Earnings Call Transcript - TD Q1 2024

Operator, Operator

Good morning, everyone, and welcome to the TD Bank Group Q1 2024 Earnings Conference Call. I would now like to turn the meeting over to Ms. Brooke Hales, Head of Investor Relations. Please go ahead, Ms. Hales.

Brooke Hales, Head of Investor Relations

Thank you, operator. Good morning, and welcome to TD Bank Group's First Quarter 2024 Investor Presentation. Many of us are joining today's meeting from lands across North America. North America is known as Turtle Island by many indigenous communities. I am currently situated in Toronto. As such, I would like to begin today's meeting by acknowledging that I am on the traditional territory of many nations, including the Mississaugas of Credit, the Anishinaabe, 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 was covered by Treaty 13 signed with the Mississaugas of 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 first 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 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, Wholesale Banking. With the move to the morning call, we will be ending promptly at 9:30 AM. Accordingly, please limit yourself to one or two questions and then re-queue. Please turn to Slide 2. At this time, I would like to caution our listeners that this presentation contains forward-looking statements, and 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 and Kelvin will be referring to adjusted results in their 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 Q1 2024 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 we turn to our results, I'd like to welcome Tim Wiggan, Group Head, Wealth Management and Insurance, who is joining us for the first time. Ray Chun is also on the call, now in his capacity as Group Head, Canadian Personal Banking. At TD, we have depth of talent and a strong leadership bench. I'm confident both Tim and Ray will build on TD's many successes and deliver the next phase of growth in these important businesses. In addition, and speaking with many of you over the past quarter, I know there are questions relating to the Bank's investments in our risk and control infrastructure, including in our AML program. We are making comprehensive enhancements. This is a priority for the Bank, and we take our responsibility seriously to live up to our high standards. We will continue to mobilize the required resources to strengthen our capabilities. This includes the appointment of proven senior leaders in anti-money laundering, external advisors with deep subject matter expertise, and investments in technology, process redesign, and training. We are accelerating investments in our risk and control environment, hiring hundreds of colleagues in these areas across the enterprise over the past two quarters. In short, we know what the AML issue is, and we are making progress in fixing it every day. I look forward to providing further updates as soon as I can. Q1 was a good quarter for TD. Earnings were $3.6 billion, and EPS was $2. Revenue grew 5% year-over-year reflecting higher fee income and an improved macroeconomic environment for our market-driven businesses, including the contribution from TD Cowen and higher volumes and deposit margins in Canadian Personal and Commercial Banking. PCLs were higher due to continued consumer credit normalization and commercial credit migration in line with our prior guidance. While expenses were up 12% year-over-year, reflecting the inclusion of TD Cowen, expense growth moderated on a quarter-over-quarter basis. We made progress on our restructuring initiatives, delivering efficiencies across the enterprise while continuing to prioritize investments in our risk and control infrastructure. The Bank's CET1 ratio was 13.9%, reflecting organic capital generation offset by an increase in RWA from strong volume growth and the impact of almost 21 million common shares bought back during the quarter. In an uncertain market, TD remains well positioned from both a capital and funding perspective with the capacity to return capital to shareholders while supporting our customers and driving growth across our businesses. Last quarter, I highlighted TD Invent, the Bank's enterprise approach to innovation. We have reached a milestone. As of this quarter, TD has over 700 patents across Canada and the U.S. And for the third consecutive year, TD was recognized by the Business Intelligence Group in its Annual Innovation Awards, ranking highest in the organization and product categories for the TD Accessibility Adapter, a browser plug-in that helps make online experiences more inclusive. Let me now turn to each of our businesses and review some highlights from Q1. In our Canadian personal and commercial banking segment, earnings were $1.8 billion, up 3% year-over-year, and PTPP was $2.9 billion, up 6% year-over-year. Expenses increased 6% year-over-year, reflecting higher employee-related spend and technology costs. We saw strong volume growth on both sides of the balance sheet while delivering another quarter of segment NIM expansion of 6 basis points quarter-over-quarter. In real estate secured lending, TD recorded its eighth consecutive month of market share gains, and personal deposits grew 3% quarter-over-quarter. In everyday banking, we saw strong advisor productivity and record customer acquisition, with new accounts up 19% year-over-year and another strong quarter for new-to-Canada accounts. In credit cards, we celebrated a 10-year milestone as the primary credit card issuer for Aeroplan, Canada's top airline loyalty program. Since TD Aeroplan credit cards were first issued in January 2014, we have delivered exceptional value to our customers, serving more than 1 million Canadians who together have earned