Earnings Call Transcript - TD Q1 2020

Operator, Operator

Good afternoon, ladies and gentlemen. Welcome to the Q1 2020 Earnings Conference Call. I would now like to turn the meeting over to Ms. Gillian Manning. Please go ahead, Ms. Manning.

Gillian Manning, Investor Relations

Thank you, operator. Good afternoon, and welcome to TD Bank Group's first quarter 2020 investor presentation. We will begin today's presentation with remarks from Bharat Masrani, the bank's CEO; after which, Riaz Ahmed, 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 Teri Currie, Group Head Canadian Personal Banking; Greg Braca, President and CEO, TD Bank, America's Most Convenient Bank; and Bob Dorrance, 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 to arrive at 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 reported results and factors and assumptions related to forward-looking information are all available in our Q1 2020 report to shareholders. With that, let me turn this presentation over to Bharat.

Bharat Masrani, CEO

Thank you, Gillian, and thank you, everyone for joining us today. Q1 was a solid quarter for TD. Earnings rose 4% to $3.1 billion and EPS was up 6% to $1.66. Revenue increased 6% on strong volume growth and record wholesale revenue. As the investments we've been making in our people and capabilities enable us to continue acquiring more customers and doing more business with them. We maintained a strong capital position, with our CET1 ratio, ending the quarter at 11.7%, including the impact from IFRS 16, and the repurchase of over 4 million common shares. We also declared a $0.05 dividend increase today, bringing our dividend per share to $0.79 for the quarter, up 7% from a year ago, for a 5-year compound annual growth rate of 9%. I'm pleased with our performance this quarter, which saw us earn through some significant headwinds. Let me highlight a few accomplishments that speak to the power of our strategy and our success and executing on it. In December, TD Bank America's Most Convenient Bank, ranked number one in the JD Power 2019 U.S. national banking satisfaction study. This is our first ever national trophy in the first year that we were eligible for the survey. The win is all the more meaningful given the peer group, which includes some of the nation's largest and most storied banks, many of which operate coast to coast. We followed a disciplined strategy since entering the U.S. market, keeping our customers at the center of everything we do. I couldn't be more proud of our team. It’s their relentless focus on providing legendary unexpectedly human experiences that has earned us this milestone recognition. In this survey, TD ranked best among national banks, for both store experience and online satisfaction. That's what our omnichannel strategy is all about. At TD, we're delivering for our customers in branches and stores, as well as online and mobile. Customers love our design-centered digital tools, and the personalization, convenience and security they offer. In Canada, our banking app consistently ranks number one for adoption, engagement and customer satisfaction. And in the U.S., our app is ranked in the top 10. We’re the largest digital bank in Canada, and our active mobile user base is up 12% from a year ago across our North American footprint to 5.4 million users in Canada and 3.4 million users in the U.S. Our omnichannel strategy is about giving customers the advice they need to feel more confident about their financial future. That's the promise behind the TD shield and it’s a message that is being heard loud and clear. This quarter, TD was named number one brand in Canada, and the 13th most valuable banking brand globally according to Brand Finance. Our brand promise is a commitment we take seriously in each of our businesses. I'll turn to them now. Canadian retail delivered earnings of $1.8 billion this quarter. We saw a strong volume growth, offset by continued normalization of credit provisions, as well as higher expense growth as we continue to invest in our business, including adding nearly 1500 advisors and customer-facing colleagues across our businesses. By the second half of the year, we expect the rate of expense growth to moderate given that the dollar level of expenses is now stabilized. We continue to make significant progress winning more customers, helping them get to yes faster and making it more personal through our focus on end-to-end journeys and omnichannel platforms. In personal and commercial banking, our future-ready branch transformation strategies are equipping our frontline teams with the resources and training to support more advice conversations. And tools like Easy Apply, Homeowners’ Journey and TD Clari, are enabling customers to engage with us in their channel of choice. We’re seeing benefits in robust loan and deposit growth, including record resel originations in this quarter. We also continue to extend our leadership in the card space. Building on the successful realignment of our consumer card lineup over the last two years, we refreshed our suite of business cards this quarter, with features that provide customers with greater flexibility, like more affordable interest rate options, and ways to accelerate accumulation of reward points. We're also gearing up for the rollout of our TD Aeroplan cards, when Air Canada unveils its new loyalty program. We look forward to sharing more with you soon. Our wealth business recorded 7% earnings growth and 40% retail net asset growth as customers entrusted us with more of their business. For the second year in a row, TD