Earnings Call Transcript - TD Q3 2020

Operator, Operator

Good afternoon, ladies and gentlemen. Welcome to the TD Bank Group Q3 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 Third 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 third quarter operating results. Ajai Bambawale, Chief Risk Officer, will then offer comments on credit quality. After which we will invite questions from prequalified analysts and investors on the phone. Also here to answer your questions today 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 Q3 2020 report to shareholders. With that, let me turn the presentation over to Bharat.

Bharat Masrani, CEO

Thank you, Gillian, and thank you, everyone, for joining us today. For the last six months, TD's 90,000 colleagues have worked tirelessly to keep the bank fully operational through the COVID-19 crisis, delivering for our 26 million customers when they needed us most. Whether working from home or at a TD location store or other location, their hard work and dedication has been inspiring. I'm very proud of their tremendous efforts, often under difficult circumstances, and I thank them for their contributions. TD is a bank but we are also a community. We care for each other and our customers. Six months into this crisis, our culture and our people remain among our most important advantages. They are what will see us through this period of turmoil, and I'm confident that they will enable us to emerge even stronger in the months ahead. COVID-19 has affected us all in ways none of us could have imagined. But over the last few months, it has become clear that some communities are being disproportionately impacted. To address this, TD has made important financial commitments and introduced new programs to support recovery and community resilience across our footprint. This includes allocating $10 million through the annual TD Ready Challenge to organizations developing innovative and measurable solutions to address the inequities exacerbated by the pandemic. We are also taking steps to confront more long-standing injustices. This quarter, anti-black racism and racism in all its forms moved to the forefront of the global conversation. In response, TD further elevated our long-standing commitment to the active advancement, promotion and celebration of inclusion and diversity within the bank and across society. We announced concrete targets and important initiatives to grow black, indigenous and minority executive representation, to invest in organizations that fight racism and promote inclusion, to introduce new training and development across the bank and to contribute directly to a future where everyone can try and achieve their goals. This past quarter, thousands of TD colleagues participated in virtual events to better understand the power of inclusion to elevate us all, to celebrate pride in indigenous history to join the effort and make a direct contribution. While we may be apart physically, we are, in many ways, closer than ever, stronger than ever. As a purpose-driven bank, this important work is fundamental to who we are, what we stand for and what we strive to achieve. Let me turn now to the current environment and our performance. TD entered this crisis from a position of strength, and through prudent financial and risk management practices, we remain well capitalized with a high-quality balance sheet and strong liquidity. This quarter, we saw encouraging signs of activity across our footprint as economies progress with reopening plans. People started to return to their workplaces. Firms stepped up hiring. Consumer and business spending picked up, and applications for loan deferrals have declined significantly. We know the route to recovery won't always be smooth. The unprecedented actions taken by the bank, our industry, governments, central banks and regulators have been critical in helping stave off a deeper crisis. And these measures cannot be sustained indefinitely, but they have served as a powerful bridge, sustaining households and businesses as the global search for a vaccine or effective treatment proceeds. The resumption in activity now underway attests to that. The longer-term outlook is still uncertain, and a measure of caution is warranted but so too is some cautious optimism given the positive signs we are seeing. As a bank and as a society, we must remain prudent but also flexible, ready to adapt in real time as the situation changes on the ground. That's exactly what we again did in Q3 and what we'll continue to do. Last quarter, I talked about how quickly we were able to reshape our operations to stay connected to our customers and support them through the depths of the crisis, thanks to the investments we've made and continue to make in technology, training and capabilities. Those investments proved their worth again this quarter as activity accelerated across our businesses. Digital applications have been enhanced with new features, self-service capabilities and other improvements, resulting in a continued high level of successful online and mobile transactions and engagements. In the U.S., we continue to process tens of thousands of small business loans under the PPP program in record time, helping support the backbone of the economy. Our new Canadian TD Ready Advice program is