over 300 billion points on their TD Aeroplan credit cards, enough to fly round-trip from Toronto to Los Angeles 3.5 million times. In business banking, we grew loans by 8% year-over-year. Small business banking helped over 165,000 clients conveniently repay their CEBA loans, providing over 70,000 pre-approved refinancing offers and almost $600 million in loans. And we saw growth in TD Auto Finance, reflecting strong performance in prime retail auto lending and accelerated acquisition of dealer relationships in our commercial business year-over-year. Turning to the U.S., U.S. retail bank earnings were $752 million, down 26% year-over-year, and PTPP was $1.1 billion, down 17% year-over-year. Revenue declined 6% year-over-year, reflecting lower deposit volumes and margins, partially offset by higher loan volumes and fee income. Expenses increased 3% year-over-year but declined 2% quarter-over-quarter as the bank's productivity initiatives helped offset higher employee-related costs and investments in business and control initiatives. PCLs were higher compared to last year, with the increase reflected in both the consumer and commercial lending portfolios. With the contribution from our investment in Schwab of $144 million, segment earnings were $896 million. The U.S. retail bank saw continued loan growth while maintaining its through-the-cycle underwriting standards. Loans were up 9% year-over-year, reflecting growth in mortgages, middle market, commercial lending, and TD's proprietary bank card book. Quarter-over-quarter, deposit balances, excluding Schwab, were flat and NIM compressed 4 basis points as the bank delivered balance sheet stability in a challenging market. TD Bank, America's Most Convenient Bank is serving small business clients with innovative solutions. This quarter, we added tap to pay on iPhone, one of the first banks globally to launch with this feature integrated within our mobile app. We also enabled Zelle for small business, enhancing convenience and functionality through near real-time payment capabilities. And last month, TD Bank, America's most Convenient Bank announced a three-year community impact plan that will provide an estimated $20 billion, supporting lending, philanthropy, banking access and other activities for diverse and underserved communities across our U.S. footprint. The Wealth Management and Insurance segment earned $555 million this quarter, flat year-over-year. The business earned through higher insurance service expenses with revenues up 8% year-over-year, reflecting insurance premium growth and higher fee-based revenue in the asset management and advice-based businesses. This month, TD Direct Investing was ranked as the number one direct investing brokerage in Canada by the Globe and Mail for the second consecutive year. And we have now onboarded more than half of our eligible active trading clients onto TD active trader, the bank's completely redesigned platform for sophisticated active traders. We had a strong start to the year in TD Asset Management with several large institutional mandates across multiple geographies, and we were proud that several TDAM managed funds were recognized with 2023 fund-grade A plus awards by fund data, reflecting strong risk-adjusted performance relative to industry peers. Finally, in TD Insurance, we continue to build on our digital leadership with Canada's number one direct insurer, with one in three customers now buying their insurance online from end to end. Wholesale Banking delivered record revenues driven by the segment's expanded capabilities coupled with improved market conditions. We are gaining share across U.S. M&A and equity capital markets as we leverage the power of TD Cowen. Expenses this quarter included a $102 million provision relating to the industry-wide U.S. record-keeping matter. Excluding this item, net income was $400 million, up 15% year-over-year. We are executing on one TD opportunities. This quarter, TD Securities and TD Wealth enabled fully paid lending to enhance returns for wealth clients. And in partnership with TD Bank, America's Most Convenient Bank, we began to issue equity-linked certificates of deposit, broadening the suite of products available to clients in the U.S. TD Securities has also continued to demonstrate its leadership in ESG, acting as joint lead manager on TD's $500 million sustainable bond offering, International Finance Corporation's $1.5 billion social benchmark offering, supporting low-income communities in emerging markets, and KFW AUD1.5 million green bond, the issuer's largest-ever transaction in the Australian market. Guided by our purpose, TD is committed to creating value for all of our stakeholders. I'm proud that the bank was listed in the Dow Jones Sustainability Index North America Index for the 12th consecutive year. TD was also recently named a 2024 S&P Global Sustainability Yearbook member awarded to banks in the top 15% of S&P's Corporate Sustainability Assessment worldwide. Last month, the TD Charitable Foundation launched its 18th annual housing for everyone grand competition. The competition will focus on organizations in the U.S. providing services to support independent living for marginalized community members, including rapid rehousing and permanent supportive housing or transitional housing. And in a few weeks, TD will release its 2023 sustainability reporting suite, including our climate action plan. We are excited to share the progress enabled by dedicated colleagues across the bank who transform our aspirations into action. It is a privilege to work alongside our TD bankers every day. I would like to thank them for all they do to deliver for our shareholders and to make TD the better bank. With that, I'll turn things over to Kelvin.