Direct Investing won the top spot among Canadian banks in The Globe and Mail's annual ranking of online brokers, with TD WebBroker recognized for tools that help people understand how their portfolios are performing and how well they're doing relative to their financial goals. On the heels of last quarter's multiple wins at the Lipper Awards, TD Asset Management won 8 awards in multiple asset classes at The Fundata FundGrade A+ awards, demonstrating TD Asset Management's commitment to delivering exceptional long-term investment solutions for clients. In our insurance business, the investments we've made in our claims platform are paying off in top-line revenue growth and stronger share of voice, with gross written premiums up 15% and TD Insurance having the strongest brand power in Canada as determined by Millward Brown's latest BrandDynamics survey. Turning to the U.S.; our U.S. Retail Bank generated earnings of $717 million this quarter, up 2% from a year ago. A strong volume growth was offset by margin compression, as we absorb last year's three Fed rate cuts. With the contribution from TD Ameritrade down as expected following the elimination of trading commissions, segment earnings declined 7% to $869 million. While U.S. retail bank earnings growth was more subdued this quarter, we continue to add new households and grow core accounts. We are driving volume growth through our store network, as well as online and digitally. The Digital Mortgage offering we launched last fall is seeing increased take-up, and we've added a digital home equity functionality, accessible in desktop and mobile formats. Overall, across our North American retail businesses, the investments we are making to enhance our capabilities, improve our productivity and transform the bank for the digital age, are delivering tangible benefits for our customers today, while positioning us to serve them better in the future. Our Wholesale Banking segment had a strong quarter, with $281 million in earnings. Revenue was $1 billion on higher trading-related revenue and underwriting fees, as we continue to grow and up-tier banking and corporate lending relationships and take share in related product areas, reflecting investments in our US dollar strategy. Our Global Markets business performed very well, with broad-based strength across products and geographies. In the SSA space, a core area of strength for TD Securities, we led the debut Sterling benchmark bond issue for the World Bank's International Development Association arm. We also made further progress diversifying our US dollar investment grade DCM business, with several new corporate origination mandates this quarter, serving as bookrunner on Duke Energy Florida's $700 million 10-year Green Bond, and Deutsche Telekom's $1.25 billion 30-year benchmark transaction. Our Corporate and Investment Banking business had a solid quarter, with several key wins. Our flagship Canadian franchise was the sole advisor to Dream Global REIT on their CAD6.2 billion acquisition by Blackstone, signifying the trust we've earned with key clients in the industry. We acted as co-lead arranger and joint bookrunner on logistics, $300 million four-year revolving credit facility, enhancing our competitive position in the Montreal market. And we strengthened our North American real estate investment banking franchise, with the addition of a team from Kimberlite Group, a strategic real estate advisory and private capital raising firm based in New York, elevating the advisory capabilities, we can offer our North American real estate client base, across TD Securities and U.S. retail bank. We are off to a good start in fiscal 2020. As we said on our Q4 call, we expect full-year EPS growth to be moderate again this year. But the path there may be bumpy on a year-over-year basis given our 2019 quarterly EPS profile, and as we continue to absorb last fall's Fed rate cuts, and the higher level of expenses in our retail segments in the first half of this year. While macroeconomic conditions continue to fluctuate and emerging risks like the coronavirus are creating uncertainty and market volatility, we will remain focused on our strategy, harnessing the strength of our diversified model to grow our business and fulfill our purpose of enriching the lives of our customers, colleagues, and communities. We've had many opportunities to do that over the last quarter. In December, we announced the 10 grant winners of the TD Ready challenge. They received $1 million each for their work advancing medical innovations across North America and mitigating geographic, financial, and other barriers to healthcare. We just wrapped up our 10th Annual TD Black History Month series. This year, we sponsored nearly 100 events, celebrating music, arts, and culture across Canada and the U.S., providing a platform for leaders and artists to share their personal perspectives on the ongoing effort to build more inclusive communities. The diversity we celebrate in the communities around us is a reflection of who we are at TD. We were honored this quarter to be recognized for our unique and inclusive employee culture on several fronts, such as one of Canada's top employers for young people by Media Corp; one of Forbes' Best Employers for diversity in the U.S.; and a member of the Bloomberg Gender Equality Index for a fourth consecutive year. Our people are our greatest asset and the best ambassadors of the TD brand. I would like to thank all of them for their passion and dedication to make TD the better bank every day. With that, I will turn things over to Riaz. Riaz?

