Earnings Call Transcript
TORONTO DOMINION BANK (TD)
Earnings Call Transcript - TD Q1 2023
Operator, Operator
Please standby, your meeting is about to begin. Good afternoon, everyone. Welcome to the TD Bank Group Q1 2023 Earnings Conference Call. I would now like to turn the meeting over to Ms. Brooke Hales. Please go ahead, Ms. Hales.
Brooke Hales, Investor Relations
Thank you, Operator. Good afternoon. And welcome to TD Bank Group’s first quarter 2023 investor presentation. Many of us are joining today’s meeting from lands across North America. North America is known as Turtle Island by many indigenous communities. I am currently situated in Toronto. As such, I would like to begin today’s meeting by acknowledging that I am on the traditional territory of many nations, including the Mississaugas of the Credit, the Anishnabeg, the Chippewa, the Haudenosaunee, and the Wendat Peoples, and is now home to many diverse First Nations, Métis, and Inuit Peoples. We also acknowledge that Toronto is covered by Treaty 13 signed with the Mississaugas of the Credit and the Williams Treaties signed with multiple Mississaugas and Chippewa bands. We will begin today’s presentation with remarks from Bharat Masrani, the Bank’s CEO. After which Kelvin Tran, the Bank’s CFO, will present our 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 Michael Rhodes, Group Head, Canadian Personal Banking; Paul Douglas, Group Head, Canadian Business Banking; Raymond Chun, Group Head, Wealth Management and Insurance; Leo Salom, President and CEO, TD Bank, America’s Most Convenient Bank; and Riaz Ahmed, Group Head, Wholesale Banking. Please turn to slide two. 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 factors or assumptions were applied in making these forward-looking statements. Any forward-looking statements contained in this presentation represent the views of management and are presented for the purpose of assisting the Bank’s shareholders and analysts in understanding the Bank’s financial position, objectives and priorities and anticipated financial performance. Forward-looking statements may not be appropriate for other purposes. I would also like to remind listeners that the Bank uses non-GAAP financial measures, such as adjusted results, to assess each of its businesses and to measure overall Bank performance. The Bank believes that adjusted results provide readers with a better understanding of how management views the Bank’s performance. Bharat will be referring to adjusted results in his remarks. Additional information on items of note, the Bank’s use of non-GAAP and other financial measures, the Bank’s reported results and factors and assumptions related to forward-looking information are all available in our Q1 2023 report to shareholders. With that, let me turn the presentation over to Bharat.
Bharat Masrani, CEO
Thank you, Brooke, and thank you everyone for joining us today. To start, I want to express that our thoughts are with all those impacted by the devastating earthquakes in Turkey and Syria, including our colleagues, customers and communities with deep ties to these two countries. TD has contributed directly to relief efforts and enabled customers to do so as well through branches and online. Together, a collective effort can make a difference and provide some comfort during these terrible hardships. It’s been a busy week and before I review our strong quarter and start to the fiscal year, I would like to provide a few strategic updates. As you know, on February 9th, we mutually agreed with First Horizon to extend the close date to May 27th as provisioned in our contract. Since then, we have come to believe that the deal is not expected to receive regulatory approval in time to close the transaction by that date. Regulatory approval is not within the Bank’s control. So we are doing what is prudent and appropriate. We have opened discussions with First Horizon about a potential additional extension. I cannot speculate on when we will receive approval. I can tell you that we are fully committed to the transaction. We have a robust community benefits plan in place with broad community support across our combined footprint and our teams have made progress on integration plans. This is a great transaction that offers scale and new capabilities to our U.S. franchise. We made another unrelated announcement earlier in the week regarding the Stanford matter. The settlement we announced allows us to avoid the distraction and uncertainty of a long legal proceeding and is in the best interest of shareholders and the Bank. And of course, yesterday, we closed the Cowen transaction. TD Securities and Cowen are a powerful combination, accelerating our U.S. growth strategy and helping to create an integrated North American dealer with global reach. The acquisition of Cowen adds key capabilities to our growing global markets platform in U.S. equity sales and trading and in U.S. equity research. It also adds scale and industry expertise across U.S. capital markets and M&A advisory. Congratulations to everyone on this important milestone and a very warm welcome to our over 1,500 new colleagues. I know I speak for Riaz and all of TD securities when I say we are very excited for what we will accomplish together. Let me now turn to our first quarter performance. TD