bringing personalized and timely digital content to millions of customers in real time. The advisers in our branches, in our TD Ready Advice center and on the phone are reaching out to customers to help them think through their financial options during this difficult period. TD Clari, our chatbot, is providing seamless, no-contact information to thousands of customers a week, freeing our TD bankers to provide crucial financial advice to those who need it most. And thousands of contact center colleagues are providing expert guidance, most enabled from home. We are also investing in the future. We continue to modernize our technology infrastructure, including migrating to the cloud to leverage its scalability, security and speed. We're also enhancing our customer- and colleague-facing applications to deliver better experiences for our customers in a more flexible and productive work-from-home environment for our people. As customers become more digitally enabled, we are working to increase the safety and security of customer-enabled data sharing through the launch of FDX in Canada and other ventures with industry participants. And we were delighted this month to introduce our updated suite of TD Aeroplan Visa cards following Air Canada's announcement of the new Aeroplan program. While we know it's early for many Canadians to be thinking about travel, we will be ready when they are. We are excited to deliver these new benefits which further differentiate our position as the number one credit card issuer in Canada. We also continue to invest in our people. Through future-ready in Canada and be legendary in the U.S., we are empowering our colleagues to provide customers with the advice they need to navigate these uncertain times with confidence. We're also investing in our colleagues' experience and career development, always central to TD's culture. This is important more than ever today. Where possible, we are helping our colleagues manage the demands of work and home life. And we are helping them develop their capabilities and advance their careers through redeployment opportunities as well as training through TD Thrive, our self-serve learning platform, which now has 60,000 users and for colleagues working at a TD location, branch or store, we continue to take precautions to protect their and our customers' wellbeing. Our financial results this quarter reflect these investments as well as the gradual economic reopening that is underway. In Q3, we delivered earnings of $2.3 billion and EPS of $1.25, much improved from last quarter as continued volume growth, moderating provisions for credit losses and strong wealth and wholesale revenue helped offset ongoing margin and fee pressure in our personal and commercial banking businesses. In addition, our CET1 ratio climbed 1.5% to 12.5%, lifted in part by the transition of our U.S. non-retail portfolio to AIRB. In Canadian Retail, we saw strong quarter-over-quarter earnings growth, led by our wealth and insurance businesses. Net asset growth, elevated trading activity and a fourfold increase in online account acquisition drove record wealth revenue. Insurance revenues climbed on a volume-driven premium growth and strong take-up of our enhanced digital capabilities, and we maintained good momentum in personal and commercial banking with strong volume growth on high levels of customer engagement and a continued acceleration in consumer spending and new account growth throughout the quarter as economies began to reopen. In the U.S., U.S. Retail bank earnings improved significantly from last quarter. We continue to work with our customers through this difficult period, and the results are evident in strong loan growth and peer-leading deposit growth. Together with flat expenses, this helped offset the impact of lower margins and fee income. At the segment level, TD Ameritrade made a strong contribution to earnings, buoyed by heightened trading activity. And we still expect the Charles Schwab transaction, which remains subject to certain conditions, to close this calendar year, making TD an important shareholder in an industry leader with the strength and scale needed to compete and grow in a highly competitive market. Wholesale Banking delivered record revenue of $1.4 billion and record earnings of $442 million this quarter on strong trading and client underwriting activity, including several marquee deals. We were Joint Bookrunner on Air Canada's $1.6 billion share offering and private placement of convertible notes. We also served as bookrunner on Verizon's $1.3 billion Maple issue as our U.S. dollar strategy continues to gain traction. And we built on our leadership in the SSA space, acting as joint lead manager on 8 U.S. dollar benchmark trades, including a 3-year $1 billion COVID-19 response bond to support the private sector in Latin America and the Caribbean, TD's first bookrunner role for IDB Invest. Our third quarter results reflect the resilience of our diversified business model and the power of our customer-centric strategy. Our model is a powerful enabler, allowing us to support customers through these volatile and uncertain times while continuing to make strategic investments to serve them even better in the future. I'll now turn it over to Riaz to review the numbers in more detail. Riaz?