Riaz Ahmed, CFO

Thank you, Bharat. Good afternoon, everyone. Please turn to slide 7. This quarter, the Bank reported earnings of CAD3 billion and EPS of CAD1.61. Adjusted earnings were just under CAD3.1 billion, and adjusted EPS was CAD1.66. Revenue increased 6%, reflecting volume growth in the retail segments and record revenue in Wholesale. Provisions for credit losses increased to CAD919 million, up 3% from the prior quarter on higher impaired PCL. Expenses decreased 7% on a reported basis, reflecting prior charges related to the agreement with Air Canada. Adjusted expenses increased 5%, reflecting higher spend supporting business initiatives and volume growth, along with changes in pension costs, partially offset by continued productivity savings. Please turn to slide 8; Canadian retail net income was CAD1.8 billion, up 30% year-over-year, reflecting charges related to the Air Canada loyalty agreement a year ago. On an adjusted basis, net income decreased 2%, as revenue growth was offset by higher expenses, credit losses, and insurance claims. Revenue increased by 4%, primarily reflecting volume growth. Average loans grew 4%, and deposits increased 7% year-over-year, reflecting growth in both personal and business volumes, and wealth assets grew 10%. Margin was 2.94%, a decrease of 2 basis points from the prior quarter, reflecting seasonality and the impact of interest expense relating to lease liabilities recorded upon adoption of the IFRS 16 standard for leases. Total provisions for credit losses decreased 2% quarter-over-quarter, with decreases in both impaired and performing PCL. Total PCL as an annualized percentage of credit volume was 36 basis points, down 1 basis point quarter-over-quarter. Expenses decreased 15%, reflecting prior year charges related to the Air Canada agreement. On an adjusted basis, expenses rose 7%, reflecting higher spend supporting the business initiatives that Bharat described earlier, volume-driven expenses, and changes in pension costs, partially offset by a reduction in operating expenses resulting from the adoption of IFRS 16. U.S. retail net income was $869 million, down 7% year-over-year. The contribution from TD's Investment and TD Ameritrade decreased to $152 million, primarily reflecting reduced trading commission fee rates and higher operating expenses, partially offset by higher trading volumes. The U.S. Retail Bank reported earnings were up 2% year-over-year, reflecting loan and deposit growth, and a lower provision for income taxes, partially offset by lower deposit margins and higher PCL. Average loan volumes increased 5% year-over-year, reflecting growth in the personal and business customer segments. Deposit volumes, excluding the TD Ameritrade sweep deposits were up 7%, including 6% growth in core consumer checking accounts. Net interest margin was 3.07%, down 11 basis points sequentially, primarily reflecting lower deposit margins and the impact of interest expense relating to the adoption of IFRS 16. Total PCL, including only the Bank's contractual portion of credit losses in the strategic cards portfolio was CAD243 million, up CAD20 million from the prior quarter. The U.S. retail net PCL ratio was 59 basis points, up 4 basis points from the last quarter. Expenses were flat year-over-year, primarily reflecting higher employee-related and volume-driven expenses, partially offset by productivity savings and a reduction in operating expenses resulting from the adoption of IFRS 16. Segment ROE was 11.1%, Please turn to slide 10; net income for Wholesale was CAD281 million, an increase of CAD298 million from the net loss of CAD17 million recorded in the first quarter last year. Revenue was a record CAD1 billion reflecting higher trading-related revenue and underwriting fees, much improved from Q1 of last year, when the business experienced challenging market conditions. PCL decreased quarter-over-quarter, as a decline in performing PCL, reflecting migration from performing to impaired, more than offset higher impaired PCL. Expenses are CAD652 million, reflecting higher variable compensation, securities lending fees, and underwriting costs, consistent with increased revenues. Please turn to slide 11; the Corporate segment reported a net loss of CAD227 million in the quarter, compared to a net loss of CAD192 million in the first quarter last year. Reported net loss increased primarily due to a lower contribution from other items and non-controlling interests. Other items decreased, primarily reflecting a CAD43 million after-tax adjustment related to hedge accounting, which will be earned back over time, partially offset by higher revenue from other treasury and balance sheet management activities recognized in the current quarter. Adjusted net loss was CAD168 million compared with an adjusted net loss of CAD125 million in the first quarter last year. Please turn to slide 12; our common equity Tier 1 ratio was 11.7% at the end of the first quarter, down 37 basis points from the fourth quarter. We had organic capital generation this quarter, which added 35 basis points to our capital position and this was more than offset by RWA growth, the impact of IFRS 16 and the revised securitization framework and the repurchase of 4.2 million common shares in the quarter. The 34 basis points decline in CET1 attributable to RWA growth was primarily a reflection of volume growth, particularly in Wholesale banking, reflecting strong client activity. Our leverage ratio was 4%, and our liquidity coverage ratio was 137%. Effective this quarter, we increased CET1 capital allocated to the business segments to 10.5% from 10%. I will now turn the call over to Ajai.