delivered a strong Q1. Earnings increased 8% to $4.2 billion and EPS rose 7% to $2.23. Revenue grew 16% year-over-year, reflecting margin expansion, strong volume growth and our diversified business mix. We took advantage of this environment to continue to invest in our business to drive future growth, while delivering robust operating leverage. As expected, we saw some credit normalization this quarter, but credit performance remained strong overall, supported by consistent and disciplined underwriting practices. TD CET1 ratio ended the quarter at 15.5% or 15% pro forma for the closing of the Cowen acquisition. With TD’s strong internal capital generation capabilities and the various capital levers available to the Bank, we continue to expect TD CET1 ratio to be comfortably above 11% post-closing of the First Horizon transaction. These strong results are matched by a brand that is second to none. TD was recently named one of the 2023 Global Top 50 Most Valuable Brands by Brand Finance earning the highest ranking in Canada. Across our distribution channels, the Bank delivers personalized connected legendary experiences. For the ninth consecutive year, the TD mobile app had the highest number of monthly active mobile users among Canadian banks according to mobile analytics firm, data.ai. Let me now turn to each of our businesses and review some highlights from Q1. Our Canadian Personal and Commercial Banking segment delivered record earnings of $1.7 billion, reflecting revenue growth of 17% and significant positive operating leverage. The Personal Bank continued to demonstrate momentum, with sales of our everyday banking products up over 20% year-over-year and industry-leading market share gains in non-term deposits again this quarter, driven by strength in branch banking. We saw a record Q1 acquisition in the New to Canada customer segment and announced an exclusive strategic relationship with CanadaVisa, one of the leading online sources of Canadian immigration information with over 2 million monthly visits. Through this relationship, TD will help support newcomers as they navigate financial services while settling into their lives in Canada. We also had record Q1 credit card spend, an organic loan growth driven by a rebound in travel and our compelling TD Aeroplan offering, coupled with our best ever quarter for digital acquisition for TD cards. In our real estate secured lending business, our teams delivered robust retention rates and enhancements in mobile mortgage specialist productivity despite a softening housing market. The Business Bank achieved double-digit loan growth for the sixth consecutive quarter and we were proud to collaborate with the Federation of African Canadian Economics to help black business owners in their entrepreneurial journeys, enabling them to access capital and scale their businesses. Turning to the U.S. Our U.S. Retail Bank delivered record earnings of US$1 billion, reflecting revenue growth of 27% and significant positive operating leverage. With the contribution from our investment in Schwab of US$222 million segment earnings were US$1.2 billion. This quarter, enabled by our investments in event streaming technology, TD launched deposit balance thresholds alerts, the first of several self-service alerts that will further enhance customer convenience and experience. We delivered strong loan growth year-over-year, led by 18% growth in mortgages and 9% growth in cards; personal loans were up 11%. And TD demonstrated continued momentum in the middle market and C&I space, with business loans up 9%, excluding PPP loan forgiveness. Finally, this quarter, we were proud to announce a 20-year extension of our agreement with Delaware North, keeping Boston’s beloved landmark arena named as TD Garden to 2045. Our Wealth Management and Insurance segment earned $550 million this quarter. Revenue was up 4% as higher insurance volumes and the benefit of higher interest rates helped offset a challenging market environment. In TD Direct Investing, we took the number one spot in the Globe and Mail’s annual ranking of digital brokers and increased market share of new account acquisition quarter-over-quarter. In TD Asset Management, TD regained its position as the number one money manager for Canadian pension assets and widened its lead versus competitors as the number one Canadian institutional asset manager. Highlighting the breadth of our capabilities, several TD Asset Management ETFs and mutual funds across equities, fixed income and balanced funds were recognized this quarter with funds Grade A+ awards. On the insurance side, our expansion into small business insurance will launch in the coming months. As the number one direct-to-consumer insurer in Canada, this is a natural extension for us to leverage our expertise to deliver exceptional insurance experiences for small business owners. In our Wholesale Banking business, we delivered net income of $347 million, with revenues roughly flat year-over-year. The impact of lower underwriting and trading revenues was offset by higher global transaction banking and lending revenues as we continue to support our clients through market cycles. This quarter, TD Securities acted as financial adviser to GIC and Dream Industrial REIT on their acquisition of Summit Industrial Income