over-quarter, reflecting volume growth across loans and deposits excluding sweeps and a 7 basis point increase in NIM. With the contribution from our investment in Schwab of $146 million, segment earnings were $946 million. TD Bank, America's Most Convenient Bank is adding customers and deepening relationships, delivering peer-leading personal and business loan growth of 12% and 9% year-over-year respectively. In Commercial banking, middle market and specialty lending grew 22% and 12% year-over-year, respectively. In our U.S. Bank Card business, new accounts were up 45% year-over-year, as our product suite continued to resonate with customers. And for the seventh year in a row, the bank ranked number one in Small Business Administration Lending in its Maine to Florida footprint and ranked number two in SBA loans nationally. TD continued to demonstrate resilience in deposits in a competitive environment with balances excluding sweeps up 1% quarter-over-quarter. The wealth management and insurance segment earned $501 million this quarter, down 3% year-over-year. Revenue growth of 9%, reflecting the strength of our diversified business model was offset by increased claims due to inflation, auto thefts, and more severe weather-related events. In Private Investment Advice, TD gained market share year-over-year and ranked number one among Canadian banks in net new asset growth, as the bank makes progress towards our investor day targets. In TD Direct Investing, we launched TD Active Trader this quarter, the Bank's completely redesigned platform for sophisticated active traders, offering leading capabilities unmatched in the marketplace. Finally, in Insurance, we continue to increase market share amongst Canadian personal lines insurers year-over-year. It was a challenging quarter for the Wholesale Banking segment. Net income was CAD178 million, down 35% year-over-year, as higher revenues from equity commissions and underwriting and advisory fees were more than offset by investments to grow TD Cowen and our U.S. Business. This quarter we expanded our credit trading team and financial institutions group in the U.S. We also achieved a significant milestone in the integration of TD Securities and TD Cowen with the combination of our U.S. institutional equities and convertible businesses to deliver even better outcomes for our clients and strengthen our brand in U.S. equity markets. We are pleased with our integration to-date and continue to pursue strategies to ensure our combined businesses and cost structure allows us to serve our clients optimally and drive profitability. For fiscal 2024, it will be challenging to meet our medium-term adjusted EPS growth and ROE objectives, as the bank navigates a complex macroeconomic environment, expected further normalization in PCLs, and elevated expenses, including investments to enhance the Bank's risk and control infrastructure and accelerate growth. Despite these headwinds, the bank continues to deliver on its purpose to enrich the lives of our customers, communities, and colleagues. This quarter, we released the TD and Indigenous Communities in Canada 2023 Report, which highlights the Bank's collaborations with First Nation, Metis, and Inuit Peoples and communities. We also opened a new branch in the Province of Alberta, on the lands of the Tsuut'ina Nation, staffed entirely by indigenous peoples. In addition, the bank continued to focus on energy transition. Earlier this month, TD announced an agreement with 1PointFive to purchase carbon dioxide removal credits from the Direct Air Capture Plan, subject to it becoming operational. This transaction will help drive innovative, technology-based solutions to advance decarbonization goals for TD and our clients. I want to end by thanking all our TD bankers around the globe, who live our purpose every day. Thank you for your many contributions in 2023, and I look forward to what we will achieve together in 2024. With that, I'll turn things over to Kelvin.