Kelvin Tran, CFO

Thank you, Bharat, and good morning, everyone. Please turn to Slide 10. This quarter, revenue increased year-over-year driven by higher fee income in our market-driven businesses and higher volumes in Canadian and personal Commercial Banking. Expenses reflecting the inclusion of TD Cowen also increased year-over-year reflecting higher employee-related expenses. We moderated expense growth on a quarter-over-quarter basis and made progress on our restructuring initiatives and reprioritized our investment. PCLs were higher due to continued consumer credit normalization and commercial credit migration. As a result, earnings were $3.6 billion and EPS was $2, down 12% and 10% year-over-year, respectively. This quarter, we had a $0.06 impact from a provision related to the industry-wide U.S. record-keeping matter. We also adopted IFRS 17 this quarter. On Slide 26, you will see that we have updated our presentation of PTPP to show revenues net of insurance service expenses. Please turn to Slide 11. As I said on our Q4 2023 earnings call, in fiscal 2024, we expect run-rate expenses, inclusive of the savings generated by restructuring program and investments to accelerate future growth to increase by approximately 2% year-over-year. For fiscal 2024, we expect adjusted expense growth in the mid-single digits, reflecting investments in our risk and control infrastructure and the impact of TD Cowen. This quarter, we incurred a restructuring charge of $291 million pre-tax. We continue to expect to incur restructuring charges in the first half of calendar 2024 and that are of similar magnitude to the restructuring charges incurred in the fourth quarter of 2023. As I noted last quarter, the restructuring program is expected to generate savings of approximately $400 million pre-tax in fiscal 2024 and annual run-rate savings of approximately $600 million pre-tax. Cost savings will be driven by a 3% FTE reduction, real estate optimization, and asset impairments as we accelerate transitions to new platforms. This will create capacity to reinvest. We are on track to deliver our FTE reduction target and targeted fiscal 2024 and annualized savings. Please turn to Slide 12. Canadian Personal and Commercial Banking delivered a strong quarter, reflecting volume growth and margin expansion. Average loan volumes rose 7% year-over-year with 7% growth in personal volumes driven by real estate secured lending up 6% and cards up 11%, and 8% growth in business volumes. Average deposits rose 3% year-over-year reflecting 6% growth in personal deposits, partially offset by a 2% decline in business deposits as small business banking customers drew down on balances to repay their CEBA loans. Net interest margin was 2.84%, up 6 basis points quarter-over-quarter, primarily due to higher deposit margin. As we look forward to Q2, while many factors can impact margins, including tractor on and off rates and balance sheet mix, we expect NIM to remain relatively stable. 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 delivered strong loan growth and operating momentum in a challenging environment. Average loan volumes increased 9% year-over-year. Personal loans increased, reflecting lower mortgage repayments in the higher rate environment, strong auto originations, and double-digit growth in TD's proprietary bank card book. Business loans increased, reflecting good originations from new customer growth and slower payment rates. Average deposit volumes excluding sweep deposits were down 2% year-over-year and flat quarter-over-quarter as the U.S. retail bank demonstrated deposit resilience in competitive market conditions. Net interest margin was 3.03%, down 4 basis points quarter-over-quarter due to lower deposit costs, partially offset by the benefit of higher reinvestment rates. As we look forward to Q2, while many factors can impact margins, including competitive deposit market dynamics in the U.S., tractor on and off rates, and balance sheet mix, we expect NIM to be relatively stable in the near term, influenced by similar drivers as those we saw this quarter. Expenses increased year-over-year, reflecting higher employee-related expenses. The decline quarter-over-quarter as productivity initiatives helped offset higher employee-related costs and investments in business and control initiatives. Please turn to Slide 14. As I mentioned, the bank adopted IFRS 17 this quarter. We appreciate that analysts and investors may have questions on the financials and presentation impacts of this change. We have added Slide 35 to this presentation to assist in this regard. Fiscal 2023 results have been restated to reflect this new standard. Wealth Management and Insurance delivered good performance this quarter, reflecting the strength of the segment's diversified businesses. Net income was flat year-over-year as higher revenue was offset by higher insurance service expenses and non-interest expenses, reflecting higher variable compensation commensurate with higher revenues. Like peers across the industry, we have seen deposit flow into GIC and other products in the high-rate environment. That trend has begun to moderate. We are also executing upon initiatives to help ensure TD retains that flow in-house and captures flows from other institutions. Assets under management increased year-over-year, reflecting market appreciation, and assets under administration increased year-over-year, reflecting market appreciation and net asset growth. Please turn to Slide 15. Wholesale Banking delivered record revenue. Net income for the quarter was $298 million, down 14% year-over-year. Excluding the impact of the $102 million provision related to the industry-wide U.S. record-keeping matter, net income was $400 million, up 15% year-over-year. Revenue, including TD Cowen, was $1.8 billion, up 32% year-over-year, primarily reflecting higher equity commissions, lending revenue, primarily from syndicated and leveraged finance underwriting fees and trading-related revenue. Expenses increased 60% year-over-year, reflecting the provision I mentioned as well as higher repo compensation commensurate with higher revenues. Excluding this provision, expenses increased 49% year-over-year, reflecting the inclusion of TD Cowen, which closed March 1st last year. Please turn to Slide 16. The corporate net loss for the quarter was $218 million compared with a net loss of $140 million in the first quarter last year. Net corporate expenses increased $63 million compared to the prior year mainly reflecting investments in our risk and control infrastructure. Please turn to Slide 17. The Common Equity Tier 1 ratio ended the quarter at 13.9%, down 49 basis points sequentially. Internal capital generation was offset by an increase in RWA excluding the impact of FX, primarily reflecting volume growth. We continued our NCIB this quarter and have now completed almost 50% of our $90 million share buyback program. Regulatory changes, which included the fundamental review of the trading book and negatively amortizing mortgages decreased CET1 by 17 basis points this quarter primarily reflecting an increase in market rates. With that, Ajai, 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 increased by 4 basis points quarter-over-quarter to 22 basis points, driven by the Canadian commercial lending portfolio largely related to one file in the automotive industry and continued normalization of credit performance in the consumer lending portfolios, including some impact of seasonal trends in the U.S. cards and auto portfolios. Please turn to Slide 19. Gross impaired loans increased 4 basis points quarter-over-quarter to 40 basis points driven by the commercial and consumer lending portfolios, partially offset by a reduction in wholesale banking. Please turn to Slide 20. Recall that our presentation reports, PCL ratios, both gross and net of the partner share of the U.S. strategic card PCLs. We remind you that U.S. card PCLs recorded in the corporate segment are fully absorbed by our partners and do not impact the bank's net income. The bank's provision for credit losses increased 5 basis points quarter-over-quarter to 44 basis points. The increase is largely recorded in the U.S. retail, corporate, and Canadian personal and commercial banking segments. Please turn to Slide 21. The bank's impaired PCL was $934 million, an increase of $215 million quarter-over-quarter, largely related to continued credit normalization in the consumer lending portfolios, including some seasonal impact in the U.S. cards and auto portfolios and credit migration in the commercial lending portfolios across various industries. Performing PCL decreased $92 million quarter-over-quarter to $67 million. Current quarter performing provisions were largely recorded in the Canadian Personal and Commercial Banking segment. Please turn to Slide 22. The allowance for credit losses increased by $79 million quarter-over-quarter to $8.3 billion due to current credit conditions, including some credit migration across the lending portfolio and volume growth, partially offset by a $122 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. Before I conclude, I will make a few additional comments about the loan portfolio. Key credit metrics in our consumer lending portfolios are now broadly at pre-pandemic levels as rising unemployment and elevated interest rates have presented challenging conditions for consumers. Notwithstanding current conditions, the performance of our Canadian result portfolio reflects its strong underlying credit quality as impaired PCLs remain at less than 1 basis point. And we see continued reductions in the negatively amortizing population. Moving to non-retail, the wholesale segment continued to perform well with no new impairments over the past two quarters. Canadian and U.S. commercial gross impaired loans and PCLs have risen over the past year from cyclically low levels. Consistent with the economic trajectory, pressure on the commercial real estate office segment is expected to persist, and we continue to bolster our reserves as appropriate. The bank's exposure to the office segment remains small. To conclude, the bank exhibited good credit performance this quarter with PCLs in line with our prior guidance. Looking forward, I continue to expect PCLs for fiscal 2024 to be in a range of 40 to 50 basis points, although results may vary by quarter and are subject to changes in economic conditions. With that, operator, we are now ready to begin the Q&A session.

