Earnings Call Transcript
TORONTO DOMINION BANK (TD)
Earnings Call Transcript - TD Q3 2023
Operator, Operator
Good afternoon, everyone. Welcome to the TD Bank Group Q3 2023 Earnings Conference Call. I would now like to turn the meeting over to Ms. Brooke Hales. Please go ahead, Ms. Hales.
Brooke Hales, Host
Thank you, operator. Good afternoon, and welcome to TD Bank Group's third quarter 2023 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 Anishnabeg, the Chippewa, the Haudenosaunee, and the Wendat Peoples, and is now home to many diverse nations, Métis, 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 third 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 2. At this time, I would like to caution our listeners that this presentation contains forward-looking statements that there are risks that actual results could differ materially from what is discussed and that certain material factors or assumptions were 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 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 Q3 2023 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. Before I begin, our thoughts are with the communities and colleagues impacted by the devastating wildfires in British Columbia and the Northwest Territories. TD is supporting relief efforts, and we are ready to assist those in need. I would also like to add my thanks to the emergency responders and the many volunteers supporting those who are impacted. Moving to our results, Q3 was a good quarter for TD. Earnings were $3.7 billion, and EPS was $1.99. Revenue grew 12% year-over-year, primarily driven by margin expansion in our retail businesses. PCLs were higher, reflecting credit normalization and expenses increased, driven by the inclusion of TD Cowen, investments in colleagues and business growth and the impact of foreign exchange. PTPP was up 7% year-over-year as TD’s diversified business model continues to deliver. The Bank’s CET1 ratio was 15.2%, reflecting organic capital generation and the impact of over 14 million common shares bought back during the quarter. Subject to market conditions, we expect to complete our previously announced 30 million common share buyback by early September. And today we announced our intention to repurchase up to an additional 90 million common shares for cancellation, subject to regulatory approvals over the next year. The Bank continues to invest to build new capabilities for our customers and shape the future of banking. TD was recently named the Best Consumer Digital Bank in Canada and recognized for the Best Transformation and Innovation in North America by Global Finance. Let me now turn to each of our businesses and review some highlights from Q3. In our Canadian Personal and Commercial Banking segment, earnings were $1.7 billion with revenue growing 7%, PTPP growth of 9%, and significant positive operating leverage. The Personal Bank had strong everyday banking acquisition with new accounts up 26% year-over-year, driven by a record quarter for New to Canada accounts. To continue to support growth in the New to Canada segment, TD offers ATMs in a market-leading seven languages and enables customers to select their preferred language when booking appointments online. In core deposits, the Bank maintained industry-leading market share of almost 26%. In credit cards, we saw record spend with an all-time high in active accounts. And we delivered strong growth in new accounts, up 35% year-over-year, driven by our diverse product lineup, key strategic partnerships and distinct loyalty offerings. This quarter, the Toronto Blue Jays unveiled the new patch on their iconic jersey featuring the TD shield. This milestone reflects the strong relationship between TD and the Blue Jays, and further enhances the TD brand. In the coming months, we will build on this relationship by offering exclusive benefits to TD card holders to enhance the in-game experience. Moving to real estate secured lending, TD continued to execute against the strategies outlined at our recent Investor Day, taking share in a slower growth market and expanding our portfolio by over 4% year-over-year. And this quarter, TD was recognized by J.D. Power as highest in customer satisfaction for its Canadian mobile banking app, earning top marks for speed and content. We are using data and AI-driven insights to better know our customers and enhance their experience. The Business Bank grew loans by 9% year-over-year and continues to accelerate growth by expanding specialization in key segments. In particular, we are adding to our team and capabilities in the technology and innovation sector. In the months ahead, we will continue to build out our venture strategy, augmenting the great progress already made by our existing team and enabling us to further meet the unique needs of technology entrepreneurs. Turning to the U.S., our U.S. Retail Bank delivered PTPP of US$1.2 billion, up 9% year-over-year, and earnings of US$890 million, down 3% year-over-year, reflecting higher PCLs driven by credit normalization. Net credit margin was 3% this quarter. While NIM expanded 38 basis points year-over-year, it declined 25 basis points quarter-over-quarter, reflecting higher deposit cost and deposit migration to higher yielding and term products as seen across the industry and some timing effects given TD's robust margin expansion earlier in the cycle. With the contribution from our investment in Schwab of US$142 million, segment earnings were US$1 billion. We saw strong loan growth again this quarter with personal loans and business loans, up 11% and 9%, respectively, year-over-year as TD added customers and took share despite a challenging operating environment. In Commercial Banking, we added leadership talent and continued to have strong momentum with the middle market and specialty lending sectors up 20% and 19% year-over-year respectively. TD Auto Finance continued to innovate, offering real-time payments and expanded financing programs with dealer clients nationwide. We are proud that for the fourth year in a row, the business received the highest ranking in the J.D. Power U.S. Dealer Finance Satisfaction Study. We had strong customer acquisition in our U.S. bank card business with new accounts up 29% year-over-year as TD leveraged a product suite that is resonating with customers to deepen relationships. Deposits remained resilient in a difficult environment, with spot balances up approximately 1% quarter-over-quarter. Earlier this month, TD Bank, America’s Most Convenient Bank announced a community reinvestment agreement developed in coordination with New Jersey Citizen Action and the Housing & Community Development Network of New Jersey. TD has committed to invest more than US$2 billion over three years in affordable mortgage, community development, small business lending, and affordable consumer products and services across New Jersey, particularly in underserved communities. The U.S. Retail Bank now serves over 10 million customers, including those being served by three new stores in low and moderate income