Kelvin Tran, CFO

Thank you, Bharat. Good afternoon, everyone. Please turn to slide 10. For 2023, the bank reported earnings of CAD10.8 billion and EPS of CAD5.60, which represents declines of 38% and 41%, respectively. Adjusted earnings were CAD15.1 billion, with adjusted EPS at CAD7.99, down 2% and 4%, respectively. Reported revenue increased by 3%, reflecting the effects of the terminated First Horizon acquisition-related capital hedging strategy and gains from the previous period on the sale of Schwab shares, as well as margin growth in the Personal and Commercial Banking sectors. Adjusted revenue rose by 12%. Reported expenses went up by 25%, driven by higher employee-related costs, including expenses related to TD Cowen, the Stanford litigation settlement, and additional charges for acquisitions and integrations, particularly concerning the terminated First Horizon acquisition. Adjusted expenses increased by 13%. Reported total bank PTPP declined by 19.1% from the previous year. Consistent with earlier quarters, slide 28 shows how we calculate adjusted total bank PTPP and operating leverage by excluding the effects of the U.S. strategic card portfolio, foreign currency translation, and the insurance fair value charge. Adjusted total bank PTPP increased by 7.2% after these adjustments. Please turn to slide 11. TD's restructuring program has been supported by the bank's continuous investments in technology and digital capabilities. This quarter, we implemented measures to reduce the bank's cost base and enhance efficiency, resulting in a pre-tax restructuring charge of CAD363 million. We anticipate incurring additional restructuring charges of a similar amount in the first half of calendar 2024. The restructuring program is expected to yield approximately CAD400 million in pre-tax savings in fiscal 2024, with a projected annual run rate savings of about CAD600 million. Cost savings will come from a 3% reduction in full-time equivalents, optimizing real estate, and asset impairments as we expedite transitions to new platforms. Our goal of achieving positive operating leverage over the medium term remains intact. In the current environment, we expect recurring expenses, factoring in the savings from the restructuring program and investments for future growth, to rise by around 2% per year. For fiscal 2024, we expect higher expense growth, driven by investments in our risk and control infrastructure and the implications of TD Cowen. Therefore, we forecast adjusted expense growth in the mid-single digits for fiscal 2024. Please turn to slide 12. In Q4, the bank's earnings were CAD2.9 billion with an EPS of CAD1.49, down 57% and 59%, respectively. Adjusted earnings stood at CAD3.5 billion, with adjusted EPS at CAD1.83, showing declines of 14% and 16%, respectively. Reported revenue decreased by 16%, largely due to the effects of the terminated First Horizon acquisition-related capital hedging strategy and prior gains from Schwab shares, although this was somewhat offset by margin growth in Personal and Commercial Banking. Adjusted revenue rose by 8%. Reported expenses increased by 20%, including restructuring charges and acquisition-related expenses for the Cowen acquisition, while adjusted expenses were up by 13%, reflecting greater employee-related costs and variable compensation. Reported total bank PTPP fell by 41.9% year-over-year. Adjusted total bank PTPP increased by 1.8% after removing the effects of the U.S. strategic card portfolio, foreign currency translation, and the insurance fair value charge. Please turn to slide 13. The Canadian Personal and Commercial Banking net income for the quarter was CAD1.7 billion, a 1% year-over-year decrease. Revenue rose by 7% year-over-year, driven by volume growth and higher margins. Average loan volumes increased by 6%, with personal volumes up 6% and business volumes up 9%. Average deposits increased by 2%, supported by a 5% rise in personal deposits, partially countered by a 3% decline in business deposits. The net interest margin stood at 2.78%, a rise of 4 basis points quarter-over-quarter. This quarter showed higher deposit margins due to tractor maturities, but this was partially balanced by loan margin compression amid intense competition. As we look ahead to Q1, many factors could influence margins, including tractors, on and off rates, and balance sheet mix; however, we expect net interest margin to remain relatively stable. Non-interest expenses rose by 6% year-over-year, reflecting increased technology spending to support business growth. Please turn to slide 14. The U.S. Retail segment reported an adjusted net income of $946 million for the quarter, down 19% and 21% year-over-year. The U.S. Retail Bank reported an adjusted net income of $800 million, down 14% and 17% respectively, due to higher non-interest expenses, increased PCL, and reduced revenue. Reported net income in the last fourth quarter included acquisition-related charges for the terminated First Horizon transaction. Revenue fell by 3% year-over-year, due to lower deposit volume, loan margins, and overdraft fees, offset by higher deposit margins, loan volumes, and fee income from increased customer activity. Average loan volumes increased by 10% year-over-year, with personal loans increasing by 12% due to strong originations and slower repayment rates across portfolios. Business loans increased by 9%, driven by strong originations from new customer growth, higher commercial line utilization, and slower repayments. Average deposit volumes, excluding sweep deposits, declined by 4% year-over-year; personal deposits dipped by 4% and business deposits fell