Riaz Ahmed, CFO

Thank you, Bharat, and good afternoon, everyone. Please turn to Slide 8. This quarter, the bank reported earnings of $2.2 billion and EPS of $1.21. Adjusted earnings were $2.3 billion, and adjusted EPS was $1.25. Revenue increased 2%, reflecting volume growth across our businesses and record wealth and wholesale revenues partially offset by margin compression and lower fee income as a result of reduced customer activity in the personal and commercial banking businesses. Provisions for credit losses decreased by 32% quarter-over-quarter to $2.2 billion. The decrease was mainly attributable to lower performing PCLs, reflecting a smaller increase to performing allowance for credit losses this quarter. And expenses decreased 1% on a year-over-year basis. Please turn to Slide 9. Canadian Retail net income was $1.3 billion, down 33% year-over-year, reflecting higher credit losses, lower revenue and higher insurance claims. On an adjusted basis, net income also decreased 33%. Revenue decreased by 2%, reflecting lower margins, partially offset by volume growth and higher wealth and insurance revenues. Average loans rose 3%, reflecting growth in both personal and business volumes. Deposits rose 18%, reflecting double-digit growth in balances across all businesses. Wealth assets increased 4%, reflecting new asset growth and market appreciation. Margin was 2.68%, a decrease of 15 basis points from the prior quarter, reflecting lower interest rates. Total PCL decreased by 18% quarter-over-quarter, primarily reflecting lower performing PCL. And total PCL as an annualized percentage of credit volume was 0.86%, down 21 basis points quarter-over-quarter. Expenses are flat year-over-year on a reported and adjusted basis. Please turn to Slide 10. U.S. Retail net income was USD 490 million. The U.S. Retail bank net income was $260 million, down USD 487 million, reflecting higher PCLs and lower revenue. Average loan volumes increased 11% year-over-year, reflecting growth in the personal and business customer segments, including record mortgage originations. Deposit volumes excluding the TD Ameritrade sweep deposits were up 24%, including 25% growth in core consumer checking. And TD Ameritrade sweep deposits were up 37%. Net interest margin was 2.50%, down 43 basis points sequentially, primarily reflecting the impact of lower deposit margins and higher cash and deposit balances. Total PCL including only the bank's contractual portion of credit losses in the strategic cards portfolio was USD 655 million, down 20% from the prior quarter. The U.S. Retail net PCL ratio was 1.51%, down 52 basis points from last quarter. Expenses were flat year-over-year, reflecting productivity savings, partially offset by higher legal provisions and cost to support government programs. The contribution from TD's investment in TD Ameritrade was USD 230 million, up 5%, primarily reflecting higher trading volumes, partially offset by reduced trading commissions, lower asset-based revenue and higher operating expenses. Please turn to Slide 11. Net income for wholesale was $442 million, an increase of $198 million, reflecting higher revenue partially offset by higher PCL and higher expenses. Revenue was $1.4 billion, up 53%, reflecting higher trading-related revenue and higher underwriting fees. PCL was $123 million, down 67% from the prior quarter on lower impaired and performing PCL. Expenses were $669 million, up 13%, primarily reflecting a higher accrual for variable compensation. Please turn to Slide 12. The Corporate segment reported a net loss of $130 million in the quarter compared with a net loss of $173 million in the third quarter last year. The decrease primarily reflects the positive impact of tax items which are held in other. Adjusted net loss was $76 million compared with an adjusted net loss of $109 million in the third quarter last year. Please turn to Slide 13. Our common equity Tier 1 ratio ended the quarter at 12.5%, up 144 basis points from Q2. The primary driver of the increase was a decline in credit risk RWA, which added 92 basis points to capital this quarter. 72 basis points of those 92 was attributable to the transition of our U.S. non-retail portfolio from standardized to AIRB methodology. We were pleased to be able to bring forward this transition, which we had hoped to implement by year-end, into the third quarter. The remaining 20 basis points reflect lower volumes, reduced line usage and parameter updates. The U.S. non-retail AIRB transition, coupled with the increase in performing allowances this quarter, eliminated the expected loss shortfall capital deduction and created an expected loss excess which added to our transitional arrangement for expected credit loss provisioning. In aggregate, these contributed 31 basis points to our CET1 ratio. Other factors included a 15 basis point increase attributable to organic capital generation and an 11 basis point increase related to the issuance of common shares under our dividend reinvestment plan. With the increase in our capital ratio this quarter, the bank has decided that beginning with the dividend declared today and until further announcement, there will be no discount to the shares issued under our dividend reinvestment plan. Our leverage ratio was 4.4% this quarter, and our LCR ratio was 150%, both well above regulatory minimums. I will now turn the call over to Ajai.

Ajai Bambawale, Chief Risk Officer

Thank you, Riaz, and good afternoon, everyone. Please turn to Slide 14. Gross impaired loan formations were stable quarter-over-quarter at 23 basis points, primarily reflecting a decrease in the U.S. and Canadian consumer lending portfolios and the wholesale segment, driven by lower formations in the oil and gas sector, largely offset by higher formations in the U.S. and Canadian commercial lending portfolios. Please turn to Slide 15. Gross impaired loans ended the quarter at $3.8 billion or 51 basis points, up 4 basis points quarter-over-quarter, driven by the U.S. and Canadian commercial lending portfolios and the Canadian RESL portfolio, largely due to the cessation of enforcement activities to resolve impaired loans in response to COVID-19, partially offset by the impact of foreign exchange. Please turn to Slide 16. Recall that our presentation reports PCL ratios both gross and net of the partner 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 $2.19 billion or 117 basis points, decreasing $1.03 billion or 59 basis points quarter-over-quarter. Although PCLs have decreased across all segments quarter-over-quarter, PCL remains elevated from pre-COVID-19 levels primarily due to the ongoing pandemic. Please turn to Slide 17. The bank's impaired PCL decreased $138 million quarter-over-quarter, as reflected in the wholesale segment, largely driven by less oil and gas-related credit migration. Performing PCL decreased $894 million, reflecting a smaller increase to the allowance for credit losses this quarter. Please turn to Slide 18. The allowance for credit losses increased $1.3 billion this quarter, primarily related to higher performing allowances due to the impact of COVID-19 and incorporate our economic outlook for Canada and the U.S., reflecting a slower pace of recovery than forecast in the previous quarter. Our allowance for credit losses increased across all segments and all major asset classes, with the largest contribution by asset class reflected in the business and government portfolios across a broad set of industries. Over the past two quarters, in response to the COVID-19 pandemic, the bank has added $3.9 billion in allowance, increasing our allowance coverage by 50 basis points to 124 basis points. The potential for further changes to our allowance coverage will largely depend on the magnitude and duration of the ongoing COVID-19 pandemic. Please turn to Slide 19. Let me now take a moment to touch on the bank's deferral programs. Loan balances under bank-led deferred programs decreased $14 billion from the second quarter. Deferrals have been largely concentrated in our RESL, auto and commercial lending portfolios. From the inception of these programs, in March, deferral requests peaked in April and have been steadily declining since then. As expected, deferral programs and government stimulus have been effective in helping our customers manage through the pandemic to date. While it is too early to see any meaningful impairment in deferred populations, we will continue to monitor and assess them closely over the coming quarters as both the deferral and stimulus periods end. Now let me briefly summarize the quarter. We continue to operate through challenging and uncertain conditions given the unprecedented impact from the COVID-19 pandemic and have added allowances for credit losses accordingly. I'm satisfied with the bank's allowance coverage, which reflects our current economic outlook and our portfolio and geographic mix. To conclude, we remain well prepared to manage through these difficult times. With that operator, we are now ready to begin the Q&A session.