Ajai Bambawale, Chief Risk Officer

Thank you, Riaz and good afternoon everyone. Overall, credit quality continued to be good across the bank's portfolios in the first quarter. Please turn to slide 13; gross impaired loan formations were CAD1.69 billion or 24 basis points, up 2 basis points quarter-over-quarter and down 2 basis points year-over-year. The quarter-over-quarter increase in gross impaired loan formations was primarily driven by borrower specific idiosyncratic events in the Wholesale segment. Please turn to slide 14 gross impaired loans ended the quarter at CAD3.2 billion or 45 basis points, up 2 basis points quarter-over-quarter and down 8 basis points year-over-year. The quarter-over-quarter increase in gross impaired loans was primarily reflected in the Wholesale segment. Please turn to slide 15; recall that our presentation reports PCL ratios, both gross and net of the partner's share of the U.S. strategic card credit losses. We remind you that credit losses recorded in the corporate segment are fully absorbed by our partners and do not impact the Bank's net income. The Bank's PCLs in the quarter were CAD923 million or 52 basis points, stable quarter-over-quarter and up 2 basis points year-over-year. Please turn to slide 16; the Bank's impaired PCL increased CAD69 million quarter-over-quarter, primarily driven by the Wholesale segment due to credit migration and the U.S. credit card portfolio, largely reflecting seasonal trends, partially offset by lower provisions in the Canadian commercial portfolio. In summary, credit quality continued to be good across the Bank's portfolios this quarter, and we remain well positioned for growth in our lending portfolios. With that operator, we are now ready to begin the Q&A session.

Operator, Operator

The first question is from Meny Grauman of Cormark Securities. Please proceed.

Meny Grauman, Analyst

Hi, good afternoon. Just wanted to ask about the margin outlook, definitely rate expectations are changing quickly, now looks like the market is pricing in three cuts in the U.S. and two in Canada. I'm wondering what the implications of that would be for your outlook on margins in U.S. and Canada?

Bharat Masrani, CEO

So Meny, I'll begin and then I'll hand it over to Teri. In the U.S., we are monitoring the situation as it unfolds. A month ago, there were no expectations for rate cuts in the near future, and we are still observing the changes. We've provided guidance for Q4 regarding the impact of potential rate cuts based on what we experienced during the three rate cuts at the end of 2019. We think the same principles will apply to any future rate cuts in 2020. Generally, we estimate that each 25 basis point cut could translate to about $90 million annually on the short end, and that has been consistent with what we've been seeing. Teri?

Teri Currie, Group Head Canadian Personal Banking

Sure. From a Canadian perspective, just in general, we're expecting downward pressure on margins. We built into our plan one cut, and so that's the starting point, and we would have thought downward pressure, the rate environment, RESL, in term competitive pricing and then IFRS 16, rounding out the reasons why. Our equivalent of the $90 million would be CAD150 million for a 25 basis point cut at the short end with an immediate effect.

Meny Grauman, Analyst

Thanks. And then just on capital, you talked about allocation to businesses from 10% to 10.5%, is that just reflecting the increased buffer, or is there something else there?

Riaz Ahmed, CFO

Well, it wouldn't be right to just relate it to the increased buffer, because obviously that is now sitting at 10.25%, but we just felt that as capital expectations are rising, that it's appropriate to increase the allocation to the business segments Meny.

Meny Grauman, Analyst

And just thinking through it in terms of sort of practical implications, can you just kind of talk to that? And if there is anything in terms of practical implications from that change?

Riaz Ahmed, CFO

No, I don't think so, because as you know, we look at capital at the top of the house and we've always been carrying this capital and simply make an allocation change, which essentially takes capital from the Corporate segment into the Business segment. So I think in terms of our business activity, there wouldn't really be any notable or material changes in how we run the businesses across the segments.

Operator, Operator

Thank you. The next question is from Ebrahim Poonawala of Bank of America. Please proceed. Your line is open.

Ebrahim Poonawala, Analyst

Good afternoon. Greg, I have a follow-up question regarding the U.S. margins. I noticed that your margin was $307 million in the first quarter, which is similar to the $308 million from 2015 before the Fed began raising rates. I'm trying to grasp why there has been such a significant change in the balance sheet mix, leading us back to where we were when the Fed maintained a zero rate. Also, it doesn't seem like you anticipate any improvement in margin defensibility with another rate cut. I would appreciate any insights on this.

Greg Braca, President and CEO, TD Bank

Sure. So you're taking us back a number of years now, five years or so, and as we've talked about, generally we're always commenting on the impact quarter-to-quarter, and what that looks like, or the changes that have been made over the course of the year. When you go back over four of five years as you would know, we've talked about this previously, there are many other inputs than just what the Fed funds rate would be. It would be a mix of the business. It's long-term rates, it's tracking and it's the general strategies of the business and that mix of the business. So there's a lot that's gone into that over the last four or five years. I would generally say that, over the last quarter, and over the last year the decline you've seen from the high, generally fits with what we've been calling out, and it really is playing out on the short end the way we would see it. And in the last quarter, quite frankly our quarter-over-quarter decline pretty much is in keeping with peers in the U.S. that we would have seen, especially if you consider the fact that we had one more month in this quarter versus their reporting cycle ending on December, for the last Fed cut.