by 5%, while sweep deposits decreased by 25%. The net interest margin for this quarter was 3.07%, a gain of 7 basis points quarter-over-quarter, driven by higher investment returns from mature tractors and a favorable balance sheet mix. Looking to Q1, while various factors may impact margins, including competitive dynamics in the U.S. deposit market, tractor on and off rates, and balance sheet mix, we anticipate net interest margin to remain stable in the near term, influenced by similar factors as this quarter. Reported expenses increased by 3%, primarily due to higher legal, regulatory, and employee-related expenses, as well as FDIC assessment fees, although this was partially offset by prior period acquisition-related charges. Adjusted expenses rose by 6%. Please turn to slide 15. Wealth Management and Insurance reported net income of CAD501 million for the quarter, down 3% year-over-year, due to increased insurance claims and related expenses that were somewhat offset by an increase in non-interest income. Revenue rose by 9% year-over-year. Non-interest income climbed by 10%, driven by higher insurance premiums, a rise in the fair value of investments supporting claim liability—which also contributed to increased insurance claims—and higher fee-based revenue, despite lower transaction revenue in the Wealth Management sector. Net interest income fell by 4% year-over-year, mainly due to decreased deposit volume. Insurance claims surged by 39% year-over-year, attributed to heightened claim severity, more severe weather events, and discount rate changes that similarly raised the fair value of investments supporting claims liabilities, reported in non-interest income. Non-interest expenses decreased by 1% year-over-year, reflecting continuous efforts to improve productivity. Assets under management grew by 2% year-over-year, aided by market appreciation, although this was partly offset by mutual fund redemptions. Assets under administration increased by 3% year-over-year, also reflecting market appreciation and net asset growth. Please turn to slide 16. The Wholesale Banking segment experienced net income influenced by acquisition and integration-related charges tied to TD Cowen. Reported and adjusted net income for the quarter were CAD17 million and CAD178 million, respectively, reflecting higher non-interest expenses, balanced by increased revenues. Revenue, including TD Cowen, totaled CAD1.5 billion, reflecting a 28% increase year-over-year, primarily due to greater equity commissions, advisory and equity underwriting fees, as well as loan underwriting commitments that had marked down in the previous year. Reported expenses surged by 80%, including charges from the acquisition and integration of TD Cowen. Adjusted expenses increased by 59%, resulting from investments geared towards expanding TD Cowen and our U.S. operations. Please turn to slide 17. The Corporate segment reflected a net loss of CAD591 million for the quarter, compared to a net income of CAD2,661 million in the previous fourth quarter. This decline primarily stems from gains made in the prior year from the terminated First Horizon acquisition-related capital hedging strategy and Schwab shares sales, alongside restructuring charges this quarter. Other items decreased by CAD83 million, mainly attributed to the favorable tax impact of earnings mix and the recognition of unused tax losses reported in the previous year, offset by higher revenue from treasury and balance sheet management activities in the current quarter. The adjusted net loss for the quarter amounted to CAD133 million compared to an adjusted net loss of CAD10 million last year. In prior discussions, we indicated that our expected run rate for adjusted net losses in the corporate segment is approximately CAD100 million to CAD125 million per quarter. For fiscal 2024, while fluctuations may occur, we project adjusted net losses will increase to around CAD200 million to CAD250 million per quarter, driven by investments in our Risk and Control Infrastructure. These investments, which could extend beyond fiscal 2024, will be captured in the corporate segment as they are intended to provide enterprise-wide benefits, with run rate expenses reflected in the business segments. Please turn to slide 18. The Common Equity Tier 1 ratio concluded the quarter at 14.4%, a decline of 81 basis points sequentially. Internal capital generation contributed 27 basis points to CET1 this quarter, but this was offset by an increase in RWA, excluding FX impacts, which resulted in a 33 basis point decrease in CET1. We repurchased nearly 38 million common shares under our previous 30 million share buyback program, as well as the current 90 million share buyback program in this quarter, which decreased CET1 by 62 basis points—57 basis points from the buyback itself and 5 basis points due to the reduced capital base affecting our investment in Schwab that exceeded regulatory thresholds. Our restructuring program negatively impacted CET1 by 5 basis points this quarter. The second phase of the Basel III reforms will take effect in Q1 of 2024, and we currently expect it to negatively affect CET1 by approximately 15 basis points, driven by implementing the fundamental review of the trading book and adopting the standardized approach for market and counterparty risk. RWA, inclusive of FX effects, rose by 4.8% quarter-over-quarter, largely due to increased credit risk from volume growth and some credit migrations. The leverage ratio was 4.4% this quarter, and the LCR ratio stood at 130%, both significantly above the published regulatory minimums. And with that, Ajai, over to you.