Operator, Operator

We have our first question from Steve Theriault from Eight Capital.

Stephen Theriault, Analyst

I want to start with a question on Canadian P&C expenses. Teri, I was looking back, and this is the first time, I think, I can see P&C banking, excluding the wealth and insurance component, has had expenses down or flat since way back in 2016. And clearly, these are extraordinary times, but can you give a bit of an outlook around how much you think you can or will or want to rein in expenses over the next few quarters? Is flat to down something we should contemplate here relative to the projects and the spend, I think, you want to undertake here over the next few quarters?

Theresa Currie, Group Head, Canadian Personal Banking

Super. Thanks a lot. Thanks for the question, Steve. So we have continued to manage our expenses quite actively and, I would say, prudently. And as you mentioned, for P&C, they were down sequentially and year-over-year despite actually absorbing COVID-related costs involving reward for our folks in the field as well as enhanced cleaning protocols and safety and security enhancements. I would say that we've talked about, over quite a period of time, the levers that are available to us. We will always invest for the future, and we will always invest to ensure that protect and comply requirements are met. And some of the levers that were available to us this quarter were some sequencing and prioritization of more discretionary activities as well as some marketing expenses that just didn't make sense in light of the context externally. We're not sort of in a position right now to give guidance because there's so much uncertainty going forward, but what I can tell you is we will continue to prioritize investments to ensure that we meet protect and comply, that we invest in our business strategies and that we also consider discretionary investments to build the business. But given many of the investments we've made in the past that we're leveraging, including our number one digital position in Canada, I feel pretty confident that we're in a pretty good place as we look forward.

Stephen Theriault, Analyst

Should we think about Q4 as in the past? We thought about it as a bit of a lumpy quarter in terms of expenses. Is that a headwind for this year at all?

Theresa Currie, Group Head, Canadian Personal Banking

So there are a lot of moving parts. If you go back to the beginning of the year, one of the things that I had commented on was the shape of our expenses last year in terms of first half, second half. And notwithstanding a lot has changed, including COVID, and we will still have some COVID expenses in Q4, just the nature of that first half, second half, probably we'd see a decent shape for expenses in Q4, all of the things being equal.

Stephen Theriault, Analyst

Okay. And just by way of quick follow-up, if I could. A very smaller than usual loss in Corporate. Riaz, I think you said that was driven by a tax item. Am I reading that right, that that's about $30 million this quarter?

Riaz Ahmed, CFO

That was the change in the expenses this quarter and would be about roughly right.

Operator, Operator

The next question is from Gabriel Dechaine from National Bank Financial.

Gabriel Dechaine, Analyst

I want to ask, Ajai, a couple of questions here on the credit stuff. First, $2.2 billion of provisions, about 60% of that is performing provisions, wondering if you can maybe ballpark. How much of the performing was due to model adjustments? And how much was due to management overlay or whatever we call it these days?

Ajai Bambawale, Chief Risk Officer

Yes. So thanks. Thank you for the question. If I look at the last two quarters, majority, and when I'm saying majority, it's very high. Over 85% of our performing allowance over the last two quarters is modeled. So the overlay is basically about 15%.

Gabriel Dechaine, Analyst

Over the past two quarters, so NAV about the same, no difference in the skew this quarter?

Ajai Bambawale, Chief Risk Officer

Well, I would say the overlays are coming down because there's more in the macro output.

Gabriel Dechaine, Analyst

Got you. And then wondering if you can quantify this for me. And you talked about what conditions need to arise for you to make adjustments to your ACL. Just wondering, what would your ACL look like? Or what kind of increase are we talking about if you were to shift 100% to the pessimistic scenario?