areas in Charlotte, North Carolina, and Tampa, Florida, reflective of TD's commitment to reinvesting in communities. Turning to Wealth Management and Insurance, we earned $504 million this quarter with results impacted by severe weather-related events. Revenue was up 1% year-over-year with strong insurance premium growth and the benefit of higher interest rates helping offset the impact of trading normalization. TD Asset Management widened its lead as the number one institutional asset manager in Canada and leveraged its broad product suite to grow ETF market share gaining momentum in a newer segment for the Bank. The Bank also gained market share in advice with TD Financial Planning business growing fastest among the big five banks over the past six months. Our One TD approach and accelerated distribution expansion enabled this strong growth with wealth planners embedded in the Bank's branches across Canada. In TD Direct Investing, the Bank maintained its number one position across key performance categories, including total accounts, revenue, trades and AUA and saw record growth in share of gross new accounts as we move towards our target of adding over 300,000 new clients in the medium term as described at our recent Investor Day. Finally, as a result of recent and continuing severe weather-related events, I would like to thank all our insurance colleagues for their tremendous efforts, including advice and support provided through the TD Insurance Mobile Response Unit across affected communities. In Wholesale Banking, net income was $377 million, driven by record revenue of $1.6 billion, which includes our first full quarter of TD Cowen. We saw strong trading revenues and good underwriting and advisory activity. We are excited about our progress, deepening the integration of TD Securities and TD Cowen, enhancing our ability to serve existing clients and win new clients together, reflecting our leadership in the healthcare sector and strength in equity capital markets execution. This quarter, TD Cowen acted as Joint Bookrunner on Acceleron’s US$621 million initial public offering, the largest biotech IPO in calendar 2023 to date. And this quarter a U.S. debt capital markets business nearly doubled both in terms of number of bookrunner roles and volume underwritten compared to the same quarter last year. These strong results reflect TD's investment in client relationships as part of our U.S. dollar strategy. As we enter the final quarter of the year, we continue to navigate a complex and dynamic environment and deliver for all of our stakeholders. Last month, TD was proud to be recognized by the Euromoney Awards of Excellence 2023 as North America's Best Bank for Corporate Responsibility. The Bank received this award based on its demonstrated commitment to an inclusive and sustainable future. As I've shared in the past, inclusion is embedded in TD's culture. TD Bank, America’s Most Convenient Bank, was recently awarded the top score of 100 in the 2023 Disability Equality Index, a national workplace disability inclusion assessment tool, for the ninth consecutive year. And the Bank was again recognized as a certified great place to work in both Canada and the U.S. As ever, TD remains committed to strengthening the communities in which we operate. Recently, together with the AFOA Canada, a not-for-profit led by indigenous peoples, the Bank announced the first cohort of recipients of the TD Scholarship for Indigenous Peoples, which provides financial support to indigenous students for post-secondary education. Every day, our TD bankers live our purpose to enrich the lives of our customers, communities, and colleagues. I will close by thanking each of them for their efforts. I'm confident that together we will deliver a strong finish to the year. With that, I'll turn things over to Kelvin.
Kelvin Tran, CFO
Thank you, Bharat. Good afternoon, everyone. Please turn to slide 10. For Q3, the Bank reported earnings of $3 billion and earnings per share of $1.57, down 8% and 10%, respectively. Adjusted earnings were $3.7 billion and adjusted earnings per share was $1.99, down 2% and 5%, respectively. Reported revenue increased 17% and adjusted revenue increased 12%, reflecting margin growth in the Personal and Commercial Banking businesses. Provision for credit losses was $766 million, compared with $351 million in the third quarter last year. Reported expenses increased 24%, primarily reflecting higher employee-related expenses, the payment related to the termination of the First Horizon transaction, higher acquisition and integration-related charges, including winddown costs of the terminated First Horizon transaction and higher spend supporting business growth. Adjusted expenses increased 15%. On our Q4 '22 earnings call, we noted that we expected adjusted expense growth excluding FX to moderate in fiscal 2023 on a quarter-over-quarter basis. TD has focused on productivity and managed expenses efficiently in this environment. As a result, the Bank delivered moderate adjusted expense growth quarter-over-quarter, excluding TD Cowen recorded in the Wholesale Banking segment and litigation expenses of approximately $125 million or $0.05 per share recorded in the Corporate segment. Absent the retailer partners, net share of the profits from the U.S. strategic card portfolio, adjusted expenses increased 15.4% ex FX. Reported total Bank PTPP was up 7.6% year-over-year. Consistent with prior quarters, slide 25 shows how we calculate adjusted total Bank PTPP and operating leverage, removing the impact of the U.S. strategic card portfolio, along with the impact of foreign currency translation and the insurance fair value charge. Adjusted total Bank PTPP was up 6.9% after these modifications. Please turn to slide 11. Canadian Personal and Commercial Banking net income for the quarter was $1.7 billion, down 1% year-over-year. The business delivered strong PTPP growth, up 9% year-over-year. Revenue increased 7%, reflecting volume growth and higher margins, partially offset by a prior year adjustment recorded in other income. Average loan volumes rose 6%, reflecting 5% growth in personal volumes and 9% growth in business volume. Average deposits rose 1%, reflecting 6% growth in personal deposits, partially offset by a 6% decline in business deposits. Net interest margin was 2.74%, flat quarter-over-quarter. This quarter we saw strong loan growth, which resulted in the shift in balance sheet mix that was offset by higher deposit margin. As we look forward to Q4, while many factors can impact margins, we expect net interest margin to bounce around and remain influenced by similar drivers as those we saw this quarter. Total PCL of $379 million increased $132 million sequentially. Total PCL as an annualized percentage of credit volume was 0.28%, up 9 basis points sequentially. Non-interest expenses increased 5% year-over-year, reflecting higher spend, supporting business growth including technology and higher employee-related expenses. Please turn to slide 12. U.S. Retail segment reported net income for the