Earnings Call Transcript - TD Q3 2024

Operator, Operator

Good morning, everyone. Welcome to the TD Bank Group Q3 2024 Earnings Conference Call. I would 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 2024 investor presentation. Many of us are joining today's meeting from lands across North America. North America is known as Turtle Islands 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 Anishinaabe, the Chippewa, the Haudenosaunee and the Wendat people and is now home to many diverse First Nations, Métis and Inuit people. We also acknowledge that Toronto is covered by Treaty 13 signed with the Mississaugas of the Credit and the Williams Treaty 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 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 Raymond Chun, Group Head, Canadian Personal Banking; Barbara Hooper, Group Head, Canadian Business Banking; Tim Wiggan, Group Head, Wealth Management and Insurance; Leo Salom, President and CEO, TD Bank, America's Most Convenient Bank; and Riaz Ahmed, Group Head of Wholesale Banking. Please turn to Slide 2. As noted on 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. Bharat and Kelvin will both be referring to adjusted results in their remarks. Additional information about non-GAAP measures and material factors and assumptions is available in our Q3 '24 report to shareholders. With that, let me turn the presentation over to Bharat.

Bharat Masrani, CEO

Thank you, Brooke, and thank you, everyone, for joining us today. In Q3, TD delivered earnings of $3.6 billion and EPS of $2.05. Business fundamentals were strong across the Bank. Before I get into the details, I want to spend a few minutes on the announcement we made late yesterday. We continue to actively pursue a resolution of our AML matters. Discussions have been productive, and while we are not through the tunnel yet, we can see the light at the end of this journey. In our release, we noted that it is our expectation that a global resolution can be achieved by the end of the calendar year. The USD 2.6 billion provision we just announced, combined with the USD 450 million provision announced last quarter, represents our current estimate of the total fines to be paid related to these matters. I also want to spend a minute on the remediation program itself. This is important work and the remediation program is well underway. In May, we updated you on our progress. We've advanced on all fronts since then. We've onboarded leadership with deep subject matter expertise supported by increased staffing resources. We've hired from other banks regulators, government and even law enforcement. We've invested in data and technology to enable improved transaction monitoring and data analytics capabilities. And we've implemented new cross-functional procedures for preventing, detecting and reporting suspicious activity. While there's still much work ahead, we are pleased with the progress we've made. This is a priority. Our U.S. business is an important part of the Bank and of our future. We must focus on the work required to meet our obligations and responsibilities and build that future on stronger foundations. As I've said before, the failures were serious. We own it. We know what the issues are, and we are fixing them. I look forward to providing additional clarity as soon as I can. Let's now turn to our third quarter earnings. Revenue grew 8% year-over-year, driven by higher fee income in our markets-driven businesses and higher volumes and deposit margins in Canadian Personal and Commercial Banking. PCLs were stable quarter-over-quarter, reflecting continued strong credit performance. We completed our restructuring program announced in the fourth quarter last year, delivering efficiencies across the enterprise and continue to prioritize investments in our risk and control infrastructure. As of quarter end, the Bank's CET1 ratio was 12.8%, reflecting the impact of the AML investigations provisions and shares bought back during the quarter, partially offset by organic capital generation. The sale of 14.5 million shares of Schwab, which brings our holding to approximately 10.1%, further strengthens our capital ratio, ensuring the bank stays well above regulatory requirements after taking this provision. TD remains very well capitalized with ample liquidity and the means to invest in our AML remediation program, in our business and in the customer experience. The Bank continues to shape the future of banking. This quarter, TD completed the migration of its main data platform to the cloud eliminating related legacy systems and modernizing the Bank's data infrastructure. Enhancing scalability, security and speed, TD's cloud-based platform is a key foundation for our forward-focused data-driven organization. And we were proud that TD was recently named the Best Consumer Digital Bank in Canada for the fourth consecutive year and the Best Transformation and Innovation in North America for the second consecutive year, both by Global Finance. Let me now turn to each of our businesses and review some highlights from Q3. Our Canadian Personal and Commercial Banking segment delivered record revenues, reaching $5 billion for the first time and record net income, up 13% year-over-year. These strong results were driven by robust loan and deposit growth and substantial positive operating leverage. Across the segment, we are enhancing products and offerings through personalization and execution against our One TD strategy. This includes strong momentum and referrals from our retail branch network. In real estate secured lending, the Bank continued to deliver market share gains while supporting our growing customer base. And TD, which already has Canada's largest credit card account base, reached a new milestone with over 8 million active accounts. In addition, according to the 2024 bond loyalty report, TD credit cards ranked number one across major issuers in program loyalty. In personal lending, the Bank is supporting the financial journey