Ajai Bambawale, Chief Risk Officer

Yes. That's a good question, but that's not a number we would disclose. I think you know that our probability-weighted ACL is greater than our base ACL. And if you look at our numbers, that difference has actually increased, which is telling you we are putting greater weight than we have in prior quarters on our downside. And the additional data point I'm willing to share with you is that on the downside, we're actually using a W shape.

Gabriel Dechaine, Analyst

Okay. So your weighting on the downside is greater than you're weighting on the base case?

Ajai Bambawale, Chief Risk Officer

No, I'm saying my weighting on my downside has increased quarter-over-quarter.

Operator, Operator

The next question is from Meny Grauman from Scotiabank.

Meny Grauman, Analyst

I have a question regarding the ACL, which has increased to $9.2 billion. I'm curious about how much of this is influenced by models. In your opinion, what would be considered too high for the ACL? Is there a limit to this? Additionally, what coverage ratios do you typically prefer to examine? When I assess the situation, it seems like the ACL may be excessively high.

Ajai Bambawale, Chief Risk Officer

Yes. So on your second question, honestly I don't have a target coverage ratio. That's not the way we work. Like every quarter, we look at what the forward-looking scenarios are. We'll assess, we'll do a bottom-up assessment as well, we triangulate all the data and then we'll take a call as to what's most appropriate for our book of business. I think we don't know, we're in very uncertain times. The shape of the reopening, who knows what's going to happen? Things could plateau in a few months. So we're taking that into account. We're being appropriately prudent. Now with respect to overlays, like typically, I don't want to see too many overlays. I'd like to see it all in our modeled output. But you have to appreciate we are in unprecedented times. These models are trained on historical data that's quite different, okay? So there should be an expectation that we would use expert judgment and that we'll do an overlay, but over time, I expect the overlays to come down.

Meny Grauman, Analyst

Approaching it differently as a follow-up, it makes sense that some banks are more conservative than others. However, the question is whether there is something specific in your business that is contributing to increased concern that we might not be aware of. Is there a particular issue that is partly driving this conservatism?

Ajai Bambawale, Chief Risk Officer

Yes. Well, thanks for the question. So my answer is no. Our allowance reflects our geographic mix. It reflects our product mix and very importantly, it reflects the times we're in. And from my perspective, we are being appropriately prudent. So there's nothing more than that.

Operator, Operator

And the next question is from Ebrahim Poonawala from Bank of America Securities.

Ebrahim Poonawala, Analyst

I guess just first, I wanted to follow up on the comment you made about the weighting on the downside increased quarter-over-quarter. I get why that would be the case in the U.S., where things probably worsened a little bit since 2Q results. Could you tell us like what on the outlook for Canada or the Canadian economy deteriorated that would cause you to increase that weighting to the downside for the Canadian Retail segment?

Ajai Bambawale, Chief Risk Officer

Yes, it's a good question. Let me explain what's causing the numbers to rise. It's not just the downside scenario. Even our base case, which was previously weak, now shows a very gradual recovery. For example, in Canada, our unemployment rates are higher, our GDP figures are lower, and our Housing Price Index is also down. This is what's contributing to our increased allowance numbers. While there is some added emphasis on the downside, it's important to note that it's not solely the downside affecting our figures. We believe these are uncertain times, and it's necessary to be cautious, which is reflected in our economic outlook.

Ebrahim Poonawala, Analyst

Understood. And I guess a question around capital. Riaz, I guess CET1 jumped a significant bit. I guess as we look out, it seems like we should still see the capital ratios drift higher. And I saw a news headline talking about you trying to be opportunistic on M&A... So just talk to us around outlook on capital. And just from a management standpoint, are you ready if an opportunity were to come through over the coming months and to kind of pursue strategic M&A?

Bharat Masrani, CEO

Sure, Ebrahim. This is Bharat. I’d like to make a couple of points. You mentioned the CET1 at 12.5%, and historically, we believe that having strong capital is beneficial regardless of the situation. We are indeed observing some positive signs, such as gradual reopenings and a degree of normalization in certain areas where we operate. However, we also acknowledge that circumstances can change rapidly, whether due to a surge in infections or other factors like schools reopening. Thus, the bank is taking a prudent and cautious approach. In such conditions, maintaining robust capital levels is advantageous, and that aligns with TD's traditional operations. Now, addressing your question, this is an unprecedented crisis—though the term is often overused, it aptly describes our current environment. We firmly believe that before this situation concludes, opportunities will arise. If and when they do, we want to be prepared, just as we were during the global financial crisis and various downturns throughout our history. We aim to assess any compelling opportunities seriously and be ready to act if they align with our risk, return, timing, and cultural considerations. Our capital levels afford us that flexibility.

Ebrahim Poonawala, Analyst

And then, Bharat, just on that, TD has been a big believer in retail distribution, both sides of the border. Does the crisis and the adoption of digital among customers make you feel differently about bank M&A?