Operator, Operator

Thank you. First question is from Ebrahim Poonawala from Bank of America. Please go ahead. Your line is open.

Ebrahim Poonawala, Analyst

Hi. Good morning. I guess maybe just Bharat for you; there's an unhealthy amount of speculation around how long you'll be in your seat and if there CEO succession waiting to happen at TD. I appreciate it's the Board's decision but given everything that's going on with dealing with the AML issues, change in leadership in Canada, it has been unsettling for investors from the outside to get confidence that execution at the top is consistent and moving in the right direction. So, to the extent you can address like how long you want to be in the seat and how we should think about it? That would be really helpful.

Bharat Masrani, CEO

Ebrahim, nice to hear your voice, and good morning to you. I've read some of these reports and, of course, speculation. What I can tell you is I'm really focused on strengthening the bank, serving our customers, and creating value for our shareholders. We have a deep and highly experienced bench of senior leaders, including those on the call with me this morning. And hopefully, many of you can see this team has delivered great momentum in all of our businesses, look at Canadian P&C, in our U.S. business, notwithstanding some of the challenges there. TD Cowen is hitting on all cylinders. And so I'm very happy with how the team is delivering. And we've talked about this before; as you would expect, we have very detailed and robust succession plans across the bank. So hopefully, that answers your question, and I appreciate the query.

Ebrahim Poonawala, Analyst

And you want to run this bank for many years to come. Did I hear that?

Bharat Masrani, CEO

I'm focused. Every day I wake up, I'm focused on strengthening the bank and serving our customers, of course, is a top priority as is creating value for our shareholders. And hopefully, I'm doing that.

Ebrahim Poonawala, Analyst

And just a separate question in terms of the AML issue, not about the specifics, but what happened there? Again, for those of us who follow TD for a long time, the assumption is always TD ahead of the curve in terms of management, risk control investments. What do you think happened there? And does that cause you to kind of re-evaluate the rest of the bank, if there are any other issues that could emerge?

Bharat Masrani, CEO

Ebrahim, I can't provide more details about the specific issue, but I can assure you that we understand what it is. We are diligently working to resolve it, and it will be addressed. When I can offer more information, I will gladly do so. Regarding our control infrastructure, this is a continuous challenge for TD and any large bank, and the environment is constantly evolving. As we receive updates from our regulators and observe industry advancements, we aim to keep pace and, where feasible, stay ahead. It's an ongoing effort, and I am pleased to share that we are making progress.

Ebrahim Poonawala, Analyst

Thank you for taking my questions.

Operator, Operator

Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead. Your line is open.

Gabriel Dechaine, Analyst

Good morning. Quick one for Bharat. 20 million shares repurchased. You're still committed to the full money amount under the current program?