quarter was US$984 million, down 12% year-over-year. Adjusted net income was US$1 billion, down 9% year-over-year. U.S. Retail Bank reported net income was US$842 million, down 6% and includes acquisition and integration related charges for the terminated First Horizon transaction. U.S. Retail Bank adjusted net income was US$890 million, down 3%, reflecting higher non-interest expenses and PCL, partially offset by higher revenue. The business delivered strong PTPP growth, up 9% year-over-year. Revenue increased 10% year-over-year, reflecting higher deposit margin and loan volumes and fee income growth from increased customer activity, partially offset by lower deposit volumes, loan margins and overdraft fees. Average loan volumes increased 10% year-over-year. Personal loans increased 11%, reflecting good originations and slower payment rates across portfolios. Business loans increased 9%, reflecting good originations from new customer growth and slower payment rates, partially offset by decline in PTPP loans volumes. Average deposit volume excluding sweep deposits were down 5% year-over-year. Personal deposits were down 5% and business deposits declined 6% and sweep deposits declined 28%. Net interest margin was 3% this quarter. While net interest margin expanded 38 basis points year-over-year, it declined 25 basis points quarter-over-quarter, reflecting higher deposit costs and deposit mix shift, given competitive market dynamics in the U.S. As I've mentioned in previous quarters, many factors can impact margins including the path of short-term rates, tractor on and off rates and competitive market dynamics. While margins this quarter gave back some of our record expansion in previous quarters, we expect NIM to stabilize in Q4. Total PCL was US$185 million, an increase of US$45 million sequentially. U.S. retail net PCL ratio including only the Bank's share of PCL in the U.S. strategic cards portfolio as an annualized percentage of credit volume was 0.41%, higher by 8 basis points sequentially. Reported expenses increased 13%, reflecting higher employee-related expenses, acquisition and integration-related charges for the terminated First Horizon transaction and higher business investments. Adjusted expenses increased 10%. The contribution from TD's investment in Schwab was US$142 million, down 37% from a year ago, reflecting lower net interest income, lower bank deposit fees, trading revenue and higher expenses partially offset by an increase in asset management fees. Please turn to slide 13. Wealth Management and Insurance net income for the quarter was $504 million, down 12% year-over-year. Revenue increased 1%, reflecting high insurance volumes, fee-based revenue and wealth and investment income in insurance, partially offset by a decrease in the fair value of investment supporting claims liabilities, which resulted in a similar decrease in insurance claims and lower transaction revenue in wealth. Insurance claims increased 11% year-over-year, reflecting more severe weather-related events, increased driving activity, and claims severity, partially offset by the impact of changes in the discount rate, which resulted in a similar decrease in the fair value of investments, supporting claims liabilities reported in non-interest income. Non-interest expenses increased 2% year-over-year, reflecting higher spend supporting business growth including technology costs and employee-related expenses. Asset under management increased 3% year-over-year reflecting market appreciation, partially offset by mutual fund redemptions and assets under administration increased 6% year-over-year reflecting market appreciation and net asset growth. Please turn to slide 14. Wholesale Banking reported net income for the quarter was $272 million, relatively flat compared with the third quarter last year, reflecting higher non-interest expenses, largely offset by higher revenues. Adjusted net income was $377 million, up 39% year-over-year. Revenue including TD Cowen was $1.6 billion, up 46% year-over-year. Higher revenue primarily reflects higher equity commissions, underwriting fees, trading-related revenue, global transaction banking revenue, and loan underwriting commitment markdowns in the prior year. PCL for the quarter was $25 million, an increase of $13 million from the prior quarter. Reported expenses increased 80% and include acquisition and integration related charges for Cowen. Adjusted expenses increased 60%, reflecting the inclusion of TD Cowen, investments in Wholesale Banking, U.S. dollar strategy, including the hiring of banking, sales and trading and technology professionals, and the impact of foreign exchange translation. Please turn to slide 15. The Corporate segment reported a net loss of $782 million in the quarter, compared with a reported net loss of $752 million in the third quarter last year. The year-over-year increase primarily reflects higher net corporate expenses, reflecting litigation expenses during the quarter, partially offset by higher revenue from treasury and balance sheet management activities. Adjusted net loss for the quarter was $182 million compared with an adjusted net loss of $175 million in the third quarter last year. Please turn to slide 16. The common equity tier 1 ratio ended the quarter at 15.2%, down 13 basis points sequentially. Internal capital generation added 31 basis points to CET1 this quarter. This was partially offset by an increase in RWA excluding the impact of FX and TD Cowen integration, which decreased CET1 by 20 basis points. We repurchased 14.25 million common shares under our share buyback program this quarter, which reduced CET1 by 21 basis points. The impact related to the terminated First Horizon transaction, which includes a net loss from the mitigation of interest rate volatility to closing capital, the termination payment, the FX hedge, and acquisition and integration related charges including current period winddown costs decreased CET1 by 11 basis points. The impact associated with the integration of TD Cowen, largely the migration of certain acquired portfolios from standardized to internal models partially offset by integration expenses increased CET1 by 11 basis points. RWA included the impact of FX and the Cowen integration decreased 0.8% quarter-over-quarter, reflecting lower market risk and credit risk RWA partially offset by an increase in operational risk RWA. Credit risk RWA decreased $1.4 billion or 0.3% as growth due to higher business volumes was more than offset by the impact of foreign exchange. Market risk RWA decreased $4.9 billion or 22% reflected the migration of certain acquired portfolios from standardized to internal models and a decrease in interest rate exposures. The leverage ratio was 4.6% this quarter and the LCR ratio was 133%, both well above published regulatory minimums. As you know, the First Horizon transaction was terminated on May 4th during Q3. Similar to last quarter, we have included slide 27 in this presentation to summarize the financial impacts from the termination. And with that Ajai over to you.