Ajai Bambawale, Chief Risk Officer

Thank you, Kelvin, and good afternoon, everyone. Please turn to Slide 19. Gross impaired loan formations were 18 basis points, stable quarter-over-quarter as increases in the US Commercial and Canadian and US Consumer Lending portfolios were partially offset by reductions in Canadian Commercial and Wholesale Banking. Please turn to slide 20. Gross impaired loans increased CAD319 million quarter-over-quarter to CAD3.3 billion, or 36 basis points, driven by the impact of foreign exchange and the US Retail and Canadian Personal and Commercial Banking segments. Please turn to slide 21. Recall that our presentation reports PCL ratios, both gross and net of the partner share of the US 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 increased 4 basis points quarter-over-quarter to 39 basis points. The increase is largely recorded in the Canadian and U.S. Consumer Lending portfolios and Wholesale Banking. For 2023, the Bank's full-year PCL rate was 34 basis points, up 20 basis points from the prior year as credit performance continues to normalize. Please turn to slide 22. The Bank's impaired PCL was CAD719 million, an increase of CAD56 million quarter-over-quarter, largely related to further normalization of credit performance in the Canadian and U.S. Consumer Lending portfolios. Performing PCL was CAD159 million, with a quarter-over-quarter increase of CAD56 million, driven by Wholesale Banking and the Canadian Commercial Lending portfolios. Please turn to slide 23. The allowance for credit losses increased by CAD415 million quarter-over-quarter to CAD8.2 billion or 89 basis points, due to a CAD214 million impact of foreign exchange. Current credit conditions, including some credit migration across the lending portfolios and volume growth. The Bank's allowance coverage remains elevated to account for ongoing uncertainty relating to the economic trajectory and credit performance. Now, let me briefly summarize the year. Despite ongoing normalization of credit performance and heightened economic risks, including prolonged elevated interest rates, geopolitical tensions, and the potential for recession, the bank has exhibited strong credit performance throughout 2023. Looking forward, while results may vary by quarter, and are subject to changes to the economic trajectory, I expect PCLs in fiscal 2024 to be in a normalized range of 40 to 50 basis points. To conclude, TD remains well positioned, given we are adequately provisioned. We have a strong capital position, and we have a business that is broadly diversified across products and geographies. With that operator, we are now ready to begin the Q&A session.

Operator, Operator

Thank you for your patience. The first question is from Gabriel Dechaine from National Bank Financial. Please go ahead.

Gabriel Dechaine, Analyst

Hi, good afternoon. Can I clarify some of these expense comments you've been making? I heard something about 2% increase and I didn't quite follow what that was tied to, but what was clearer to me, and thank you for quantifying that, but the additional investments will be increasing your loss in corporate from, you know, previous guidance of CAD100 million to CAD125 million to CAD200 million to CAD250 million per quarter, I believe, and that could actually persist into 2025, correct?

Kelvin Tran, CFO

Yes. Hi, this is Kelvin. That's correct. When I mentioned the 2%, I was referring to the normal run rate we anticipate after implementing restructuring savings. However, the total expected expense growth for the bank will be in the mid-single digits.

Gabriel Dechaine, Analyst

Okay. So after restructuring, if nothing else is going on, you would expect 2% expense growth in '24. But then these additional costs, you're in the mid-single-digits?

Kelvin Tran, CFO

Correct? That and Cowen. Remember, we still have four months of TD Cowen.