Bharat Masrani, CEO

Well, as we announced when we launched the program, our intention is to complete the program within the timeline we set out. And with market conditions permitting, we will continue to execute against the program.

Gabriel Dechaine, Analyst

Okay. Perfect. Next question for Mr. Wiggan. Wealth earnings have remained flat year-over-year, driven by market conditions, and insurance also remained flat. I'm curious about how one of the challenges facing P&C insurance, particularly related to auto theft, is worsening. How are you adjusting your pricing in response to this issue, and do you believe you need to take further action?

Tim Wiggan, Group Head, Wealth Management and Insurance

Thank you for the question. If we look at gross written premiums, we don't break down volume versus premium increases, but overall, there was a healthy increase of 15% in the G&I sector. As you've noted, the insurance service expense increased by 17% this quarter, which includes claims, maintenance, and acquisition costs. Auto theft is a significant concern in Canada, as highlighted during the National Forum on February 8th. When considering claims, it's important to look at claims severity. To address this issue, we have various programs in place. One key initiative is our tagging program, where we place tags inside automobiles similar to what is done with Apple products. We've found that these tagged cars are often targeted again by criminals later. This program enables us to track and recover stolen vehicles, achieving a success rate of approximately 95% in returning them. Additionally, we operate 25 TD insurance auto centers where customers can get their vehicles repaired and rent cars. We also have eight partnerships that allow us priority placement for servicing vehicles. In cases of theft, we aim to expedite the return of vehicles, and for regular damage, we strive to reduce both return times and rental costs. This remains a major focus for us.

Gabriel Dechaine, Analyst

Perfect. Thanks. And, well, enjoy the rest of the week, everyone.

Operator, Operator

The next question is from Paul Holden from CIBC. Please go ahead. Your line is open.

Paul Holden, Analyst

Thank you. Good morning. I want to ask a question on the U.S. banking business. You reported an adjusted ROE this quarter of a little over 11. I think if I attribute some of the investments you're making to risk control to that segment rather than corporate, then maybe it pushes the number down closer to 10. But anyways, the question is 10 is clearly below where you'd like it to be. Do you think this business can get to in terms of ROE over time, and what is required to get it back to an acceptable return?

Leo Salom, President and CEO, TD Bank

Thank you for your question, Paul. To provide some context, the macro environment in the U.S. is quite challenging, as reflected in this quarter's financials. However, I find several reasons for optimism looking ahead. Firstly, we have significant operating momentum, evident in our loan growth across both retail and commercial portfolios, with retail up 11% and commercial up 7%. We executed on several strategic priorities, maintaining that momentum. Additionally, as Kelvin mentioned, we are seeing short-term margin stability. I am hopeful about the potential for margin expansion due to reinvestment rates and increased tractor maturities later in the year. Coupled with our focus on productivity, we managed to reduce quarter-on-quarter expenses by about 2%, emphasizing our commitment to efficiency. Regarding credit, as Ajai noted, we are experiencing a period of normalization, and while we cannot predict when it will peak, I am confident in the quality of our card and auto loan origination. In fact, the new FICO scores in our card business are currently higher than those in our existing portfolios, indicating our disciplined approach. Considering all these factors, I am confident that our outlook for the latter part of the year and into 2025 is strong, which should lead to a higher return on equity. While I can't provide a specific target, historically, we've seen ROE in the 13% to 14% range, and I believe that level is attainable again.

Paul Holden, Analyst

Thank you for that. And then a second question is just relating to consumer credit experience in some ways. I'm surprised to see U.S. underperformed Canada or Canada outperform U.S. given higher leverage among Canadian consumers. So maybe you can talk to some of the trends and differences you're seeing between the U.S. and Canada and why U.S. losses are higher versus Canada?

Ajai Bambawale, Chief Risk Officer

Certainly. So what we saw this quarter actually was PCLs are up both in Canada and the U.S. and impaireds are up both. In Canada, it's driven by commercial auto and cards, and in the U.S. as well, it's commercial auto and cards. I think the one difference this quarter is on performing PCL. And that's because we built less performing in Canada. And the reason we built less performing in Canada is we built quite a bit of performing the previous quarter. And if you go and look at our HPI numbers last quarter, you would have seen it triggered built, and we built for other areas like cards and commercial. So it's not like we haven't built in Canada, but yes, we built less. And then in the U.S., we actually had a small release in the U.S. last quarter and a build based on volume and credit migration this quarter. So overall, I think generally, the trends are consistent, but they can vary by quarter and can vary by product. The other thing I'd draw your attention to because you're really calling out the difference in consumer. If you look at our allowance numbers, our allowance numbers year-over-year are up $790 million. That includes FX. But if you look at it segment-wise, for Canadian P&C, that number has gone up $479 million, and for U.S. retail, it's US$125 CAD$197. So that difference in the consumer has been taken into account in our allowance build, but PCLs can vary by quarter. So hopefully, that gives you color.

Paul Holden, Analyst

That does help. Thank you. And I'll leave it there.

Operator, Operator

Thank you. The next question is from Mike Rizvanovic from KBW Research. Please go ahead. Your line is open.