Riaz Ahmed, CFO

Ebrahim, I think it's also worth pointing out, it's Riaz, I think quarter-over-quarter analysis that Greg was talking about, the adoption of IFRS 16 would have put a 4 basis point pressure on margin in the U.S. segment.

Ebrahim Poonawala, Analyst

Understood. That's helpful, and I get what you mentioned about the mix, but when I look back four years ago, your commercial book was still 42%. It's about 41% today. So, and maybe I can follow up offline to better understand the drivers of the mix change. I guess just moving to Canada Retail, we noticed a pretty decent slowdown in the HELOC growth and you've seen a pickup in I guess fixed rate residential mortgage growth. Just if you can talk about what's going on there and what implications that mix shift. Should we expect that trend to continue? Is that by design? And what that mean for the incremental margin?

Teri Currie, Group Head Canadian Personal Banking

For sure. Thanks. So if you look at the originations in Q1, the total portfolio had about 4.4% at a spot basis year-over-year growth, and the flex line growth would have been 4.5%, so just slightly higher. I think the other relevant statistic to your question is, all of the growth more than the growth of the portfolio. So, 5.6% year-over-year was the combination of mortgage and fixed HELOC. So what we are seeing is in a low rate environment customers taking the sort of decision to lock in. In terms of sort of HELOC overall, the slightly more than mortgage, that would still be the fourth place share that we've talked about in terms of hybrid HELOC mortgage and 96% of that origination is actually the TD Canada Trust customers. So, quite comfortable with what we're originating there. In terms of the sort of ongoing, how this will play out over time, every time we meet with the customer, we help them to make the right decision around the right product that meets their needs. And so, as the environment shifts, you could see some shifting in the mix.

Operator, Operator

Thank you. The next question is from Sumit Malhotra of Scotiabank. Please proceed.

Sumit Malhotra, Analyst

Thanks, good afternoon. Ajai, you were quite clear during the Q4 call regarding the provision ratio expectations for 2020, indicating around 50 basis points. I wanted to hear your thoughts, keeping in mind that it's still early, on how the COVID-19 virus is affecting economic growth predictions and business activity. Has this influenced your outlook for the bank's provisions this year? Additionally, does this pertain to the performing portfolio? Is there any alteration in the usual seasonal trends for credit card and auto portfolios regarding your visibility on that?

Ajai Bambawale, Chief Risk Officer

Yes. So let me start with COVID. So what I would say is, as you're aware, the situation is still playing out, certainly from a credit perspective, up to now we haven't seen any material business impact. We, however, continuing to monitor developments and really looking at different scenarios that could play out, so as of now, from a credit perspective, there is nothing in our forecast relating to PCL. We have however has been spending time on things like our employees and our customers and certainly the health and safety and business continuity. I think that's been quite important. So I'll come back to guidance. My guidance, which was in the neighborhood of 50 basis points subject to seasonality and subject to supportive economic conditions for now remains unchanged. And then your third question was about seasonality. So Q1, as you know, tends to be a high seasonal quarter, and if you look at the U.S. segment and the corporate segment on a combined basis, you will see an increase and that increase is largely because of seasonality. However, I do acknowledge the seasonality wasn't as much as we've seen in the previous years. And the reason for that is, we've actually taken some risk-reducing actions in those portfolios, and this is particularly U.S. cards. So, a bit of that is playing out.

Sumit Malhotra, Analyst

Thanks for that. The second question is for Riaz or Teri regarding the expense outlook for the Personal and Commercial Bank. Historically at TD, we've observed some seasonality at the beginning of the new year that usually resets the expense levels. You've mentioned the spending needed for the Aeroplan refresh and other project activities. I would like to inquire because there was a small restructuring charge taken, which is minor relative to TD as a whole. While it didn't affect this segment significantly, it appears that restructuring discussions are resurfacing in this sector. From your perspective, Riaz, are the restructuring initiatives now complete for the Bank, and can we expect the expense lines to reflect a more consistent run rate? Or is there a possibility that to finance some of your planned projects, additional structural cost reductions might be necessary?