of Canada's next generation of doctors, dentists and veterinarians by enhancing TD's student line of credit offering and deepening relationships as their needs evolve. TD grew its leading deposit franchise with another strong quarter for account openings and in the new-to-Canada market, we extended our packages beyond accounts to include offers for both TD Direct Investing and the TD Cashback Visa card, as we add even more value for new Canadians. In Business Banking, TD grew loans by 7% year-over-year. This quarter, the Bank launched TD Innovation Partners, a new team offering a broad suite of services to further address the needs of technology and innovation companies. TD already has more than 1 million business banking customers across Canada. And now with TD Innovation Partners, the Bank is helping the next generation of technology companies at every step of their journey. Turning to the U.S., the U.S. Retail Bank continued to deliver strong operating momentum with sequential earnings growth and stable deposits, excluding sweeps, and peer-leading loan growth year-over-year. TD grew consumer loans 8% year-over-year with proprietary bank card balances up 16%. We simplified our infrastructure and drove productivity savings across our credit card business with the migration of retail card services into our consolidated, more advanced cards platform. In Commercial Banking, middle market loan balances grew 18%. These strong results were driven in part by continued execution of our One TD strategies. As TD Bank, America's Most Convenient Bank and TD Securities collaborated to bring industry expertise to middle market clients and prospects and leverage relationships to capture sponsor-backed finance opportunities. And this quarter, we are proud that for the fifth year in a row, TD Auto Finance received the highest ranking in the J.D. Power U.S. dealer finance satisfaction study. J.D. Power also awarded TD Bank, America's Most Convenient Bank, the highest ranking in online banking satisfaction among national banks according to its U.S. online banking satisfaction study reflecting our investments in digital banking and our dedication to delivering legendary customer experiences across all our distribution channels. The Wealth Management and Insurance segment demonstrated resilience this quarter as strong fundamentals, including record revenues enabled the business to earn through a significant increase in claims. For the last few years, we've seen an increase in the frequency of weather events. With TD's winning direct-to-consumer business model and our ability to adapt to changes in the environment, I'm confident that the insurance business will continue to deliver an attractive return on equity over time. Our advice businesses saw significant retail net asset growth across all our channels, coupled with market appreciation, driving total assets up 15% year-over-year. Direct investing, our leadership position is the result of consistent innovation to bring market-leading capabilities to our clients. You saw that last quarter with the launch of TD Active Creator, and we've continued to innovate. This month, TD was the first bank in Canada to launch real-time partial shares, enabling investors to buy and sell a fraction of stocks, indices and ETFs, making investing more accessible. This launch reflects the power of One TD with TD Securities providing the backend execution to support this new functionality. Our insurance business was impacted by the severe weather events in the Greater Toronto area and the wildfires in Alberta in Q3 and by hailstorms in Calgary and floods in Montreal this month. At TD Insurance, we are there for our customers in their moment of need. I want to thank TD colleagues for their tremendous efforts for our customers through these events. To support the communities impacted by wildfires, TD has made donations to the Canadian Red Cross and is facilitating customer donations at branches across Canada. Wholesale Banking continued its growth with revenues up 14% year-over-year on broader, stronger capabilities. We continue to make good progress integrating our teams, deepening our client relationships and gaining momentum across our banking and markets businesses. In addition, we enhanced U.S. share trading execution for our clients with a fully launched and automated TDSX private room. Overall, our businesses performed well in Q3, and I'm confident in the strength of our franchise. We are operating in a challenging environment with significant market volatility, rapidly evolving rate expectations and heightened geopolitical risk. Amidst uncertainty in the outlook for the economies in both Canada and the U.S., retail customers and business clients alike are generally taking a cautious approach. As always, TD will be there for them as we navigate the coming months together. And those of you in Toronto have likely noticed in addition to the city skyline, the new TD Terrace building. Inside the building is a state-of-the-art TD branch, built as a next-generation innovation center, enabling the bank to test new capabilities in a live environment. The Bank's unique and inclusive culture continues to attract talent. TD received a top score of 100 in the 2024 Disability Equality Index for the 10th consecutive year in the U.S. and with the expansion of the index to Canada for the first time this year, the Bank achieved the same top score in Canada as well. Across our businesses, our customers are at the heart of who we are and what we do. That's why 10 years ago, we launched our first TD Thanks You campaign to showcase our gratitude for their unwavering support. In this milestone year, we've taken our appreciation to the skies through spectacular drone light shows in cities across Canada. Our colleagues live our commitment to our customers every day, and I want to thank them for all their efforts. I'm confident that together, we will continue to deliver for all our stakeholders. With that, I'll turn things over to Kelvin.