Gabriel Dechaine, Analyst

Yes, I understand. Sometimes you need to explain things slowly. One thing I want to ask about is NSF fees. I spoke with one of your competitors today regarding these fees since the government is reviewing them in Canada, and your bank has faced this issue in the U.S. Is your reliance on overdraft fees in your Canadian bank as significant as it was in your U.S. bank?

Michael Rhodes, Group Head, Canadian Personal Banking

Let me take this question. This is Michael. With respect to the potential impact, you might be surprised. There is a lot we don't know right now, so it would be premature for us to comment on the potential impact at this time. Regarding relative dependence, I am looking at Kelvin or Leo on that. I'm not sure I have a point of view on the relative dependence.

Gabriel Dechaine, Analyst

All right, my word, not yours, but in the U.S., there was around 5% or 6% of your other income or total revenues in the U.S. at some point? And I'm wondering if it's anything close?

Michael Rhodes, Group Head, Canadian Personal Banking

It'll be lower. It'll be lower. But, you know, look, honestly at this point, I know you probably want to figure out a number to put in your forward view. It's very hard for us to give you any guidance on that right now.

Gabriel Dechaine, Analyst

I have a note that I wanted to clarify. Regarding the AML issue, I understand you prefer not to discuss the situation with the regulator. However, when I review the disclosure on reasonable probable loss for Q3, it shows a range of zero to CAD1.26 billion last quarter, compared to zero to CAD1.44 billion this quarter, indicating an increase. I'm curious if this is reflected in the RPL figure and how significant this issue is for you.

Bharat Masrani, CEO

Gabe, this is Bharat. I don't think we disclose specific cases. I don't think that'd be reasonable. And if I'm mistaken, then we'll clarify that after this call with you, but my understanding is we don't disclose specific cases.

Gabriel Dechaine, Analyst

Okay. And the last one, sorry, it's a few questions. It's my birthday, so I feel entitled.

Bharat Masrani, CEO

Go for it, Gabe. Go for it.

Gabriel Dechaine, Analyst

Yes, the FDIC assessment that few of your peers have quantified, I don't recall if you have?

Kelvin Tran, CFO

Gabriel, hi. First of all, did I hear that it's your birthday?

Gabriel Dechaine, Analyst

Yes. I'm so lucky to have three banks reporting, and I going out with my wife's friend tonight, so it's great.

Kelvin Tran, CFO

Happy birthday! I imagine you'd prefer to be doing something else right now. Let me quickly answer your question. We estimate that the impact of the FDIC assessment will be about CAD300 million. Our plan is to account for that in the first quarter of next year as a lump sum item. The total FDIC cost of recovery announced was CAD16.3 billion, which is slightly higher than their initial estimate. That's how we arrived at our CAD300 million figure.

Gabriel Dechaine, Analyst

Perfect. And that's U.S. pre-tax?

Kelvin Tran, CFO

Yes, that is.

Gabriel Dechaine, Analyst

Thank you and enjoy the rest of the week.

Kelvin Tran, CFO

Happy Birthday again.

Operator, Operator

Thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead.

Doug Young, Analyst

Hi, good afternoon, and happy birthday, Gabriel. Regarding the CET1 ratio, it seems that part of the reduction came from credit quality, and I assume that relates to migration. My rough calculation suggests about an 18 basis point reduction in the CET1 ratio. Can you provide some insight on that? I believe it's related to the impact of credit risk-weighted asset growth, so I would appreciate any additional details.

Ajai Bambawale, Chief Risk Officer

Yes, it's Ajai. I'm glad to provide some insight. Our total risk-weighted assets increased by CAD26 billion. Of that, CAD7 billion is due to asset quality, which is related to migration. Some of this increase is linked to Canadian consumer sectors such as resale and auto, as well as U.S. Retail, particularly commercial, auto, and cards, largely influenced by the probability of defaults. Additionally, we conduct a thorough bottom-up analysis every quarter, and sometimes we proactively move certain credits to Stage 2. For instance, in Canada, if we identify a client reaching a trigger point, we elevate them to Stage 2 even if they are current on payments, which results in a higher allowance rate. We also conservatively anticipate a segment of the population that may reach a trigger point in the next year, moving them to Stage 2 and establishing higher reserves. This contributes to the asset quality figure of CAD7 billion.