Ajai Bambawale, Chief Risk Officer
Thank you, Kelvin, and good afternoon, everyone. Please turn to slide 17. Gross impaired loan formations increased by 4 basis points to 18 basis points quarter-over-quarter, driven by the commercial and wholesale lending portfolios and some further normalization of credit performance in the consumer lending portfolios. Please turn to slide 18. Gross impaired loans were 33 basis points with an increase of 3 basis points quarter-over-quarter, largely recorded in the commercial and wholesale lending portfolios, driven by a handful of loans across a number of industries. Please turn to slide 19. 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 increased 7 basis points quarter-over-quarter to 35 basis points. The increase is largely reflected in the Canadian Personal and Commercial Banking and U.S. Retail segments. Please turn to slide 20. The Bank's impaired PCL was $663 million, an increase of $112 million quarter-over-quarter, largely recorded in the Canadian and U.S. commercial lending portfolios across a number of industries. The Bank's current quarter impaired PCL rate remained well below 2019 levels. Performing PCL was $103 million with the quarter-over-quarter increase of $55 million, driven by the Canadian consumer lending portfolios. Please turn to slide 21. The allowance for credit losses increased by $127 million quarter-over-quarter, due to credit migration in the commercial and wholesale lending portfolios. The Canadian consumer lending portfolios reflective of some further normalization of credit performance coupled with an update to our interest rate outlook, and volume growth, partially offset by the impact of foreign exchange. The Bank's allowance coverage remains elevated to account for ongoing uncertainty relating to the economic trajectory and credit performance. In summary, while the Bank has experienced some further normalization of credit performance across key credit metrics this quarter, credit performance remains strong. Accordingly, I continue to expect PCL in 2023 to be in the neighborhood of 35 basis points, which is at the low end of the guidance I provided at the start of the year. 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
Certainly. The first question is from Meny Grauman with Scotiabank. Please go ahead.
Meny Grauman, Analyst
Hi. Good afternoon. Bharat, I’m interested in your decision to raise your NCIB from 30 million to 90 million shares. What can we interpret from that regarding the expansion of the buyback? I would like to hear your thoughts on this.
Bharat Masrani, CEO
No, we've discussed the Bank's capital deployment framework, which involves assessing how much is needed to support our strategies and identifying any gaps that require investment. If, after this analysis, we determine that a buyback is appropriate, we will consider it. Also, Meny, the amount is actually 90 million, not 30 million, as you mentioned. Based on our current capital levels and the framework I outlined, we believe a buyback is suitable at this time, which is why we've announced it.
Meny Grauman, Analyst
I'm just curious in terms of expanding it to 90 million from 30 million. And what specifically changed over the past few months to give you more sightline to be able to increase that?
Bharat Masrani, CEO
Last quarter, when we announced the 30 million, I mentioned that we had issued shares through the DRIP program to fund the acquisition, which has now been terminated. It made sense to return that to shareholders since we are not moving forward with the acquisition. For this particular expansion, it will occur over the next year. As I mentioned earlier, we expect to complete the 30 million program around September, depending on market conditions, which may change. Given the current situation, we believe it is appropriate to increase that by an additional 90 million.
Meny Grauman, Analyst
I got it. And then, if I can just ask on the disclosure related to the inquiries from U.S. regulatory authorities and law enforcement, you highlight anticipated monetary and/or nonmonetary penalties. On the monetary side, just curious, what you've provisioned or have you provisioned anything for this potential monetary charge or anticipated monetary charge, I should say?
Bharat Masrani, CEO
As you know, I can't comment on our ongoing discussions with our regulators. What I can say regarding the disclosure and as we've shared in the disclosure, we are pursuing efforts to enhance our U.S. AML compliance program. We have a strong and disciplined risk management culture and are focused on continuously improving our programs. So I just wanted to emphasize that, Meny. With respect to what amounts and all that, I really can't comment on that because that I don't think would be appropriate. And regarding our accounting policies, when it is appropriate, we will certainly let you know what it has cost or not cost us.
Operator, Operator
The next question is from Sohrab Movahedi with BMO Capital Markets. Please go ahead.
Sohrab Movahedi, Analyst
Maybe just to pick up where Meny left off. What's the management's working assumption as to how long it may take to resolve the issues around compliance program with money laundering and the like?
Bharat Masrani, CEO
I don't think, Sohrab, it's appropriate for me to comment on our ongoing discussions with our regulators because that would be going into that territory if I started predicting things for you. So, I think best is what we've said in our disclosure that we are working hard to enhance our programs. That is the TD way. We learn new things from our ongoing internal monitoring and management and through engagement with various stakeholders, including our regulators, and look for opportunities to enhance our controls whenever that situation arises. And I think you know us well, as you'd expect from TD, we take this very seriously and make the appropriate investments and enhancements that fit our organization to manage the risk. And I'm really confident that in time, we will deliver the required enhancements. So, I think, best to leave it at that, Meny, and Sohrab.