Kelvin Tran, CFO

Thank you, Bharat, and good morning, everyone. Please turn to Slide 11. Reported earnings this quarter include a USD 2.6 billion AML investigations provision. On an adjusted basis, earnings were $3.6 billion, flat year-over-year, and earnings per share was $2.05, up 5% year-over-year. Overall, we saw good fundamentals across our businesses, reflected in our strong top line growth. This was partially offset by two items in the Wealth Management and Insurance segment. The impact of claims from severe weather-related events which, as a percentage of earned premiums, was 40% higher than Q3 of last year and provisions related to ongoing litigation matters. Revenue increased year-over-year driven by higher fee income in our markets-driven businesses and higher volumes and deposit margins in the Canadian personal and commercial banking. We saw record revenues in two segments this quarter, Canadian Personal and Commercial Banking and Wealth Management and Insurance. Expenses increased year-over-year reflecting investments in our risk and control infrastructure and higher employee-related expenses. We continue to prioritize our investments and manage expenses diligently. While we continue to look for efficiencies in our cost base, we have now concluded our restructuring program. We have provided more details on Slide 27. Notwithstanding good execution against our restructuring initiatives, we expect fiscal 2024 adjusted expense growth to be in the high single digits reflecting higher investments in our risk and control infrastructure, strong performance in our markets-related businesses and certain items, including litigation. PCLs were stable quarter-over-quarter. Please turn to Slide 12. Canadian Personal and Commercial Banking delivered a strong quarter with record net income and revenue reflecting loan and deposit volume growth and substantial positive operating leverage. Average loan volumes rose 6% year-over-year, with 6% growth in personal volumes driven by real estate secured lending up 6% and cards up 10% and 7% growth in business volumes. Average deposits rose 5% year-over-year reflecting 7% growth in personal deposits and 2% growth in business deposits. Net interest margin was 2.81%, down three basis points quarter-over-quarter as expected, reflecting the migration of BAs to CORRA-based loans. As we look forward to Q4, while many factors can impact margins, we expect downward pressure due to BA CORRA migration and the impact of Bank of Canada rate cuts, partially offset by the benefit of tractor on and off rates. Expenses increased, reflecting higher spend supporting business growth, including employee-related expenses and technology costs. Please turn to Slide 13. The U.S. Retail Bank continued to deliver strong operating momentum with sequential earnings growth and peer-leading loan growth year-over-year. Average loan volumes increased 5% year-over-year, reflecting 8% growth in personal loans and 3% growth in business loans. We continue to deliver growth in mid-market commercial lending, with volumes up 18%, a business that is also driving fee income. Average deposit volumes, excluding sweep deposits were relatively flat year-over-year, as the U.S. retail bank demonstrated deposit stability in a competitive environment. Net interest margin was 3.02%, up three basis points quarter-over-quarter driven by higher deposit margins. As we look forward to Q4, while many factors can impact margins, we expect a modest NIM expansion due to the benefit of tractor on and off rates, partially offset by any potential fed rate cut. Reported expenses include a USD 2.6 billion AML investigations provision. On an adjusted basis, expenses were relatively flat year-over-year, primarily due to higher operating expenses, offset by ongoing productivity initiatives. Please turn to Slide 14. Wealth Management and Insurance delivered record revenue and strong fundamentals across its diversified businesses. Revenue grew 13% year-over-year, reflecting higher insurance premiums, fee-based revenue, deposit margins and transaction revenue. Insurance service expenses were up 20% year-over-year, primarily reflecting increased claim severity, less favorable prior year's claims development and larger impact of severe weather-related events. We saw claims cost of $186 million this quarter due to severe weather events in the Greater Toronto area and wildfires in Alberta in July. In addition, there have been two significant weather events so far in August, the Calgary hailstorms and the Montreal floods. For these two events, we expect claims and related costs of more than $300 million in Q4. To help support analysts, investors analysis of our insurance business performance, we have added disclosure of current quarter claims costs net of reinsurance to Page 12 of the supplemental financial information package. Expenses were up 13% year-over-year, more than half of this increase related to provisions for ongoing litigation matters with the remainder driven by higher variable compensation. Assets under management and assets under administration increased year-over-year, both reflecting market appreciation and net asset growth. Please turn to Slide 15. Wholesale Banking continued its growth, delivering revenues of $1.8 billion, reflecting higher trading-related revenue, lending revenue, advisory and underwriting fees. This quarter, we also saw higher PCLs, reflecting a few new impairments across different sectors. Expenses increased 12% year-over-year, primarily reflecting higher level compensation commensurate with higher revenues. The business delivered positive operating leverage and an efficiency ratio of 69% as we continue to optimize the platform. Please turn to Slide 16. The corporate net loss for the quarter was $324 million. As you will recall, we guided to adjusted net losses in the $200 million to $250 million range, although we expected it to bounce around from quarter-to-quarter for fiscal 2024. We have increased investments in our risk and control infrastructure and expect corporate adjusted net losses to remain above that range for Q4. Net corporate expenses increased $93 million compared to the prior year mainly reflecting investments in risk and control infrastructure, partially offset by litigation expenses in the prior year. Please turn to Slide 17. The Common Equity Tier 1 ratio ended the quarter at 12.8%, down 57 basis points sequentially. We had strong internal capital generation this quarter. RWA, excluding the impact of FX, increased slightly, primarily reflecting the operational risk RWA impact from certain provisions taken last quarter. We repurchased approximately 13 million shares in Q3 and none in August to date. Our current NCIB expires on August 31st, and we do not intend to repurchase any additional shares prior to expiry. Across the $90 million share buyback program and our previous $30 million share buyback program, TD repurchased over 100 million shares, almost 85% of the shares authorized, delivering returns for shareholders while managing our capital appropriately. TD sold its common shares in First Horizon this quarter, generating six basis points of CET1. We had a negative 71 basis point impact to CET1 from AML investigation provision this quarter reflecting the earnings impact of this quarter's provision and the operational risk RWA in provision announced last quarter. We expect a negative 35 basis point impact from this quarter's AML investigation provision in Q4. As a reminder, consistent with the Basel III reforms, operational risk RWA impacts take effect on a one quarter lag. This will be partially offset by a positive 54 basis point impact to CET1 in Q4 from the sale of 40.5 million swap shares. With that, Ajay, over to you.