Doug Young, Analyst

And maybe just, like looking forward, as you kind of look at your PCL expectations in, you know, the evolution of the economic environment, any way to kind of get a sense of what we should be expecting, impact-wise on CET1 ratio from migration? I just see big this quarter, that's what I'm just trying to understand how to think about this one?

Ajai Bambawale, Chief Risk Officer

I can't comment specifically on CET1, but from my PCL guidance, we expect to see continued normalization of our credit portfolios. The range of 40 bps to 50 bps that we've provided is a normalized range for TD Bank. If this occurs as we anticipate, then I would expect RWAs to also increase.

Paul Holden, Analyst

Thanks. Good afternoon. Wondering if anyone on the call would like to provide guidance on Gabe's age?

Bharat Masrani, CEO

What's the consensus on that, Paul?

Paul Holden, Analyst

Sorry, I just had to roll with the birthday joke. Okay, so first serious question is, just looking at the PCL trends across the book of business, I'm just trying to figure out why U.S. Retail is increasing faster than Canadian Retail. Because I just look at the economic trajectories of those two economies and it looks like Canada is weaker than U.S. I'm just wondering if this is simply a matter of loan mix and maybe that is the simple answer. And then also maybe you can give me a sort of expectation going into 2024, again, given the different trajectories of the two economies?

Ajai Bambawale, Chief Risk Officer

You need to analyze those figures over a longer timeframe. When examining the full year, both Canadian and U.S. P&C have seen increases in PCLs. Additionally, both impaired and performing loans have risen, but performing loans are higher in Canada for the entire year. What you might be noticing is fluctuations between quarters, which we believe is influenced by the Canadian consumer being more vulnerable compared to the U.S. consumer, particularly concerning leverage and interest rate exposure. In this quarter, there have been some ups and downs, leading to differences between impaired and performing loans in the two segments. However, I believe the quality in both segments remains strong, and we have sufficient reserves in each. I recommend considering these factors over a longer duration.

Operator, Operator

Thank you. And we do have one last question, Darko Mihelic from RBC Capital Markets. Please go ahead.

Darko Mihelic, Analyst

Hey, thank you for squeezing me in. I appreciate that. Just a couple of quickies. First, maybe this is for Kelvin. The U.S. business, I'm looking at it in U.S. dollars, what's a reasonable tax rate, do you think for 2024 to think about with respect to our business?

Kelvin Tran, CFO

I'll take that. So on an average basis right now, it's sitting just under 20%, but at the margin, I would expect that number to be slightly higher.

Darko Mihelic, Analyst

Slightly higher. Okay. Second question, Leo sticking with you, I may be looking at this incorrectly, but was there a benefit to your NII from the Schwab payment or was that put into corporate?

Leo Salom, CEO, TD Bank, America's Most Convenient Bank

No, it's a very good question, Darko. There was a benefit in the cost. Let me break those two out. There was a one-time breakage fee that was paid by Schwab as they reduced flexibility regarding the fixed rate obligations, which was a condition we set in the agreement with them, and they utilized that in the quarter. This provided us with a slight benefit during the quarter. However, it was more than offset by the decline in overall sweep balances and lower investment earnings and management fee earnings from the actual agreement. Therefore, Schwab was a drag on our net interest income in the quarter.

Darko Mihelic, Analyst

It has been a challenge moving forward, and unless there are additional charges, we should really consider that. Is there anything you can share regarding the impact on net interest income? I believe I can calculate the fee Schwab paid to you, but I’m unable to determine all the negative impacts. Can you provide a figure related to the hit on net interest income?

Leo Salom, CEO, TD Bank, America's Most Convenient Bank

Darko, we typically don't disclose that figure, but if you're inquiring whether we anticipate declines in balances and potential revenue challenges, the answer is yes, and we have incorporated that into our long-term projections.

Operator, Operator

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