REIT. Our wholesale banking team also acted as a joint book runner on the Government of Canada’s $500 million Ukraine-sovereignty bond to assist the Government of Ukraine in providing essential services to Ukrainians and restoring energy infrastructure. And as I mentioned earlier, Cowen is now part of TD Securities, with robust integration plans in place, work is already underway to tap the combined strengths of the business and extend our competitive advantage in the market. Guided by our purpose, TD is committed to creating value for all our stakeholders. I am proud that the Bank was listed in the DJSI World Index for the ninth consecutive year. TD is one of six banks listed in the DJSI North American Index and the only North American Bank included in the World Index. The Bank was also recently recognized with the top 10% S&P Global ESG score again, standing out from its peers as the only North American Bank to be listed in the top 10%. And TD Bank, America’s most convenient Bank was recognized as one of America’s best employers for veterans by Forbes for the third consecutive year. This recognition is a reflection of our commitment to the communities we serve. Earlier this week, as part of the TD Ready Challenge, we were pleased to announce a total of $10 million in grants to 10 non-profit and charitable organizations that are working on solutions to help those who may be disproportionately affected by climate change and the transition to a low carbon economy. Later this month, TD will release its 2022 ESG reporting suite, including our climate action plan. We are excited to share the outcomes of a year of effort and accomplishments by thousands of dedicated TD colleagues who transformed our aspirations into action. Our TD bankers continue to deliver for all of our stakeholders and it is a privilege to work alongside them every day. I would like to thank them for all they do to make TD the better Bank. I will end by noting that this is Paul Douglas’ last earnings call as Group Head, Canadian Business Banking. Barbara Hooper will assume leadership of this segment. Barbara’s almost 47-year TD career is filled with remarkable achievements and success. He and his team have built one of Canada’s premier business banks known across market for their dedication to their customer. Paul has also built the best team of business bankers in the country and leaves behind a tremendous bench of talent that will continue to drive growth. I have known Paul throughout my entire time at TD. I want to thank him for his partnerships, support and significant contributions to the bank’s success over many decades. Paul will assume a newly created position as Chair, Canadian Business Banking and will also serve as a special advisor to me. Congratulations to Paul and I look forward to continuing to benefit from his wise counsel as we build for the future. With that, I will turn things over to Kelvin.
Kelvin Tran, CFO
Thank you, Bharat. Good afternoon, everyone. Please turn to slide 11. For Q1, the Bank reported earnings of $1.6 billion and EPS of $0.82, down 58% and 59%, respectively. Reported earnings include the Stanford litigation settlement, a net loss from mitigation of impact from interest rate volatility to closing capital on the First Horizon acquisition and the recognition of a provision for income taxes in connection with the Canada Recovery Dividend and increased Canadian federal tax rate for fiscal 2022. Adjusted earnings were $4.2 billion and adjusted EPS was $2.23, up 8% and 7%, respectively. Reported revenue increased 8% and includes a net loss for mitigation of impact from interest rate volatility to closing capital on the First Horizon acquisition. Adjusted revenue increased 16%, reflecting margin and volume growth in the Personal and Commercial Banking businesses and the impact of FX translation. Provision for credit losses was $690 million, compared with $72 million in the first quarter last year. Reported expenses increased 39%, primarily reflecting the Stanford litigation settlement and higher acquisition and integration-related charges. Adjusted expenses increased 11%, driven by higher employee-related expenses, the impact of FX translation, and higher spend supporting business growth. On our Q4 call, I noted that we expected adjusted expense growth, excluding FX to moderate in fiscal 2023 on a quarter-over-quarter basis. We saw that this quarter with adjusted expense growth moderating sequentially as we continue to prioritize our investments. Our goal of delivering positive operating leverage over the medium-term remains unchanged. Absent the retailer partners net share of the profits from the U.S. strategic card portfolio, adjusted expenses increased 10.4% ex-FX. Reported total Bank PTPP was down 26% year-over-year, primarily reflecting the Stanford litigation settlement. Consistent with prior quarters, slide 26 shows how we calculate adjusted total Bank PTPP and operating leverage, removing the impact of the U.S. strategic portfolio along with the impact of foreign currency translation and the insurance fair value charge. Adjusted total Bank PTPP was up 14% after these modifications. Please turn to slide 12. Canadian Personal and Commercial Banking net income for the quarter was $1.7 billion, up 7% year-over-year. Revenue increased 17%, reflecting