Sohrab Movahedi, Analyst
Okay. Maybe just for a bit of additional clarity. When we look at, for example, the current quarter U.S. segment expense base, when we think about that relative to last quarter, some of the enhancements that you're talking about, Bharat, I assume requires hiring some people and spending some money. Are we starting to see some of the likely expense implications of the enhancement program in the numbers right now, or is that still to come?
Bharat Masrani, CEO
I think I'll let Leo address the overall expenses in the U.S. However, I want to emphasize that improving our business controls is a continuous effort at TD. It's not just triggered by a specific event; we make these investments regularly. With that context in mind, I'll turn it over to Leo to discuss the expenses in the U.S.
Leo Salom, President and CEO, TD Bank, America’s Most Convenient Bank
Our expenses for the quarter increased by 9.8%, primarily due to higher staffing costs and essential investments in our franchise. I previously mentioned that we intentionally increased our staff in key frontline areas late last year as part of our recovery from the pandemic. We've successfully completed that process, and those teams are now in place, contributing positively to the overall customer experience in our call centers and branch network. Additionally, we're making significant investments in our core infrastructure. Governance and control are critical elements of our investment strategy, and we are focusing on various areas to reinforce the foundation of our U.S. franchise, allowing us to continue its growth.
Sohrab Movahedi, Analyst
Okay. So just one last question here then. Leo, are these investments not necessarily aimed at enhancing revenue?
Leo Salom, President and CEO, TD Bank, America’s Most Convenient Bank
No, I wouldn't say that. Sohrab, if you think about our portfolio, we have a disciplined process every year. We evaluate the opportunities we want to fund to transform the business. First, we need to ensure we have a strong control platform for operations. Those investments come first. Beyond that, we also focus on areas that will drive new ventures or offer new features, functionality, or resolve customer issues to help scale our operations. It's an inclusive approach, and we will find the right balance based on the business's needs.
Operator, Operator
The next question is from Doug Young with Desjardins Capital Markets. Please go ahead.
Doug Young, Analyst
I wanted to understand the RWA calculation. I noticed that TD's operational risk RWA is about 16% of total RWA, which is nearly 4 percentage points higher than the other major five banks. Is there a specific structural reason for this difference compared to peers? How should we think about it? I know there have been some litigation and U.S. issues that we’ve discussed. As these matters are resolved, is there a chance for a quick reversal, or will this remain elevated? I would appreciate some insights on this.
Kelvin Tran, CFO
Yes. It's Kelvin. I'll take that. There's no specific structural issue. But you're right, like litigation would have an impact on it, because you do have to hold operational risk capital. And I believe that that stays with you for the next 10 years.
Doug Young, Analyst
Okay. So there's no quick reversal. This is something that does stick around for a while. Okay. And then, Kelvin, on the fundamental review of the trading book, I forget if you quantified what the implications of that would be when it gets implemented?
Kelvin Tran, CFO
Yes. We're working through it. But as you know, with market risk, that changes from quarter-over-quarter depending on the market risk level, and you would have seen over the past year as market risk has drifted, RWA has drifted lower, that means the impact on the transition would be a little bit higher. But we'll announce it when we're ready to do so.
Doug Young, Analyst
Okay. So, you're not willing to count that. Okay.
Kelvin Tran, CFO
Because quarter-to-quarter, yes.
Doug Young, Analyst
Yes, it appears that Schwab exercised an option to buy down, possibly around 3.3 million. I might be incorrect, but I noticed there is a termination fee of $151 million that seems to have passed through NII. Could you clarify if this was part of the U.S. NIM and whether it was excluded from the core EPS? Additionally, how does this affect the financial relationship between TD and Schwab, if at all?
Kelvin Tran, CFO
Yes. There are two parts to that question. First, that amount is excluded from the U.S. retail core net interest margin, as we have net interest margin excluding sweep. Secondly, the payment is intended to reimburse TD for the expenses related to unwinding certain hedging arrangements and the associated loss of revenue. There are costs associated with that, which are offset.
Operator, Operator
The next question is from Ebrahim Poonawala with Bank of America. Please go ahead.
Ebrahim Poonawala, Analyst
I have a question about the Canadian margin outlook, Kelvin. It seems like your back book should be repricing higher, which would lead to an increase in the net interest margin. However, this might be countered by asset growth. So, I have two questions. First, we've heard that TD is being very competitive with mortgage pricing, and that might be affecting mortgage pricing overall. Can you address this and discuss the profitability of the new customers you are acquiring now compared to those in the past? Also, considering how you are funding this growth, I would like to hear your thoughts on how additional growth may come with a lower margin and its potential impact on profitability.
Michael Rhodes, Group Head, Canadian Personal Banking
Ebrahim, this is Michael. Let me address that. As you know, many factors influence margin, but I want to break down the key components. In the past, you've inquired about RESL and its pricing, which is a significant part of our loan book for the Canadian Personal Bank. Let's discuss GIC as well. Starting with RESL, I want to provide some context. The market is competitive, and consumers are pressing for better rates due to the current higher rate environment compared to previous years. There's also a decrease in market volume, which has led to heightened competition. I want to be clear that we chose to walk away from some business this quarter due to aggressive pricing from competitors. This has led to margin pressure, influenced by various market factors. One such factor is the fluctuating yield curve, which requires us to make real-time adjustments. The shape and height of the yield curve directly impact our cost of goods sold. We made numerous pricing adjustments this quarter to align with the real-time changes in funding costs and we must pass these changes on to our customers to maintain margins. Regarding pricing, particularly on RESL, I remember you asked me about this during Investor Day, and I mentioned that our volume growth is closely linked to strong execution. We've made several investments that support this. For instance, our lead management program, which converts shoppers into buyers, has seen double-digit year-over-year growth in conversion rates. We're experiencing more leads, better contact rates, and higher conversion rates from our franchise customers into mortgage customers, which is encouraging. Additionally, our successful marketing campaign this spring drove high market consideration. We measure our sales force productivity, and it's improving, leading to increased business. We also have a broad distribution strategy that enhances our reach in a slower market. Moreover, our analytics capabilities aid in retaining higher-risk customers. So, while the market is competitive on the RESL side, our investments are yielding strong outcomes that drive our positive growth. On the GIC side, the business we're originating is profitable; we appreciate the economics of our generated business. Our strategy remains focused on core franchise deposit customers, offering competitively priced products to strengthen customer relationships. Despite the yield curve fluctuations, our margins in the term business have been increasing quarter-over-quarter. Overall, we're responding to market challenges, but I'm satisfied with the margins and profitability we're achieving.