Ajai Bambawale, Chief Risk Officer

Okay. Thank you, Kelvin, and good morning, everyone. Please turn to Slide 18. Gross impaired loan formations were stable at 22 basis points for the bank as higher impaired loan formations in wholesale and U.S. commercial were largely offset by lower formations in Canadian commercial. Please turn to Slide 19. Gross impaired loans increased three basis points quarter-over-quarter to 44 basis points, driven by a few new impairments across a number of industries in each of wholesale and U.S. commercial, partially offset by lower impairments in Canadian commercial. 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 gross provision for credit losses was stable quarter-over-quarter, as an increase in the wholesale segment was offset by decreases in the Canadian P&C, U.S. retail and corporate segments. Please turn to Slide 21. The Bank's impaired PCL was $920 million, an increase of $50 million quarter-over-quarter, reflecting higher provisions in the Wholesale segment, partially offset by lower provisions in the Canadian Personal and Commercial segment. Performing PCL decreased $49 million quarter-over-quarter to $152 million. The smaller current quarter performing build was primarily recorded in the Canadian Personal and Commercial and U.S. Retail segments. Please turn to Slide 22. The allowance for credit losses increased by $288 million quarter-over-quarter to $8.8 billion due to current credit conditions, including some credit migration driven by the nonretail lending portfolios, volume growth and a $20 million impact from foreign exchange. The Bank's allowance coverage remains elevated to account for ongoing uncertainty relating to the economic trajectory and credit performance. In summary, the Bank exhibited continued strong credit performance this quarter as evidenced by stable gross impaired loan formations and PCL. Our year-to-date PCL result is 46 basis points. My prior guidance of 40 to 50 basis points for fiscal 2024 remains appropriate, although results may vary by quarter and are subject to changes in economic conditions. With that, I will turn it back over to Bharat.