Bharat Masrani, CEO

It's hard to say. I think there are different angles to look at from an M&A perspective. I think our belief in distribution has been more omni oriented. I think this environment is showing that our view on omni rather than digital-only has turned out to be correct. I think every channel of ours, as long as we're providing those personalized connected and seamless experiences, they've served us well. And so I wouldn't want to totally discount bank M&A from it. I think our situation is such that we would look at any opportunity, but we would only do a deal that made sense from a risk and a financial and a strategic perspective.

Ebrahim Poonawala, Analyst

Got it. And Riaz, fair to assume that capital ratio lift higher from here, at least in the near term?

Riaz Ahmed, CFO

Yes. As I mentioned in our previous call, we have been transitioning our practices from standardized to advanced approaches for quite some time, and the U.S. non-retail portfolio was nearly the last significant portfolio to undergo this conversion. I believe we have completed that phase, and I anticipate that our capital from this point forward will more accurately reflect organic variables as well as any potential migration effects if conditions deteriorate.

Operator, Operator

The next question is from Sohrab Movahedi from BMO Capital Markets.

Sohrab Movahedi, Analyst

Two quickies. One, if I can just maybe ask Ajai. Maybe it's a bit of a redundant question, but in past calls, you've kind of reminded us that there is a seasonality in the provisioning levels with the cards partnership. And that tends to kind of have historically had spikes kind of towards the Christmas timeframe and coming out of it, so Q4 and Q1. I mean there's obviously lots and lots of reserves you put up here right now. But is there still going to be some seasonality we should be thinking about when it comes to the cards portfolio and your share of it going into Q4 and Q1 of next year?

Ajai Bambawale, Chief Risk Officer

Yes. So the simple answer is yes, Q4 and Q1. So you see the card PCLs buildup because of seasonality in Q4 and Q1. So you will see seasonality. But what you should also keep in mind is that card balances generally have come down. So the seasonal impact may not be as great as it was previously.

Sohrab Movahedi, Analyst

Okay. I have a question for Bob. The diversification benefits of your segment were quite helpful this quarter. Can you share your vision for the future of the business, including any additional resources you might need, such as personnel, expenses, or capital? What expectations do you want to set for us over the next couple of years?

Bob Dorrance, Group Head, Wholesale Banking

Thank you for the question. Over the last few years, we have focused our investments on our U.S. dollar strategy, which encompasses both the U.S. market and global transactions in U.S. dollars. This strategy has proven to be a sound investment, as evidenced by recent benefits. Our emphasis will remain on enhancing our U.S. dollar capabilities in areas where we can compete effectively and achieve strong returns. Notably, the corporate sector presents substantial opportunities, particularly in the U.S., where we have significantly expanded our corporate lending franchise. We're enhancing our presence in both investment-grade and non-investment-grade lending. The ongoing pandemic has enabled us to attract new clients and upgrade existing ones in corporate lending. Consequently, we've been able to increase our share of business in debt capital markets transactions, asset securitization, high-yield offerings, and foreign exchange hedging. Our approach involves integrating product lines with client relationships. Globally, there are many opportunities on the government side as well. We have significantly developed our SSA business in U.S. dollars and hold a top five market share in that area. With increasing financing needs within government sectors, we anticipate continued opportunities not just in SSAs but also at provincial and federal levels and with various agencies. We've also diversified beyond dollars, making significant strides in sterling and euro markets. Additionally, in our institutional client base, which includes hedge funds, real money investors, and central banks, we've broadened our product offerings to enhance both origination and client relationships, covering prime services, commodities, foreign exchange, and various structured products in the U.S. equity sector. We are committed to growing our franchise, focusing not only on hiring new talent but also on identifying synergies and productivity enhancements to support our initiatives. The digitization of many business opportunities has also increased productivity, providing us with more resources for investment. As we look ahead, we aim to continue expanding our franchise. While significant acquisition opportunities are limited in our market, we are continually adding teams and will explore further growth avenues, replicating our success in Canada, which remains a vital market for us.

Operator, Operator

The next question is from Paul Holden from CIBC.

Paul Holden, Analyst

I would like to hear your thoughts on the timing for potential loan impairments under your base case. From what we've heard from other banks, it seems that we will need to see the loan deferrals come to an end, which is expected around the end of Q4, and then possibly see impairments peak in mid-2021. Is that in line with your perspective? How are you assessing the timing of impairments?

Ajai Bambawale, Chief Risk Officer

Yes. Well, thanks for the question. As you know, both the deferral programs and all the stimulus provided either to corporations or to individuals, have been very beneficial. So I'm not seeing a lot of impairments in the near term. I think the impairments, to me, will pick up when some of the stimulus programs end. And in my judgment, that will be in 2021. I can't pinpoint a quarter, but my gut tells me it will be more the second half of 2021.