higher margins and volume growth. Average loan volumes rose 8%, reflecting 6% growth in Personal volumes and 14% growth in Business volume. Average deposits rose 3%, reflecting 8% growth in Personal deposits and a 5% decrease in Business deposits. Net interest margin was 2.80% up 10 basis points compared to the prior quarter, primarily due to higher deposit margins, reflecting rising interest rates, partially offset by lower loan margins. While many factors can impact margins including the path of short-term rates, tractors on and off rates, customer activity, and competitive market dynamics, margins may bounce around quarter-to-quarter, we currently expect net interest margin expansion to moderate for the remainder of fiscal 2023. Total PCL of $327 million increased $98 million sequentially. Total PCL as an annualized percentage of credit volume was 0.25%, up 8 basis points sequentially. Non-interest expenses increased 10% year-over-year reflecting higher spend supporting business growth, including technology and employee-related expenses. Please turn to slide 13. U.S. Retail segment reported net income for the quarter was US$1.2 billion, up 17% year-over-year. Adjusted net income was US$1.2 billion, up 23% year-over-year. U.S. Retail Bank reported net income was US$955 million, up 18%, primarily reflecting higher revenue partially offset by higher noninterest expenses, including acquisition and integration-related charges for the First Horizon acquisition and higher PCL. U.S. Retail Bank adjusted net income was $1 billion up 26%, US$1 billion. Revenue increased 27% year-over-year, reflecting higher deposit margins and loan volumes, partially offset by lower loan margins and deposit volumes, lower overdraft fees, and lower income from PPP loan forgiveness. Average loan volumes increased 9% year-over-year. Personal loans increased 11% reflecting strong originations, lower prepayments, and higher credit card sales volumes. Business loans increased 6%, reflecting strong originations, new customer growth, higher commercial line utilization, and increased customer activity, partially offset by PPP loan forgiveness. Excluding PPP loans, business loans increased 9%. Average deposit volumes, excluding sweep deposits, were down 2% year-over-year. Personal deposits were flat. Business deposits declined 4% and sweep deposits decreased 15%. Net interest margin was 3.29%, up 16 basis points sequentially as higher deposit margins, reflecting the rising interest rate environment were partially offset by lower loan margins and negative balance sheet mix. While many factors can impact margins, including the path of short-term rates, tractors on and off rates, customer activity, and competitive market dynamics, margins may bounce around quarter-to-quarter. We currently expect net interest margin expansion to moderate for the remainder of fiscal 2023. Total PCL was US$149 million, a decrease of US$20 million sequentially. The U.S. Retail net PCL ratio, including only the Bank’s share of PCL for the U.S. strategic cards portfolio, as an annualized percentage of credit volume was 0.34%, lower by 6 basis points sequentially. Reported expenses increased 22% and include acquisition and integration-related charges for the First Horizon acquisition. Adjusted expenses were up 16%, reflecting higher employee-related expenses, credit card growth-related expenses, and other business investments. The contribution from TD’s investment in Schwab was US$222 million, up 11% from a year ago, reflecting higher net interest income, partially offset by higher expenses, lower asset management fees, and lower trading revenue. Please turn to slide 14. Wealth Management and Insurance net income for the quarter was $550 million, down 14% year-over-year. Revenue increased 4%, reflecting higher margins and increase in fair value of investments supporting claims liabilities and higher insurance volumes, partially offset by lower volumes and lower transaction and fee-based revenue in Wealth. Insurance claims increased 29% year-over-year, reflecting the impact of changes in the discount rate, which resulted in a similar increase in the fair value of investments supporting claims liabilities reported in non-interest income, increased driving activity, and inflationary costs, partially offset by fewer severe weather-related events. Non-interest expenses were flat year-over-year, reflecting higher spend supporting business growth, including higher employee-related expenses and technology costs, partially offset by lower variable compensation. Assets under management decreased 3% year-over-year, reflecting market depreciation. Assets under administration decreased 3% year-over-year, reflecting market depreciation, partially offset by net asset growth. Please turn to slide 15. Wholesale Banking reported net income for the quarter was $331 million, a decrease of 24% year-over-year, reflecting higher noninterest expenses and PCL. Adjusted net income was $347 million, down 20% year-over-year. Revenue was $1.3 billion, largely unchanged year-over-year, reflecting lower trading-related revenue and underwriting fees, offset by higher global transaction banking and lending revenue. PCL for the quarter was $32 million, an increase of $6 million from the prior quarter. Reported expenses increased 