Bharat Masrani, CEO

Thank you, Ajai. Before we begin the Q&A session, I want to note that we have included the information that we are able to share on AML matters in yesterday's press release and our Q3 materials. We do not have additional information to share at this time. I look forward to providing additional clarity as soon as I can. For today, I suggest that we focus on the Bank's Q3 earnings. With that, operator, we are now ready to begin the Q&A session.

Operator, Operator

Thank you. The first question is from Meny Grauman from Scotiabank. Please go ahead.

Meny Grauman, Analyst

Hi, good morning. I want to talk about capital and specifically, it is not clear to me why you needed to sell down your Schwab stake to shore up capital, especially even if I take into account the guidance on operational RWA coming in Q4. If you could help me understand the thought process there, it seems like there is something else going on here in terms of other considerations, especially in the context of buying back $1 billion in shares in the quarter as well. So hopefully, you could help me understand that.

Bharat Masrani, CEO

Meni, this is Bharat. You know that traditionally and historically, the bank likes to be well capitalized and frankly, like to carry more capital than what may generally be necessary. In line with that, we think it is prudent to have capital. There is still a lot of volatility and economic conditions are not as predictable as one would like. This is just to be prudent and it makes sense. That is the capital framework we use and we think it makes sense to have the capital levels that we are projecting for the next quarter.

Meny Grauman, Analyst

So would this conservative capital stance signal that AML signs could end up being larger, materially larger?

Bharat Masrani, CEO

We announced $2.6 billion yesterday. Additionally, we announced $4.5 billion in the second quarter. Together, this is the current estimate we have on what it will take to put these matters behind us. That's how we follow this. The accounting rules are very clear on this. So our current estimate is that this is the amount it will take to move forward.

Meny Grauman, Analyst

And just another follow-up. Is it fair to assume that you are not comfortable going below 12.5% CET1? Is that sort of where you are thinking that in terms of your comfort level?

Bharat Masrani, CEO

We are targeting 12%, between 12% and 12.5%. We continue to be comfortable with that target, but obviously we review this on an ongoing basis depending on economic conditions.

John Aiken, Analyst

Could you hear me?

Bharat Masrani, CEO

Yes John.

John Aiken, Analyst

Sorry about that. My apologies. With the sale of the Schwab stake, is it safe to assume that if at some future point we end up below 10%, you will lose board representation and it will no longer be accounted under the equity method?

Bharat Masrani, CEO

Our current intention is not to go below where we are.

John Aiken, Analyst

I understand that Bharat, but if you do go below that, is that the case?

Bharat Masrani, CEO

It is a strategic investment for us. We are very happy with how this investment is performed. Our view is that our governance requirements and where we are, we are very comfortable with that, and we would like to continue at these levels.

John Aiken, Analyst

Okay. Bharat, is it safe to assume that the sale of the stake has no bearing in terms of the agreement you have on the Schwab accounts?

Bharat Masrani, CEO

Yes.

Matthew Lee, Analyst

Hi. Good morning, guys. Thanks for taking my question. Maybe one on expenses. Your guidance is now high single-digit growth in 2024, a bit of an increase versus mid-single-digit mentioned prior. Maybe just breaking it down, is the core expense growth still 2% and now the investments that push it to high single-digits? Are there other factors that may be at play in terms of updated guidance?

Kelvin Tran, CFO

Hi. It's Kelvin, I'll take that question. There are mainly three factors. One is risk and control costs being higher than previously thought. Also, our markets-related businesses are performing really, really well. And so therefore, the ramp up compensation are driven by higher revenues and will take that trade any day. And there are a few discrete items like the litigation that we just talked about in wealth this quarter. Those are the three main factors.

Matthew Lee, Analyst

Then maybe a follow-up just on the AML costs themselves. It sounds like a lot of the investment that's being made is predicated on hiring additional talent, building out and maintaining some sort of AML infrastructure. Should we just assume those FTEs will remain with TD even after that build-out is complete? Does that essentially mean that OpEx associated is occurring?