Riaz Ahmed, CFO

Yes. There are a couple of things I would like to highlight in response to that question, Sumit. As I mentioned in Q4, at the bank-wide level, expense levels and growth have stabilized for four or five quarters, and this trend has continued into this quarter. We are pleased with the overall expense performance, and the growth in Q1 reflects the necessary investments we are making. Regarding seasonality, we have been actively working to reduce its impact on our expense profile and have made significant progress. What you are observing now is not primarily seasonal but rather related to the timing of when expenses are incurred. For instance, in Canadian Personal Bank, Teri discussed the increased investments in branch transformation and other initiatives from last year, which is resulting in expenses shown in Q3, Q4, and now in Q1, where we are stable again. In personal and commercial banking, we expect to see more moderate growth rates in expenses during the second half of the year. Concerning the restructuring charge, as I mentioned in Q4, this charge was not specifically tied to expense savings or productivity but relates to the ongoing optimization of processes and procedures we are developing during our transformation efforts, which will continue at the Bank. As technology evolves and we invest in the omni-channel delivery of our products and services, changes in the environment might lead us to reassess how we operate, occasionally resulting in restructuring charges.

Sumit Malhotra, Analyst

Last point though, and just to go back to something you said, the way I look at it expense growth on an all bank level year-over-year, this quarter was 5% and that's the same as we had in 2019, again, at least the way I look at it. Is that, in your view, a reasonable level for us to expect in terms of a run rate all Bank expense growth mark for TD?

Riaz Ahmed, CFO

I would say that it gives us sufficient envelope to make the investments that we feel that we need to make to continue to build on our leadership positions in the market.

Operator, Operator

Thank you. The next question is from Doug Young of Desjardins Capital. Please proceed.

Doug Young, Analyst

Hi, good morning. Regarding the CET1 ratio, I noticed on Slide 12 that there was essentially no organic internal capital generation this quarter when I examine internal capital generation and risk-weighted asset growth. I'm trying to understand if there was anything unusual about the increase in risk-weighted assets that might not persist. Looking at your growth in Canadian retail and U.S. retail, it didn't seem to be the cause. You mentioned Wholesale as well. I'm trying to get clarity on that. As we look ahead, has your perspective on TD's ability to generate internal organic capital changed?

Riaz Ahmed, CFO

Thank you for that question Doug. No, I think this particular quarter, the organic RWA deployment as you point out, is somewhat elevated. It isn't in my view and in my expectation, a run rate level of quarterly RWA investment, but from time to time, there are situations where we can take advantage of certain positions. So we have our normal client growth and then we have opportunities to increase investment every now and then. In this particular quarter, we had some very good opportunities to look at certain exposures and adjust them to increase our productivity on capital deployed.

Doug Young, Analyst

Can you elaborate on what those interesting opportunities were? Is this more of repo? Or is this just wanted to get a little more detail.

Riaz Ahmed, CFO

Yes. I think it's mostly in the Wholesale segment. And I don't think it's going to be particularly productive to point them out other than to say that there were some interesting opportunities for us to deploy some capital.

Doug Young, Analyst

Okay. And then just Capital Markets, there is a sizable new gross impaired loan formation. Just hoping to get a little bit more detail on what that related to. I think it was mentioned in idiosyncratic-related events that occurred in the quarter. Just hoping you could flesh that out a bit.

Ajai Bambawale, Chief Risk Officer

Yes, it's Ajai, I'll respond to that. We experienced three impairments in capital markets; two were related to the oil and gas pipeline and one to media. These were all unique incidents, and I don't see any overarching trend. Additionally, you may have noticed that we had already set aside part of the provision, which is why some of the performing provision is transitioning to impaired.

Doug Young, Analyst

Okay. You answered my other question. And then just Ajai, you talked about, you took risk-reducing actions in the U.S. on the U.S. card portfolio. Can you give a little more detail on that?

Ajai Bambawale, Chief Risk Officer

Yes, I can. So it's a combination of things. I'd say one is investment in collections. Second is just refining the Buy Box a little. So being more selective with clients. A third good example would be credit line decreases. So we did a combination of things on that portfolio.

Operator, Operator

Thank you. The next question is from Nigel D'Souza of Veritas Investment. Please proceed.

Nigel D'Souza, Analyst

I just have one quick question for you. If I could turn to your U.S. Retail segment, I noticed that the effective tax rate this quarter for that segment was, it's fairly low at about 4.5%. Could you just provide us some color on what's driving that lower effective tax rate this quarter? And how should we think about the run rate for your effective tax rate in U.S. Retail going forward?

Greg Braca, President and CEO, TD Bank

So, Nigel, thank you for the question. And as you would know that we take various estimates on our tax liabilities over several exposures and we'll regularly update the provision based on new information, resolution of tax matters, and changes in regulations. And these kinds of events would be fairly common quarter-to-quarter and we'll move around a little bit. In aggregate this quarter, they tended to all be favorable and at the same time, they all tended to be more significant of an impact for this quarter than would be typical in a usual quarter.