Ebrahim Poonawala, Analyst
Thanks, Michael. That was very comprehensive. Just one separate question. I think someone asked a question, when you think about the Basel end game in the United States, maybe Riaz is on the call. It appears that most U.S. banks and broker-dealers will be under sort of RWA optimization mode, create opportunity in terms of the desire for hedge funds, investors to look for counterparties. Just talk to us in terms of, is that an opportunity where using TD Cowen and just the wholesale banking push, you will look to deploy more balance sheet within the markets business as some of the U.S. competitors retrench?
Riaz Ahmed, Group Head, Wholesale Banking
Yes, thank you, Ebrahim. I hope you’re doing well. To answer your question directly, yes, absolutely. Since we began integrating and defining our strategic goals for combining the broker-dealers and our coverage teams, we have focused on how to engage with institutional clients. From the moment we announced this transaction to its closing, the enthusiasm from our clients, both corporate and institutional, has been incredibly impressive. They are drawn to the strength of our balance sheet and our enhanced capabilities to generate revenue and support their growth aspirations. We are very optimistic about the potential of merging the two companies to improve our productivity and client services. I feel very confident about the future outlook for the combined dealers.
Operator, Operator
The next question is from Gabriel Dechaine with National Bank Financial. Please go ahead.
Gabriel Dechaine, Analyst
I have two questions. First, I understand you’re not willing to estimate anything regarding the potential fine related to the AML program, but you mentioned a possible loss range of zero to $1.26 billion linked to various factors. I’ve noticed that range has remained relatively unchanged for some time, so perhaps that’s not included. Second, regarding the buyback news, I believe it significantly addresses the concerns about how you plan to deploy your considerable excess capital. From a modeling perspective, I plan to make an assumption about activity that will reduce my share count, which should positively affect EPS. However, what kind of interest rates should I expect on the capital being deployed? A few years back, it was negligible, but now, just parking the money in T-bills could generate a substantial amount.
Bharat Masrani, CEO
Regarding providing ranges, I don't think that's appropriate. I understand you want to put a number in your model, but I can't assist with that. Historically, we haven't discussed provisioning in the way you're asking, so it may not be the right time to start now. As for the buyback, numerous calculations factor into that, and we've felt comfortable with the levels we've announced. The amount we can accomplish by a certain period will depend on market conditions and other economic factors. However, considering our capital levels and the strategies we need to advance, this buyback program is appropriate for us to pursue. We'll keep you updated on our progress as time goes by.
Gabriel Dechaine, Analyst
I'm not suggesting otherwise. I'm just trying to fine-tune the impact. Sometimes I try to model precisely, but maybe we could take it offline.
Bharat Masrani, CEO
Well, the Bank's medium-term earnings growth target remains the same. So, I think from a modeling perspective, that might be a good place to start, but I'm sure your models require fine-tuning on an ongoing basis. But that's all I can provide you on that.
Gabriel Dechaine, Analyst
All right. Enjoy the rest of your summer.
Bharat Masrani, CEO
Thanks very much, Gabe.
Operator, Operator
The next question is from Paul Holden with CIBC. Please go ahead.
Paul Holden, Analyst
First question is for Kelvin. And Kelvin, when you're referring to the Canadian P&C banking business, you mentioned that NIMs might bounce around a little bit from here and be impacted by the same factors as fiscal Q3. I'm surprised if not a little bit more of a positive message on Canadian NIMs, given rates are starting to stabilize and then you should have the benefit of sort of the tractor on and off based on the back book. So, I'm wondering why there's just not more of a positive message on NIM. And maybe it's related to the growth in mortgages, but an expansion on thoughts there would be helpful.
Kelvin Tran, CFO
Sure, it's Kelvin. I'll take that. Yes, you're right. From a deposit margin perspective, the on and off rates would be helpful, and we discussed that in the last quarter. However, we do see significant loan growth. From a balance sheet perspective, when you experience high loan growth, you would see, even with higher net interest income that could benefit earnings, margin compression. Therefore, Q4 really depends on the balance of these factors, which one grows faster than the other. That's why in our outlook, we mentioned that the NIM might fluctuate.
Paul Holden, Analyst
Okay. That explains it. That makes sense. Thank you. Thank you for that. And then just want to ask a couple of questions on noninterest expenses, and I'll ask it sort of as one joint question. But first off, looking at the growth in average FTE, it was up roughly 1.5% Q-over-Q. Should we expect that will continue to grow sequentially from here, or will it sort of flatline? And then I guess the second part of the question is related to that litigation expense of $125 million, you highlighted, should we consider that more of a Q3-specific item, or do we need to factor that into our expense assumptions going forward?