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

Let me take that one, Matt. This is Leo Salom. Just to give you a sense, and I think Bharat outlined where we're making critical investments in the program. And obviously, hiring the right leadership has been a first priority. I think we've been very fortunate to bring really subject matter leaders from other G-SIBs, from the Department of Homeland Security, from the Treasury Department, as well as the FBI and other law enforcement organizations. So we're really pleased with the leadership team that we brought on board. We've added over 500 colleagues to support this effort. And to your point, a good portion of those are program management resources that are scaling up data, technology, other process management changes that will, over time, those will fade away. But we're also making some important investments in investigative capacity, in advanced analytics. And I would suspect that those would stay. So to give you a sense, there would be a portion of it that will be repurposed to other initiatives as we move forward. But there's going to be an increase, a structural increase, to represent the model we want to run going forward, which I think will be a very strong AML program going forward.

Matthew Lee, Analyst

That's helpful. Thanks, guys.

Gabriel Dechaine, Analyst

Good morning. The expense commentary, I guess, Kelvin, you were saying that the corporate loss could be above that guidance range, the 200 to 250, again in Q4, because of risk controls, investments and that type of stuff. If I look at your full year consolidated adjusted expense growth, adjusted for the strategic card portfolio, you're running at 10% growth, 9% if I exclude variable comp. At the start of the year, you had guided to mid-single digits. Is that delta solely because of additional investments of this nature?

Kelvin Tran, CFO

No. So if you're looking at corporate - so remember earlier when I talked about the two items here, you talked about the corporate losses and then the expenses. So expenses, I talked about the three drivers that caused the increase. And remember that the higher expense growth rate also had partly TD Cowen impact as well, because last year was partial year, this year is full year.

Gabriel Dechaine, Analyst

Yes. Well, no, I mean, I think it was on the Q4 call, you said mid-single digits, including these AML type costs and Cowen.

Kelvin Tran, CFO

High single digits are the three factors that I talked about earlier. There's the risk and control, longer markets-related businesses, and then discrete items like litigation and so forth.

Gabriel Dechaine, Analyst

Okay. Now, refresh my memory, please. This year, I think it was - you'd quantified 500 million after tax of the risk control type expenses, and then another amount of that magnitude in 2025. Is that correct?

Kelvin Tran, CFO

No, I think the 500 million talked about the cost that we've spent up until that point in time. We haven't talked about anything for 2025.

Gabriel Dechaine, Analyst

Nothing for 2025? It seems likely that these costs could persist though into 2025. Is that unreasonable to expect?

Kelvin Tran, CFO

That's correct. It's a multi-year program.

Bharat Masrani, CEO

Hard to comment on that, Lemar. It depends on the situation, circumstance, and it's - I don't think it's appropriate to speculate, as to how a particular case might turn out. Best is to wait out as to what those class actions might be. Given the type of business we have, large financial services companies serving tens of millions of customers, we do encounter many of these issues, and it's hard to predict accurately how each one might turn out.

Gabriel Dechaine, Analyst

Right. But non-monetary can involve financial impact. So, we can agree on that, correct?

Bharat Masrani, CEO

I don't want to speculate. There might be compliance requirements. There can be various other requirements. It's hard to speculate. We are in the middle of this negotiations, investigations. And so, we just want to make sure that we give you fulsome disclosures when it is appropriate, rather than speculating what it may or may not be.

Ebrahim Poonawala, Analyst

Hi, good morning. I just wanted to follow-up, Leo, to your response earlier. What I'm figuring out is how much of the remediation actions that you're taking or fixing AML sort of risk controls is still a moving target, where you're still learning as you dig into in terms of what needs to be done. And from a shareholder standpoint, I think the two questions are the risk of expense creep, right mid-single-digit move to high-single-digit, could this become low double-digit and then, some more next year. So that's what I'm trying to handicap. And the second is, given all these experts you hired, do you forget about the regulators? But do you have a sense of the timeline of when you can at least get this at par with management's expectation in terms of where you want the AML controls to be?