Mike Rizvanovic, Analyst

Good morning. I have a question for either Ray or Kelvin regarding noninterest-bearing deposits, which have decreased by about 5% quarter-over-quarter in your Canadian business. Given the guidance we've been receiving about the runoff of noninterest-bearing deposits slowing down, it's evident that it hasn't. Could you explain why this trend is not stabilizing? I’ve noticed that the deposit rates currently offered aren’t as attractive for customers as they were a month ago or earlier in 2023. Why is this situation persisting? Do you have any updated insights on where this might head in the future?

Raymond Chun, Group Head, Canadian Personal Banking

Thank you for the question. To provide an overview of our deposits, I’d like to mention that one-third of our deposits are in checking accounts, another third is in savings, and the remaining third is in term deposits. This indicates a well-balanced distribution of our deposit volume. We are observing a slowdown in deposit migration, with money moving from non-term deposits to term deposits within the industry. A positive aspect for TD is that these deposits are remaining with us, and we are witnessing an overall increase in total deposits. Notably, over 50% of our total deposits are new funds brought to the bank. Coupled with our strong core deposit portfolio—leading in Canada—this has contributed to the NIM expansion we've experienced from one quarter to the next. I am satisfied with our deposit strategy and the activity we are observing. Regarding NIM, we expect it to remain stable at least through the second quarter. Looking ahead for our deposit business, we are experiencing strong acquisition volumes, as highlighted by Bharat's comments, with record new account openings up 19% year-over-year. This indicates that our value proposition is appealing to our clients, and we have seen five consecutive months of growth in term deposit market share. Overall, I hope this addresses your question, and I feel confident in our deposit and pricing strategies.

Mike Rizvanovic, Analyst

No, that's certainly helpful, but I'm more so thinking along the lines of, do you see any risk that even if rates do decline or when rates ultimately decline, is there some sort of difference in how the Canadian consumer views that demand deposit, that free funding that TD gets? And this will be more impactful for TD because of the size of your deposit base. But is there any risk in your mind that maybe Canadians are just a bit more demanding coming out of this rapid rate hiking cycle that we had, and perhaps the demand accounts, the free money that's been available to fund your lending just is not going to come back in any sort of meaningful way? That's what I'm sort of getting at in terms of the funding side.

Raymond Chun, Group Head, Canadian Personal Banking

I would say at this point, I'm not seeing anything that would show us that there's a difference on that question. What I would say is that, again, what we continue to see is from an acquisition standpoint, consumers are actually picking TD to do their day-to-day banking. We're seeing increased deposits overall, and we'll see as interest rates moderate, definitely to expect some of that deposit money will go into equities, but we'll see, and we'll adjust accordingly. But at this point, I'm comfortable with where we're at.

Operator, Operator

Thank you. The next question is from Meny Grauman from Scotiabank. Please go ahead. Your line is open.

Meny Grauman, Analyst

Hi, good morning. I had a question about wholesale banking and was hoping you could provide some color in terms of performance by geography, Canada versus the U.S. and sort of the different trends if we look at results between both geographies.

Riaz Ahmed, Group Head, Wholesale Banking

Yeah. Thanks, Meny. It's Riaz. Look, I think overall, when you kind of look at the revenue production this quarter at 1.8 billion, that's been kind of a nice lift of about 50% from where we were in the last full year before we acquired TD Cowen in 2022, where revenue per quarter was averaging about 1.2 billion. And that kind of lift is really coming from almost all areas in investment banking, as well as in syndicated leverage finance, transaction banking, as well as trading. And I was particularly encouraged that last quarter I mentioned that we had raised our revenue power by 25% to about 1.5 billion, so it's nice to see that as markets have become somewhat more supportive that that continues to grow. And it's giving you the proof points that the acquisition is working. But look, as we continue to grow the wholesale segment, a large part of that growth is going to be based in the U.S. just because of the size of the relative markets. And while we've not historically disclosed the Canada versus U.S. revenue differences, you might consider that in the future. But really we run a global business, and particularly on the global market side. And it therefore sometimes can be a little bit of a bookkeeping exercise to parse the differences in liquidity funding, etc. But I kind of look at the overall production and feel pretty good about it.

Meny Grauman, Analyst

Just to maybe ask a follow-up question on this. If I look at the quarter-over-quarter growth in revenue and wholesale banking, are we seeing similar growth rates between Canada and the U.S.?

Riaz Ahmed, Group Head, Wholesale Banking

The activity in both markets is returning quite well. Equity capital markets have shown more momentum in the U.S. compared to Canada. However, both the M&A side and the debt capital market are experiencing improvement, with Q1 performing better than Q4. This positive momentum is being seen on both sides of the market.

Operator, Operator

Thank you. The next question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead. Your line is open.

Sohrab Movahedi, Analyst

Thank you. Before I ask my question, I wanted to clarify something. Kelvin, am I correct in understanding that there will likely be an additional restructuring charge of about $300 million next quarter?

Kelvin Tran, CFO

No. So what we said is that in the first half of this calendar year, the total charge is going to be similar to last year.