Kelvin Tran, CFO
Sure. I'll begin with the second question. The litigation expense is an issue from nearly ten years ago, and we've now reached a settlement that resolves it. I hope that answers your question. Regarding the full-time equivalents, there are many factors to consider. In the summer, we typically have summer interns joining us. We have communicated that we are managing our expenses, and we anticipate a moderation in growth. The full-time equivalents are just one aspect of this, as there are other costs involved. We will continue to manage expenses accordingly.
Paul Holden, Analyst
Okay. Okay. One more if I can sneak in, if that's okay. I'm just really curious on the 2024 sort of NII/NIM outlook given the probability of Central Bank rate cuts, but at the same time, maybe some anchoring in rates in the long end of the curve. Like, how should we think about that potential nonparallel shift scenario, short end going down and long end staying where it is? Like obviously, I think that would be a net negative, but is there any kind of characterization of how negative or not that might be for TD's NII?
Kelvin Tran, CFO
Yes, there are many assumptions involved. You're considering two factors on the short and long ends, as well as how much and how quickly changes occur. It's difficult to predict accurately. However, you are correct that sensitivity on the short end is affecting our net interest margin and net interest income more rapidly. Meanwhile, if the long end remains high, it benefits the tractors since they adjust periodically, but that process takes more time.
Operator, Operator
The next question is from Lemar Persaud with Cormark Securities. Please go ahead.
Lemar Persaud, Analyst
I want to ask just a big picture question here. Would it be fair to suggest that the bank is more aggressively pursuing growth even at the expense of margin because of the inability to deploy some of that excess capital into accretive M&A in the U.S., kind of as a result of this AML investigation, not suggesting this growth isn't positive to revenue and earnings, but it does seem like maybe the paddle was pushed a little bit harder down on growth when looking at some of the volume pickup and kind of softer than guidance.
Bharat Masrani, CEO
Let me respond to that, Lemar. This is Bharat. It's not accurate to say that's the sole focus of the bank. We take a very disciplined approach to pricing, volumes, profitability, and enhancing the customer experience. We aim to stay competitive in the markets we operate in. So, I don't agree with the notion that the increase in volumes is due to an unusual strategy. Michael provided a clear explanation of how he's developing the RESL market, and I believe he gave a solid answer highlighting that our investments over the years are yielding results. These products are generating margins that are quite comparable to our historical standards. I'm genuinely pleased with the incoming business. Our strategies do not shift dramatically within a quarter; we maintain a disciplined long-term approach to managing the bank, and that hasn’t changed.
Lemar Persaud, Analyst
And then kind of on a related note, so Kelvin, maybe. It sounds like the guide on margins is a bit softer versus the guide last quarter. I think you guys are suggesting maybe a bit more of a pickup by the end of the year. So, do I have that right that you're kind of walking off the expected pickup in margins? And then, can you talk about what evolved a little bit more unfavorably than anticipated versus last quarter to cause you to move off there?
Kelvin Tran, CFO
Sure, sure. So first, yes, it is softer than what we spoke about last quarter. And the dynamics in Canada and the U.S. are different. In Canada, it's about loan growth being stronger than we expected, and this is really a balance sheet mix issue. The underlying margin expansion on deposit that continues because of the tractor on and off rate. And then the U.S. is really a result of the competitive markets that we continue to monitor very closely over there.
Operator, Operator
The next question is from Nigel D'Souza with Veritas Investment Research. Please go ahead.
Nigel D’Souza, Analyst
I wanted to touch on the deposit trends for U.S. Retail. When I look at the disclosure on insured versus uninsured, it looks like that mix excluding suite deposits is relatively the same quarter-over-quarter. But the positive concentration in U.S. Retail has gone up relative to Q2. So just trying to get a sense of what exact shift in deposit mix puts drag on NIM this quarter? And maybe if you could touch on what you're seeing in noninterest-bearing deposits and whether you're seeing deposit outflows for insured deposits?
Leo Salom, President and CEO, TD Bank, America’s Most Convenient Bank
Hi Nigel, this is Leo. I'll begin by discussing NIM. As Kelvin mentioned earlier, NIM was at 3%, which is an increase of 38 basis points year-on-year but down 25 basis points quarter-on-quarter. This change was driven by two main factors: higher deposit costs and a significant migration of deposits to higher-yielding money market and term products, primarily among our mass affluent and high-net-worth retail clients, as well as institutional government clients on the commercial side. I want to note that there might be a timing issue or a catch-up effect at play. Over the past five quarters, we saw an increase of 118 basis points in NIM, one of the highest in our expanded peer set. However, in the last two quarters, we've given back about 29 basis points because we may have lagged in adjusting our pricing trends. Given current rates and our recent pricing adjustments, we expect to see some migration happening a bit later in our portfolio compared to others. That said, I believe this quarter marked a turning point. On a spot basis, deposit levels overall rose by about $1.4 billion or 0.6%. Regarding concentration, I can say that for the most part the composition of our book remains stable, similar to previous quarters. We are making strides in our corporate and government cash management programs, especially in government, where we became the third largest deposit institution for that sector last quarter. We are seeing success in that area, although these deposits are somewhat more concentrated. Overall, our core checking account base, which has always been a strength, remains robust. In fact, this quarter we achieved record gross and net checking account sales. I feel optimistic about the underlying trends, though I anticipate some pricing pressure in the short term as clients look for alternative yields, either on or off our balance sheet.
Nigel D’Souza, Analyst
Okay. And I guess on that point, how do you balance the pass-through of higher deposit rates versus to be competitive with money market alternatives versus liquidity needs of the banks? In other words, are you okay with some deposit one-off here, or would you like to maintain deposit levels at the cost of higher deposit rates?