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

Thank you very much. Ebrahim, it's a very good question. Let me first just assure you that we've spent a lot of time in building a very comprehensive AML program, and it really looks at the program in its entirety, all pillars, to ensure that we've got one of the most robust AML programs in the country that's been the objective from the very beginning. I believe we have a very robust program and we're executing, we're well underway in terms of the actual execution program. I talked about the leadership attraction. I've talked about the increase in complement in investigators and program managers, and in data specialists in the technology areas. And we are sparing. We're really moving as quickly as we can to be able to make sure that we've got that mature infrastructure in place. We're also making investments in data and technology. So, I feel quite comfortable that we have a roadmap to execute against, and that we're doing. We are executing against that plan. Certainly over the course of the next year or two years, as our sophistication and advanced analytics increases, we are going to be even more effective at identifying, and thwarting the risks that are present in the financial industry. But that's by design. That's exactly what we're trying to drive towards. I believe that the costs that we have forecasted internally are appropriate for the program that we've outlined. And I feel quite comfortable with the outcome. And I just want to stress we just, we're not looking to simply meet the minimum standard here. The instructions from Bharat has been very clear from the very beginning. We want a world class program. We're making the investments required, and it will create an infrastructure that will allow us to continue, to grow sustainably and build a franchise, because we have an exceptional franchise in the U.S., and it's one that we want to continue to build.

Ebrahim Poonawala, Analyst

Right. And Leo, the reason I'm trying to sort of drill into this is, I think you said it looks like it's going to be a multi-year program to get to the end point. And I think, I mean, obviously you don't want to comment on the non-monetary penalties, but in a world where there's an asset cap, the concern is if this is going to be a two to three year deal, the U.S. franchise is going to be under an asset cap. And the risk of attrition, like how - is there a way that you can make us feel better about the U.S. franchise if there's an asset cap, and this thing takes multi-years, as you said, as someone who runs that business day-to-day, of why that should be okay, and there's no risk of attrition?

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

Yes. Ebrahim, I would say, first of all, I just want to emphasize this is a priority for us. Getting this AML program complete and making sure that we've got that sustainable foundation is a first priority for me personally. So as I've outlined, we're making the requisite investments there. But I do want to just pivot for a moment, and just point to the performance of the underlying franchise. If you look at the third quarter performance, we did have sequential NIAT and PTPP growth that was powered, by a three basis point increase in NIM and peer-leading loan growth, and strong and stable deposit performance. We saw some of the areas that we've identified previously, like our bank card business, was up 16% on a year-on-year basis. Our mid-market business, where I've indicated we have an opportunity to be able to leverage the partnership, with TD Securities and TD Cowen to be able to scale that business, was up 18%. Even our core small business franchise, where we are the largest SBA lender in our footprint, was up 8% in what has been a relatively subdued lending environment. So I think the franchise continues to perform, and there's no reason why that should end. We're going to continue to do what we need to do from a governance and control standpoint, but we want to continue to build a franchise that we're very proud of and that we think can continue to consolidate itself in the U.S. marketplace.

Paul Holden, Analyst

Thank you. Good morning. I want to follow-up on that question a little bit, Leo, and I think you've already answered it to some degree, but when I look at the numbers for the U.S. segment, I see efficiency ratio effectively flat year-over-year, which I think is pretty impressive given the additional investments you've had to make in risk and control. But I guess the counter argument to that would be, well, then you've had to reduce branch count, had to reduce headcount. And so, the concern would be how does that impact revenue, and productivity of the U.S. segment? Again, I think you've addressed it a little bit already, but maybe you can talk us a little bit through in terms of the strategies you're using to maintain market share, and to grow productivity per branch and FTE, because that's kind of what I am seeing in the numbers?

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

Thank you very much for the question, Paul. Just to start, maybe I'd say we have been very focused on creating the space to be able to make these critical investments. So on a year-on-year basis, in segment expenses were flat. And I think, I communicated three quarters ago that we were prosecuting a productivity program that really had four or five major pillars. One, we were looking at organizational health post the first horizon transaction, we were looking to right-size the organization, and overall FTEs are down about 3% on a year-on-year basis. Second, we looked at our corporate real estate, including our store optimization program, to be able to identify areas of being able to rationalize what the current environment required. And that has been able. We have been able to generate some productivity savings there. And then finally, we've been looking at both our technical architecture as well as our data architecture, to find opportunities to be able to simplify. In fact, I'm very pleased that this past weekend we did consolidate our retail card services business onto our target cards operating platform, and that will represent about a $15 million reduction in operating cost. So we are doing the things we need to do to be able to create operating leverage so that we can invest those proceeds, not only in the governance and control programs but also in some of the critical areas that we've identified, like our digital and mobile environment, like investments in our next generation store design, in cards, in wealth. Areas that we think we're still underpenetrated and where the franchise, our 10 million client base would benefit from a greater and deeper relationship over time. So that's really the strategy that we've been executing against. There's no doubt that as we execute, on some of these programs from a governance control standpoint, there could be some elevated expenses. And I'm comfortable with that, because I want to drive to that sustainable platform. In the U.S., we have such a signature differentiated platform. We want to make sure that we've got the license and the capability to continue to grow at scale.