Paul Holden, Analyst

Interesting. Okay. And then second question would be with respect to Canadian Retail banking. I'm just wondering how you're viewing potential market share opportunities today across mortgages and other personal lending products. Given the COVID uncertainties, have you pulled back a bit in terms of appetite to gain market share or is it more steady course in terms of what you want to do from a market share perspective?

Bharat Masrani, CEO

Teri?

Theresa Currie, Group Head, Canadian Personal Banking

Thanks for the question. It's Teri. So I'll talk a little bit about RESL, and then maybe the business overall. So in this quarter, our sequential volume growth would have been third relative to our main competitors. I feel like, if I think about the quarter, we were competing in some sense with one arm tied behind our back. As of August 24, we have fewer branches open than three of our four top competitors, and I think we've been somewhat more conservative with our safe reopening. But having said that, by the end of September, we would have the majority of our branches open, all other things being equal as the environment shakes out over the next month. And so if I just step back and look at the RESL business, I feel really great about how we're positioned for growth. You may recall that in 2019, we implemented our future-ready strategy. And those distribution changes were an adjustment for our colleagues in branch banking in particular as they adjusted to the model and, in particular, the hand-off of more complex deals to the mobile mortgage specialists. But when we entered this year, we really saw an uptick, kind of 40% volume year-over-year increase pre COVID of branch banking activity. And so as we went into COVID with the flattening of the curve activities and the closure of the branches, we have seen branch originations come off a bit. And then for our mobile mortgage specialists, as we went into the COVID period, the change to have customers signing with mobile mortgage specialists required a little bit of setup. We quickly sort of got ourselves in a place where that capability was there, but that caused us a little bit of drag in the early part of the quarter. We really saw significant increases by July. And our third-party volumes were very strong in July, and our branch originations are picking up. So with the investments we've made in distribution, in operations, in automation, in training and with the network open, I feel like we're well positioned to grow the business. And our retention was very strong at 60 basis points in the quarter. From a risk perspective, because that was a component of your question, we continue to have grown this business kind of mid-single digits over a number of periods and have been able to do that within our risk policies and our risk appetite.

Operator, Operator

The next question is from Nigel D'Souza from Veritas Investment Research.

Nigel D'Souza, Analyst

I just have two questions for you. And the first, if I could turn to risk-weighted assets. I want to look at credit risk and drill down on asset quality. That was a benefit this quarter. I was wondering if you could speak to what drove that. I assume it's retail exposures. And maybe if you can provide any details of how that split between residential secured versus qualifying revolving credit.

Ajai Bambawale, Chief Risk Officer

Yes. So the asset quality improvement is really coming from two things. It's lower utilization of lines, so lower utilization. Part of it would show up under volume, but when you have low utilization, a piece of it shows up as, basically, quality because the probability of default is less. So a part of that benefit has been attributed to quality. And then the second part of that is we did update our non-retail PD parameter for '19 data. And as you know, '19 was relatively benign so we got some benefit from that. So overall, those two things sort of offset any credit RWA increase because of migration.

Nigel D'Souza, Analyst

Okay. So just a follow-up on that. Does that mean that the non-retail RWA updates are going to lag a bit through the cycle? Is that how we should interpret it? And the retail is going to be more sensitive on RWA? Or is there a different way to look at it?

Ajai Bambawale, Chief Risk Officer

Yes. So retail, I would say, does lag because what happens in retail is you've got to wait for the bureau scores to get updated, and that sort of feeds back into the RWA. The other thing that you have to keep in mind also is there's a charge-off retail much faster. So there's a bit of lag because of retail. I think the other very important point is that generally, the reg cap calculations are quite different than IFRS 9, right? IFRS 9 is forward-looking, it's more volatile because of macro factors, because of probability weights. RWA is all backward looking. It's a through-the-cycle view. And generally, that view, because it's through the cycle, it changes very slowly.

Nigel D'Souza, Analyst

Yes, that's very helpful. And just a last quick question, if I may, on your deferral book, specifically on small business and commercial. I know it's too early to talk about impairments, but could you maybe just provide some color on geographic mix and sector mix of that deferred book just so we have some insights on what the composition is?

Ajai Bambawale, Chief Risk Officer

Yes. So that deferred book on the commercial side, it really goes back to what are the impacted industries. And you'll notice we have a new slide, I believe it's Slide #29, where we sort of call out what the industries of focus are. And part of those industries of focus include commercial real estate, and there are some riskier segments within commercial real estate. For example, retail CRE, to the extent you have nonessential retailers on your rent rolls, there's some risk there. There's some risk associated with hotels, some with office CRE. The other segment I'd call out is just the retail segment, restaurants and again, coming back to nonessential retailers. Then there's transportation and within transportation, air transportation and cruise lines, though our exposure is fairly small there; a bit in health and social services as well. So then if I come back to deferrals and who took the deferrals, it's really along the lines of the impacted industries. So some of the biggest users of deferrals are in commercial real estate, are in retail because these are the sectors that are most impacted by COVID-19. I hope that helps.