Nigel D'Souza, Analyst

And what run rate do you expect going forward for 2020 on that tax rate?

Greg Braca, President and CEO, TD Bank

Yes, I think it would be helpful to look at the normally quarterly run rate over the last year since tax reform was probably a good guide.

Operator, Operator

Thank you. The next question is from Gabriel Dechaine of National Bank Financial. Please proceed.

Gabriel Dechaine, Analyst

Question for Teri. OSFI in the recent speech talked about, they're taking a closer look at HELOCs and an issue with readvancable loans. Can you maybe tell me how you interpret that commentary, and what the TD, given the size of it, HELOC book, what exposure there might be? And how you see this issue playing out?

Teri Currie, Group Head Canadian Personal Banking

Thank you for the question. We are quite confident in our product design, which allows for 65% of the loan-to-value to be readvancable and up to 80% fixed. We will engage with OSFI during any consultations they may have regarding this issue. If we take a step back and examine our HELOC business, it has primarily served TD Canada Trust customers whom we are familiar with; 96% of our recent quarter's originations were from these customers, so we are very comfortable with the quality of our borrowers. When analyzing the specifics of the product over time, we have observed very little change in the actual utilization of these HELOCs. In fact, there was a slight decrease from the previous quarter in Q1 of this year and only a minimal increase year-over-year. Therefore, it is our responsibility to ensure that we are advising customers on the most suitable product for their needs and that they fully understand what they are purchasing from us. That is where we are focusing our efforts.

Gabriel Dechaine, Analyst

So you're not seeing any increased, I guess, stubborn levels of indebtedness? So people are actually paying off rather than as the LTV goes down and not tapping into it more?

Teri Currie, Group Head Canadian Personal Banking

So in Q1, 88% of HELOCs and 95% of total RESL would have been paying down principal in Q1 as an example just to give you a sense of how the book is operating.

Operator, Operator

Thank you. The next question is from Sohrab Movahedi of BMO Capital Markets. Please proceed.

Sohrab Movahedi, Analyst

Thank you. I have a couple of questions, starting with you, Bob Dorrance. The lending volume in your Wholesale Bank increased by about 13% year-over-year. Did the risk-weighted assets rise by a similar percentage?

Bob Dorrance, Group Head Wholesale Banking

No, they would not have increased by the same amount. The majority of that growth would still be in investment grade lending, which tends to involve a significant amount of revolving credit. We did experience good growth in risk-weighted assets, as Riaz mentioned. Some of this growth was in corporate lending, some in markets, and approximately two-thirds of our growth was driven by business activities, while the remaining third was influenced by regulatory changes.

Sohrab Movahedi, Analyst

Okay. And in the past, I think you had said that as far as the segment expenses CAD600 million or so quarterly is probably the new norm. That's still valid?

Bob Dorrance, Group Head Wholesale Banking

That's a good question, Sohrab. Last year, we operated at around CAD600 million for most of the year. As you remember, we faced a challenging first quarter last year, but our performance improved significantly in the same quarter this year. Consequently, variable compensation increased. The growth rates for those numbers will vary year-over-year due to last year's improving trend. Therefore, I wouldn't anticipate the same level of growth in variable compensation when comparing quarter-over-quarter or year-over-year. That should stabilize. There was an accounting change regarding the recognition of security lending fees and underwriting costs last year; they would have been a contra-revenue in the past but are now classified as an expense this year. When factoring in the rise in variable compensation along with this change, we would have remained roughly flat. However, there is some inflation. I anticipate no growth in full-time equivalents this year. We continue to invest significantly in systems projects related to ongoing regulatory changes. You can see that across all dealers on both sides of the border. While we aim to keep that pace appropriate, we are also focusing on productivity to support these initiatives. In summary, it may be slightly higher than CAD600 million per quarter, but if it is, it would be driven by revenue.

Sohrab Movahedi, Analyst

And if I could just sneak one more in for Ajai. Ajai, I think in the Canadian Retail risk discussion in the shareholder report, anyway you call out credit migration in auto portfolios. Can you comment a little bit about exactly what that is? And if that's going to have any bearing around future growth prospects for the portfolio?

Ajai Bambawale, Chief Risk Officer

So what's occurring is really that business is growing, so some of the credit migration is also linked to higher volumes. And then there are mix changes occurring as well. So there is more prime non-sub rented in that portfolio. So it's a combination of volumes and mix changes that are driving that. I remain quite satisfied with the book and the underwriting standards in that business.