16% and included acquisition and integration-related charges, primarily for the Cowen acquisition. Adjusted expenses increased 13%, reflecting continued investments in Wholesale Banking’s U.S. dollar strategy, including the hiring of banking, sales and trading, and technology professionals, higher severance and the impact of foreign exchange translation. Please turn to slide 16. The Corporate segment reported a net loss of $2.6 billion in the quarter, compared with a reported net loss of $227 million in the first quarter last year. The year-over-year increase primarily reflects the Stanford litigation settlement, a net loss from the mitigation of the impact from interest rate volatility to closing capital on the First Horizon acquisition, the recognition of a provision for income taxes in connection with the Canada Recovery Dividend, an increase in the Canadian federal tax rate for fiscal 2022 and higher net corporate expenses. Adjusted net loss for the quarter was $140 million, compared with an adjusted net loss of $127 million in the first quarter last year. Please turn to slide 17. The common equity Tier 1 ratio ended the quarter at 15.5%, down 69 basis points sequentially. We had strong internal capital generation this quarter, which added 42 basis points to CET1. This was more than offset by an increase in RWA net of FX, which decreased CET1 by 62 basis points. We saw a 14 basis point increase in CET1 related to the issuance of common shares under our dividend reinvestment plan. Relating to the First Horizon acquisition, a net loss from the mitigation of the impact from interest rate volatility to closing capital decreased CET1 by 13 basis points and an FX hedge decreased CET1 by 6 basis points. Previously announced regulatory changes also impacted our CET1 this quarter. We saw a 16-basis-point decrease in CET1 related to the Canada Recovery Dividend and an 8-basis-point decrease related to the elimination of the transitional arrangements for expected credit losses. Finally, the previously announced Stanford litigation settlement decreased CET1 by 23 basis points this quarter. RWA, including FX, increased 2.8% quarter-over-quarter, reflecting higher credit risk RWA. Credit risk RWA increased $16.8 billion or 4%, mainly reflecting higher volumes, asset quality reflecting further credit normalization and parameter updates, and methodology changes in preparation for Basel III reforms. Market risk RWA decreased $3.4 billion or 15%, reflecting lower exposures and tightening credit spreads. The leverage ratio was 4.8% this quarter and the LCR ratio was 141%, both well above published regulatory minimums. I will now turn the call over to Ajai.
Ajai Bambawale, Chief Risk Officer
Thank you, Kelvin, and good afternoon, everyone. Please turn to slide 18. Gross impaired loan formations increased by 2 basis points to 16 basis points quarter-over-quarter, driven by Canadian Commercial Banking, primarily related to a new formation in the health and social services sector and some further normalization of credit performance, largely reflected in the Canadian and U.S. consumer lending portfolios. Please turn to slide 19. Gross impaired loans were stable quarter-over-quarter and remained at cyclically low levels. Please turn to slide 20. Recall that our presentation reports PCL ratios, both gross and net of the partner share of the U.S. strategic card PCLs, we remind you that U.S. card PCLs recorded in the Corporate segment are fully absorbed by our partners and do not impact the Bank’s net income. The bank’s provisions for credit losses increased 3 basis points quarter-over-quarter to 32 basis points. The increase was largely recorded in the Canadian Personal and Commercial Banking segment. Please turn to slide 21. The Bank’s impaired PCL was $553 million, an increase of $99 million quarter-over-quarter and primarily related to some further normalization of credit performance largely reflected in the consumer lending portfolios. The Bank’s current quarter impaired PCL rate remained well below 2019 levels. Performing PCL of $137 million this quarter was largely recorded in the Canadian Personal and Commercial Banking and Wholesale Banking segment. Please turn to slide 22. The allowance for credit losses increased by $113 million quarter-over-quarter, reflecting volume growth and credit conditions, including some deterioration in the economic outlook, partially offset by the impact of foreign exchange. The Bank’s allowance coverage remains elevated to account for ongoing uncertainty relating to the economic trajectory and credit performance. In summary, the Bank’s credit performance was strong again this quarter. However, as anticipated, key credit metrics continue to rise from cyclically low levels experienced last year with this trend, most evident in the consumer lending portfolios. Looking forward, while results may vary by quarter, I continue to expect total PCLs to be in the range of 35 basis points to 45 basis points in 2023 as credit performance continues to normalize and we progress along the economic path. TD remains well positioned given we are adequately provisioned, we have a strong capital position and we have a business that is broadly diversified across products and geographies. With that, Operator, we are now ready to begin the Q&A session.