Leo Salom, President and CEO, TD Bank, America’s Most Convenient Bank
We consider the wealth portfolio to be an important aspect of our strategy, especially as clients may be looking for higher yields, which could surpass what we are willing to offer for our overall deposit book. We plan to utilize off-balance sheet investment options, such as treasury brokerage solutions and laddered bond portfolios. Our approach is comprehensive, focusing on serving clients as a whole rather than addressing just one section of the balance sheet.
Operator, Operator
I have a question for Ajai regarding credit losses. If I understood correctly, the guidance is for a PCL ratio of 35 basis points this year. Considering the PCL ratio in the first three quarters, this suggests a possible increase in credit losses in the fourth quarter, likely around 45 basis points. Is that accurate? This would bring us back to pre-pandemic levels. I'm curious if you could provide more insight into whether you are observing a quicker return to the pre-pandemic credit trends.
Ajai Bambawale, Chief Risk Officer
Yes. Thanks, Nigel. I won't give you a specific number for Q4. But yes, continued normalization is expected. I do think impaireds will continue to rise from current levels. So if you look at our impaired rate, it's 30; pre-pandemic, it was 38. So we expect that will continue to rise. Performing, again, could be bumpy, depending on the drivers of performing. So, that number could move. But I think for the overall, yes, I am messaging that we'll be closer to the 35 number. You can work back from that and get an estimate of what Q4 looks like.
Operator, Operator
The next question is from Joo Ho Kim with Credit Suisse. Please go ahead.
Joo Ho Kim, Analyst
Hi, good afternoon. Thank you for the extra time. Regarding the 5% buyback with plans to launch 90 million, how soon can we expect the Bank to take action on that? I realize this will be influenced by market conditions and the general outlook. However, when the previous 30 million NCIB was announced, there was an indication that it would be completed by the end of summer. Can we expect a similar pace, like 30 million per quarter, with the new buyback?
Bharat Masrani, CEO
Again, like you answered the question. It depends on market conditions. This requires regulatory approval. Obviously, it has to go through an approval process, which sometimes is quick, sometimes not so quick. So, one cannot predict exactly. And with respect to the pace, market conditions have a huge impact on that. As you know, as a bank, we come up with an algorithm as to how this should work. It would depend on the number of shares traded in a day. There are certain rules we have to follow that the exchanges put out. So, it's very difficult to predict, whereas 30 million shares was a much smaller program. And hence, we were in a better position to give you a prediction. But very hard to do when it is of this quantum. And markets are really choppy. They're very volatile. So, it's hard to give you a specific timeline.
Joo Ho Kim, Analyst
I understand. Regarding the U.S. business, it appears that the noninterest income has stabilized. Are there additional challenges you anticipate that could affect this area, such as regulatory issues related to card fees or other competitive factors? Additionally, could you share your thoughts on how you expect noninterest income in the U.S. to develop in the near future? Thank you.
Leo Salom, President and CEO, TD Bank, America’s Most Convenient Bank
Thank you for the question. We had a strong quarter in terms of noninterest income, growing by 17% from the previous quarter. What excites me is that we've largely moved past the issues related to overdrafts on a quarter-to-quarter basis, and we're experiencing solid growth in core account fee revenue. This growth is evident in our checking account services, credit card operations, and this quarter, we also saw an increase in wealth management with higher overall AUA levels. I'm optimistic that the overdraft challenges, which had significantly affected us over the last year, are now behind us. Looking ahead, it's difficult to make precise predictions. I believe focusing on the growth of our core franchise will be the key driver for noninterest income moving forward. We're paying close attention to the recent CFPB guidance on late fees, but I won't speculate on its status at this moment. It's something we're considering as it may impact our outlook for 2024. Overall, I'm very encouraged by the strong foundational elements we observed this quarter.
Operator, Operator
The next question is from Mike Rizvanovic with KBW Research. Please go ahead.
Mike Rizvanovic, Analyst
I have a quick question for Michael about the Canadian mortgage portfolio. It appears that the 35-plus year amortization has decreased slightly from the previous quarter. I'm wondering whether this is due to borrower-initiated paydowns with negative amortization or if it's simply a result of you writing a lot of fixed-rate business.
Michael Rhodes, Group Head, Canadian Personal Banking
Yes, a fair question. I know the table you're referring to when we have seen a decline, certainly or last quarter and from year-end. What we're seeing is our customers when they're hitting trigger rate, we have a proactive program to reach out to customers and give them the options, which include lump sum payments, increase their payments, switching to a fixed-rate product, et cetera. And we're having good uptake. And so I think that table shows consumers reacting to our outreaches with respect to the customers who have trigger rate.
Kelvin Tran, CFO
No, I think it's bang on.
Mike Rizvanovic, Analyst
And what would that take-up rate be if you can give me an approximation? Like is it like a third of your borrowers with the negative AM? Is it less than that, more? Just trying to get some color on I guess the propensity for borrowers to actually do that voluntarily.
Michael Rhodes, Group Head, Canadian Personal Banking
Yes. I would prefer not to provide a specific number, but I can say that a significant number of customers we reach out to are making the changes.
Operator, Operator
There are no further questions registered at this time. I will turn the meeting over to Mr. Bharat Masrani.
Bharat Masrani, CEO
Thank you. Thank you, operator. And thank you, all the folks who joined us for this call. Just to end here, another very good quarter from TD. And as usual, I'd like to take this opportunity to thank my colleagues around the world. They do a fantastic job in delivering for all our stakeholders, including our shareholders. And look forward to the call again in approximately 90 days. Thanks very much, folks.
Operator, Operator
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.