Operator, Operator

The next question is from Scott Chan from Canaccord Genuity.

Scott Chan, Analyst

Just on the U.S. Retail side, I think in your opening remarks, you talked about record U.S. mortgage originations. And I was wondering if you could provide perspective on kind of the outlook on U.S. mortgages and perhaps on cards and autos, on how it's progressed through COVID.

Greg Braca, President and CEO, TD Bank

Sure. It's Greg, Scott. So thank you for the question. So first, I would just give you a little bit of a backdrop that over the last five plus months or so, we've definitely seen a slowdown in general activity starting in March and then progressing through various parts of the footprint in the U.S. Certainly, you saw a lot of slowdown in the Mid-Atlantic, in particular in New York, New Jersey and Pennsylvania markets, as those are the hot points for COVID. That would translate to lower card spend, lower retail credit line spend. And certainly, we saw that play out in the Mid-Atlantic states. As we got into late spring and then into early summer and through mid-summer, really the focus of the pandemic in the U.S. shifted to the Southeast, really down through the Carolinas and Florida. And you would have seen a lot of that slowdown where retailers, both large and small, consumer spending patterns would have slowed down, and you would have seen that while some of the more hard-hit markets earlier on were starting to reopen. On the mortgage front, the way that translates is with rates so low, you certainly saw a shift from a percentage from purchase volume to much more refinance volume, but what we're certainly seeing real time right now is record volumes that we're taking in right now for refinance and some purchase volume that is still holding up. There's a lot of activity right outside the major cities, the suburbs, and we're seeing really record activity up and down the footprint from Maine to Florida. As I said, so mortgages are up given what we've talked about, more muted growth than we've traditionally had over the last year or two in auto and certainly depressed card spend translating to less card balances. Does that get to what you wanted, Scott?

Scott Chan, Analyst

That's perfect. And maybe just a follow-up on that. Just on margin, on the U.S. side, down 43 bps quarter-over-quarter. Can you maybe kind of talk about the outlook there? Has it bottomed? And then maybe from the Canadian perspective as well.

Greg Braca, President and CEO, TD Bank

All right. Let me start, and then I'll turn it over to Teri. You correctly pointed out the decrease of 43 basis points quarter-over-quarter and 77 basis points year-over-year. The quarter-over-quarter number reflected some delay, as LIBOR did not drop immediately with the 150 basis points rate cuts implemented in March. At that time, credit spreads in the market were still widening due to various factors. By the time we reached Q3, LIBOR spread returned to more normalized levels, aligning more closely with where Fed funds were and emphasizing our own margins, which can be observed. Additionally, we experienced strong deposit growth. In assessing the quarter-over-quarter and year-over-year perspectives, we find that it's about rates, but also about the volume and mix of the business, as the volume we're receiving is being reinvested at much lower rates than traditionally seen. That's the overall perspective. We are not providing an updated outlook due to a lot of uncertainty in the upcoming quarters. However, given the current long rates, there may be some further pressure on margins as we look ahead.

Theresa Currie, Group Head, Canadian Personal Banking

And it's Teri. Just to pick up on the similar theme. About half of the rate cuts would have worked their way through in Q2, and they've been fully worked through in Q3. There will be still downward pressure in the near term. Lower cards in the asset mix would be one contributor to that. And then over time, tractor repricing will play a role. But a lot of moving parts, but certainly more modest compression, we would think.

Operator, Operator

The next question is from Gabriel Dechaine from National Bank Financial.

Gabriel Dechaine, Analyst

I forgot how to retract my question. I don't need to ask anything.

Ajai Bambawale, Chief Risk Officer

Okay. Good to hear from you, Gabe.

Operator, Operator

In that case, there are no more questions in the queue. At this time, I would like to turn the meeting over back to Mr. Bharat Masrani for closing remarks.

Bharat Masrani, CEO

Thank you for joining us this afternoon. Overall, I'm quite pleased with how the quarter has turned out, especially given the challenging environment we are all facing. Our performance has been strong, and our businesses are meeting expectations. We also have robust capital levels, which is beneficial for the bank. Overall, I am very satisfied with our progress, especially in relative terms. Although, with the current conditions, no one is truly happy. I hope that in the next 90 days, we will be in a better situation. I would like to take this opportunity to thank my colleagues at TD worldwide. They have done an exceptional job adapting to a difficult environment and have been committed to serving our customers and communities. A big thank you to the 90,000 TD bankers across the globe. Your daily efforts make us proud. Thank you for joining us today, and we look forward to our next discussion in 90 days. Thank you very much. Goodbye.

Operator, Operator

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