Sohrab Movahedi, Analyst

Okay. So last year, the charge was $363 million pretax.

Kelvin Tran, CFO

Right.

Sohrab Movahedi, Analyst

Okay. Thank you. I appreciate that clarification. Bharat, I mean the good news is, I think you've made it clear that the AML issues are understood, I suppose, and progress is being made fixing them. Are you in a better position now versus a few quarters ago to give a sense of how long do you think that will take? And how much do you think it will cost?

Bharat Masrani, CEO

I wish I could, Sohrab. And I'm hoping that I'll be able to in the near term. But suffice it to say, as I said in my prepared remarks, we know what the issues are. We are working hard to improve and enhance our processes, and I'm confident that I've been with the bank many years that when we get on to a particular issue we find, we get on to those and fix them. And so this is from my perspective, something that we are doing. And when I'm in a position to give you more information, I too am waiting to do that, and I will certainly attempt to do that as quickly as I'm able to.

Sohrab Movahedi, Analyst

Okay. But do you think the information you are waiting for will have a potential impact on either more restructuring charges or the benefits of the restructuring charges taken to date affecting the bottom line? Or do you wonder if it might require a review of the expense program compared to what you have currently outlined for us?

Bharat Masrani, CEO

Kelvin outlined our expense profile for the year at the end of Q4. He mentioned that our core expense growth is anticipated to be around 2%, but this could change depending on market conditions. Including additional risk and control improvements we plan to implement, that growth could reach mid-single digits. This gives you an idea of our outlook. Kelvin, who is next to me, also noted that some expenses will be categorized under the corporate segment, which we expect to phase out in the future. Other expenses related to certain programs will fall under different segments. Consequently, for a while, corporate segment expenses may be about double what you have seen in previous years. That should provide some clarity, Sohrab, but I can't share more than that.

Sohrab Movahedi, Analyst

No, no, I appreciate that. I appreciate the color. I just wanted to make sure that what had kind of contemplated is what's kind of reflected in here. And I guess the rest of it will kind of hear about in due course. Thank you for taking my questions.

Bharat Masrani, CEO

Thanks very much.

Operator, Operator

Thank you. The next question is from Lemar Persaud from Cormark. Please go ahead. Your line is open.

Lemar Persaud, Analyst

Thanks. Maybe for Riaz, can you talk about some of the actions you've taken in that business to right-size the cost base? And then I'm wondering if you could just touch on the impact on your business from the proposed dividend tax changes in Q1 and expectations moving forward?

Riaz Ahmed, Group Head, Wholesale Banking

Thank you, Lemar. As I mentioned last quarter, we completed the integration of the equities platform last year, along with a significant portion of the legal integration of the broker-dealers and some of the market-based technology integrations expected to wrap up by the end of this calendar year. With these integrations progressing and our leadership structure fully announced and in place to guide us into the next phase of growth for the wholesale bank, we are on track to achieve the aspirational efficiency ratio of 66% that I spoke about last quarter. Today marks the eve of the first anniversary of the acquisition of TD Cowen, and I am very pleased with the progress we've made over the past year. Although we initially indicated that the integration would take up to three years, it appears to be moving along faster than anticipated, which makes me particularly happy. I also want to take a moment to congratulate all our colleagues for their efforts in getting us here so quickly. Regarding the dividend tax matter, the financial statements show that our annual dividend deduction has been between $100 million and $125 million. The impact for Q1 of 2024 is projected to be 112 million.

Lemar Persaud, Analyst

Okay. And then moving forward, should we just take the Q1 and just quarterize on that. So that's a reasonable expectation?

Riaz Ahmed, Group Head, Wholesale Banking

Yes, I think that would be reasonable. But of course, it's all buried in the otherwise fantastic growth we're having elsewhere in the business across the business. So yes, I think for your modeling purposes, that makes sense to adjust it by that much.

Kelvin Tran, CFO

I think it's important to clarify that the impact to Q1 is only one month out of three months.

Lemar Persaud, Analyst

Sure. Kelvin, regarding the restructuring program, it's quite substantial, and it appears you have a clear understanding of its scale and the expected savings. I noticed that there haven't been any updates to your cost savings projections for 2024. Could you elaborate on how the program will be distributed across three categories: growth initiatives, addressing AML issues, and the impact on overall profits? It seems that would be a helpful perspective.

Kelvin Tran, CFO

Yes. To discuss this, we can refer to the numbers. We anticipate savings of $400 million from the restructuring program in 2024 and $600 million in 2025 on an annualized basis. Most of these savings will be reinvested in risk and control, which is reflected in the increase provided for the corporate segment. Risk and control will be the primary factor here, although there are several considerations within the corporate segment. The remaining savings will focus on driving future growth.

Lemar Persaud, Analyst

So it's essentially just risk and control. And if you bucketed into that, is it fair then to say that this spend isn't necessarily going to drive additional revenues or benefits to the bank outside of risk and control? Is that fair?

Kelvin Tran, CFO

I guess you can always say which one do you prioritize? Because at the end of the day, we are expecting mid-single-digit expense growth. And so you say that that is going to drive investment, and then the rest is because of the growth in risk and control or the others first. We look at it as one portfolio basis, and we continue to reprioritize given the environment.