Sohrab Movahedi, Analyst

And so, Teri, you're okay to continue to originate, I guess, with whatever risk standards there are? You can maintain that growth rate?

Teri Currie, Group Head Canadian Personal Banking

The business is continuing to drive good growth in that business. I think quite comfortable with the relationships that we've built in the business that we've done.

Operator, Operator

Thank you. The next question is from Darko Mihelic of RBC Capital Markets. Please proceed.

Darko Mihelic, Analyst

Hi, thank you. My question is for Teri. And it's just rather straightforward. I think we've had some discussion around elevated spend. I just wondered if you could maybe provide us a little more color on when you expect the revenue benefits from these initiatives and how quickly it ramps up.

Teri Currie, Group Head Canadian Personal Banking

Thank you for the question. I believe we are well positioned with the investments we are making in the business, addressing all of our customers' needs. Bharat mentioned some key investments like Air Canada and our future ready strategy, and Riaz touched on the expense implications, especially the increase from Q2 to Q3, followed by a stable pattern moving forward. We haven't discussed the PCL piece much, but looking back to 2019, we reached approximately CAD400 million in PCL levels, which will be a year-over-year headwind for this quarter and the next. On the revenue side, there was some softness this quarter due to our ongoing transformation under the future ready strategy. This has been a significant change in our business aimed at enhancing advice, boosting customer and colleague confidence, and meeting more customer needs. In late 2018, we gathered all branch managers from across the country for the first time, a move we didn’t make following the TD Canada Trust integration, to initiate substantial changes in roles and responsibilities in branches. We enhanced our performance ecosystem and invested in client-facing advisors. Bharat pointed out that we have nearly 1,500 additional FTE in Canadian Retail compared to last year, with growth mainly attributed to our future ready strategy. We are also investing in tools and training, adding new roles such as Senior Financial Advisors to develop capabilities and career progression for our top advisors. More district leaders have been introduced to improve coaching and support for our staff. This substantial change led to some initial softness in branch sales last year as colleagues adapted, which took time to reflect in revenue. Despite this, we ended the year with positive momentum in branch banking. In Q1, we saw record real estate secured lending originations up 22% year-over-year and a 21% year-over-year increase in credit card account sales. We introduced a multi-holding account capability and improved conversation tools for in-branch advisors, resulting in significant growth in Canadians opening RSP or TFSA accounts with us. Our broader investments in the cards business are starting to pay off, and we anticipate an increase in Air Canada Aeroplan cards in 2019, along with the program launching at the end of this year. I’m confident that the growing momentum in branch banking will benefit us moving forward. In addition, we have consistent real estate secured lending volume growth and strong core deposit growth at 6% in both the business and personal banks. Our digital banking capabilities also lead the market in Canada, with 7.65 million digital active users, 71% of whom are active on mobile. Digitally active users grew by 6% year-over-year, and over 6% of self-service financial transactions are now carried out via digital channels. We’re seeing an uptick in customers using our digital services, which have the highest engagement and ratings in Canada. With our investments in branches and the phone channel improving service levels, along with our top digital capabilities, we are well positioned for future revenue growth.

Darko Mihelic, Analyst

And is it fair to say then that this momentum is kicking in now, so I should be seeing it as early as next quarter?

Teri Currie, Group Head Canadian Personal Banking

I believe these initiatives require time to develop, but we are confident that you will see them reflected in our financial results later in the year. We anticipate, assuming there are no macroeconomic disruptions, a positive operating leverage in the second half along with continued mid-single digit growth in both loans and deposits.

Operator, Operator

Thank you. This concludes the question period. I will now like to return the meeting back over to Mr. Bharat Masrani. Please proceed, sir.

Bharat Masrani, CEO

Thank you, operator, and thank you all for joining us this afternoon. I want to express how pleased I am with our performance, especially considering the significant challenges we outlined for this coming year. To recap the earlier points made during the call, the reduced earnings from TD Ameritrade amounting to $300 million for this year will be recaptured once the Schwab deal is finalized, allowing us to begin realizing some of the synergies. Additionally, Greg mentioned the three rate cuts in the United States that occurred during our fiscal Q4. Given our sensitivity to rates, particularly in our U.S. operations, it's not unexpected that this poses a challenge for us. We are committed to investing in Canadian Retail, which is a crucial element of our strategy, and we are already seeing positive results from those efforts. Overall, I am very satisfied with how the Bank is performing as reflected in our volume metrics and customer engagement. I want to extend my gratitude to our nearly 90,000 colleagues worldwide for their dedication in serving all of our stakeholders, including our shareholders. Thank you, and I look forward to speaking with you again in 90 days.

Operator, Operator

Thank you. The conference has now ended. You can disconnect your lines at this time. Thank you for your participation.