Darko Mihelic, Analyst

Hi. Thank you. Good morning. I will honor the no questions on AML and instead, focus on Canada one more time. I want to come back to what you just spoke about with respect to Canada. And I'll ask this in a manner that highlights my concerns with the quarter and maybe you can beat them down. The first part is the 500 basis points of operating leverage. I mean historically, whenever we saw TD's Canada business produce revenues of 9%, anything over and above 200 basis points of operating leverage is considered a no-go zone, because you were always reinvesting in the business, even if you were taking restructuring charges. In the past, and again, I've been following TD for a very long time, that was the sort of approach. It was always a reinvestment. And today, I'd see - 500 basis points of operating leverage an all-time low on efficiency ratio. And it begs the question for me. The question is, are you hitting the brakes really hard in expenses, because you need to over-earn here - for a period of time, only to later have to spend again? So maybe you can beat down that thesis for me, and explain why this is maybe transitory. Will you, in fact, try to revert back to a historical, kind of operating leverage that has never really exceeds 200 basis points? Or is this a new paradigm that we're looking at for TD? Thank you.

Raymond Chun, Group Head, Canadian Personal Banking

Thank you, Darko. Maybe I'll start. It's Ray. And thanks for the question. The way I sort of think about our business as we're over the last few quarters and moving forward, first and foremost, we are looking to consistently deliver positive operating leverage. So I think your statement around positive operating leverage, and the history that we have with that is accurate. From an expense perspective, a few different levers that we're looking at managing as we move forward. And certainly, one of them is around finding the right mix within the complements. And when you actually look at the traffic within our branches, transaction traffic within branches are actually down 50%, over the past - since the pandemic. And so, we've looked at how do we actually find the right balance. And what we're doing within our branch network, is actually moving from a one service colleague to one sales colleague, to two sales colleagues, or two adviser colleagues to one service colleague, that's driving significant productivity while we're able to actually take down costs, in our Canadian branch network on that side. And so, I see that playing through from a productivity perspective. The other thing that we're looking at is likely, or we are looking across the entire spectrum on expense management in the Canadian personal bank, whether it's real estate, whether it's from the actual head office complements, and what have you. And so, we continue to be looking at that as we line up our strategies as we move forward. But make no mistake, Darko, we are continuing to make investments to accelerate our growth in digital, mobile and omni. To make sure that we're meeting the needs of our customers. And so, we're able to balance on a go-forward basis, growing revenue on both sides of the balance sheet, while managing our expenses and making the necessary investments, from a digital mobile and also improving our risk and control environment, here in Canada.

Bharat Masrani, CEO

It's hard to provide guidance at that level. I think the point to make here is, we've got very strong revenue momentum, driven by account acquisition, particularly in the new-to-Canada segment. In addition to that, we are finding ways to have the business be more productive through technology. Ray talked about what's happening to traffic and how can we tweak our models. As long as those factors remain, where the account acquisition continues to be strong, driving revenue growth. Given the strength of Ray's business and Barb's business, we should see good positive operating leverage.

Operator, Operator

Thank you. Ladies and gentlemen, this will conclude today's question-and-answer session. I will now turn the call over to Mr. Masrani.

Bharat Masrani, CEO

Thanks very much, operator. And thank you all for joining this morning. Really appreciate it. I know you have lots of questions on the AML matters. But as you can probably understand, we cannot tell you more than we already have. I understand that you want to know more. And I'm looking forward to the day that we can provide you all the details that you need. In the meantime, very happy with how our businesses have performed. If you look at the fundamentals in each of our segments, not only in Canada, but the United States, wholesale, it's been terrific. It's great to see the momentum we have, new account growth, revenue growth, loan growth. So it's good to see. And I could not be more proud of our bankers around the world, TD bankers around the world, and once again, I want to thank them, for their dedication and delivering for all our stakeholders. Look forward to seeing you again at the next quarter end. 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.