Lemar Persaud, Analyst

Okay, thanks. That's it for me.

Operator, Operator

Thank you. The next question is from Darko Mihelic from RBC Capital Markets. Please go ahead. Your line is open.

Darko Mihelic, Analyst

Hi, thank you for taking my questions. I know it's running along. Really quickly, two questions for Leo. First one, Leo, is when I look at the U.S. business, I'm trying to understand what you're aiming for this year in terms of loan growth, and you can talk to this, whether it's relative to industry relative to where you are now. Where do you see the biggest opportunities for growth? And given that the bank clearly had lots of capital, are you actually aiming for above industry average kind of growth levels on the loan side? That's my first question.

Leo Salom, President and CEO, TD Bank

Great, Darko. Thank you very much for that question. Let me just give you a sense first at a macro level and then I'll look at it within the bank. From a macro perspective, just to be clear, I do expect there to be moderation in the level of asset growth in the market as a whole. In fact, we saw that we were pure leading in the quarter, in the first quarter. So to the extent that rates stay longer, and to the extent that there is more pressure on consumers, I do expect that there will be some moderation in consumer loan demand. And on the commercial side, we've seen commercial entities pulling back a little bit, waiting to see what happens with rates. And so they're taking a shorter view with regard to some of their decisions. Now from our perspective, in particular, I think we find ourselves in a bit of a unique situation. As I think shared with you, we've got 10 million retail clients, and we've been historically underpenetrated in terms of our consumer lending businesses. So the ability to bring our cards, our bank cards offer to bear on that subset of consumers to the extent that we can bring mortgage products and obviously continue to grow our broader consumer lending, it's an opportunity. So just to bring that to life a bit in our cards business, about 16% of our consumers today have a TD bank card in their wallet. Our aspiration is to double that. So that will give us to the extent that we lean into the honest opportunity, I do think that we'll be able to outgrow the market, and that's what we've done over the past three or four quarters. So, that really goes to what we're doing on the consumer side. Likewise, on the commercial side, you saw us post relatively strong growth. And I would say the partnership with TD Cowen and TD Securities is at the heart of that. The work that we're doing to redefine our mid-market franchise hand-in-hand with Riaz's team is giving us an opportunity to be able to cast a much bigger shadow in the mid-market space. And so we're really excited about that. The fact that the market is experiencing some degree of liquidity challenges, while we are in a much stronger position, is giving us an ability to be selective and able to support clients through this sort of macro environment. So long-winded way of saying, I do believe that we'll be able to outperform from a lending perspective in the short term. But we're going to do that prudently. We respect our underwriting criteria. We'll make sure that we're putting on good effective credit. But I do think we should be able to outperform the market.

Darko Mihelic, Analyst

That's a very helpful answer. My next question may seem silly since I'm not entirely clear on how this works. Today, you announced a three-year, $20 billion community impact plan. How should I interpret that? Should I expect $20 billion in consumer loans to appear on your balance sheet over the next three years? I doubt these loans will have a high spread, but they might come with a high provision for credit losses. How should I incorporate this plan into my model after hearing this today?

Leo Salom, President and CEO, TD Bank

That's a great question. I'm really excited about the announcement of the $20 billion community impact plan. To clarify, this amount consists of three lending categories: $10 billion for mortgage lending to low- and moderate-income consumers, $3 billion for minority-led small businesses, and $7 billion for development financing for affordable housing programs. It's important to note that we are required by fair lending regulations under the Community Reinvestment Act to make these investments, which we have been doing for quite some time. This program intensifies our efforts in certain areas to ensure we are actively supporting our communities, which is central to our identity and core culture. Therefore, I don't expect this initiative to negatively affect our credit performance. We will maintain strict underwriting standards for these programs while being more intentional about our fair lending and CRA commitments.

Darko Mihelic, Analyst

And these are all on balance sheet, correct?

Leo Salom, President and CEO, TD Bank

Yes, they are.

Operator, Operator

Thank you. There are no further questions registered at this time. I will turn the call back to Bharat Masrani.

Bharat Masrani, CEO

Thank you very much. Darko, just to clarify on this topic. In terms of mortgages, there are instances when we transfer conforming mortgages to Fannie and Freddie. So, attempting to equate this dollar for dollar on the balance sheet might require further explanation from us at a later date. It's important to clarify this point, as it’s a unique aspect of the U.S. market that may not be widely understood. Overall, I am very pleased with our team's performance. As I mentioned earlier, our business momentum is strong, with impressive volume and growth in Canada, as well as good loan growth in the U.S. The integration of TD Securities and TD Cowen is progressing well. I also want to commend our colleagues in the wholesale bank as they approach a significant milestone. It's wonderful to see how much we have accomplished. I recognize Mr. Wiggan, as well as everyone else who prefers to go by their first name, Tim, it’s great to have you on this call. I'd also like to take this moment to express my gratitude to our 95,000 bankers worldwide. They are the ones who ensure we deliver results for all our stakeholders, including our shareholders. Thank you, and I look forward to seeing you next quarter. Thank you 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.