Operator, Operator
Thank you. The first question is from Meny Grauman from Scotiabank. Please go ahead.
Meny Grauman, Analyst
Hi. Good afternoon. A few questions on First Horizon, Bharat, you addressed it in your opening comments in terms of renegotiating of the contract and I am just wondering what extension data are you looking for, for that new contract?
Bharat Masrani, CEO
Meny, we have just started those conversations. I think it’s premature for me to give you any specific dates. We are thinking through as to what might be appropriate and when the timing is right, we will certainly let you know.
Meny Grauman, Analyst
And just as a follow-up to that, as a result of these negotiations, could the purchase price change, is that something that is a potential?
Bharat Masrani, CEO
Well, we have just initiated the negotiations, and once the negotiations are finalized, we will be sure to give you further details.
Meny Grauman, Analyst
Okay. And then just a final one on the same topic, just wondering about the nature of the delay, given that the fact that the commentary that we are hearing comes so soon after the contract was extended to the end of May. So I am wondering, is the issue a procedural issue or is it something more substantive? How would you sort of describe the delay as you see it?
Bharat Masrani, CEO
We are very excited about this transaction and have been working hard on it. Our planning for integration is ongoing, and we have established an integration management office. Recently, we announced our community benefit plan, which is important for the communities where we operate. We are enthusiastic about what this transaction means for our U.S. franchise. Regarding the timing, I can only reiterate what I mentioned earlier. We extended the deal until May 27th, but we believe we will not be able to close the transaction by that date. Therefore, I have begun discussions about an extension with First Horizon.
Meny Grauman, Analyst
Okay. Thank you very much, Bharat.
Operator, Operator
Thank you. The next question is from Doug Young from Desjardins Bank Capital Markets. Please go ahead.
Doug Young, Analyst
Hi. Good afternoon. Just a few related questions. I mean, TD had negative organic capital generation this quarter about negative 20 basis points. So just a few items I just want to get some clarity on and hoping you can dig into the asset quality drag of 21 basis points. Is that just normal migration or can you kind of elaborate?
Ajai Bambawale, Chief Risk Officer
Yeah. It’s Ajai. So let me take asset quality. You would have noticed the increase there is $6.8 billion and there are really two drivers of that. One is normal cost non-retail parameter updates that were made and we make these annually. So we actually put it through in Q1. And then the second driver is credit normalization, and as I said in my prepared remarks, that credit normalization is occurring largely in the consumer portfolios, both Canada and the U.S. Hopefully, that...
Doug Young, Analyst
Thank you. It is. Can you kind of split the two in terms of which one was more impactful?
Ajai Bambawale, Chief Risk Officer
I would estimate that about 40% is due to parameter updates, while the remaining portion is related to credit migration.
Doug Young, Analyst
Okay. Okay. And then, second, I mean, the CET1 impact from the Basel III changes coming in Q2, it looks like you had parameter updates because of Basel III that came through in Q1. Can you talk about is there additional hit or benefit that you are going to have in Q2 from the upcoming Basel III changes?
Kelvin Tran, CFO
Hi. It’s Kelvin. I will take that one. Correct. So in Q2 we expect the impact of Basel III to be small either way.
Doug Young, Analyst
Okay. Bharat and Kelvin mentioned that First Horizon's CET1 is comfortably above 11%. My question is whether that would still hold true if the deal were to close immediately and if it takes into account any other actions, such as selling additional stakes in Schwab or loan sales. I'm curious if you could provide some context on what this means, as I've received a lot of inquiries about it.
Bharat Masrani, CEO
Well, Doug, let’s look at and I heard some of the noise around capital. Let’s look at what TD’s record has been on this. I mean, look at the last couple of years, our internal capital generation earnings less dividends is a simple way to do it. It’s about 40 basis points per quarter. The DRIP contributes about 13 basis points per quarter and that allows us to support our customers’ activity through RWA growth, which over the last five quarters is about 15 basis points to 20 basis points. The first quarter was unusual because I think Ajai provided some of the explanations to you. So the Bank’s capital flexibility is immense and that’s why I was quite happy to say that, at the closing of First Horizon, we will be comfortably over 11%. But as you can see, there’s a pathway to a much higher capital level and that will depend on what the requirements are that will be announced from time to time. So feel very comfortable with where the Bank’s position is on capital, we have a lot of capital levers as well and so I think the noise around this, I am not sure that I really understand.
Doug Young, Analyst
Well, I guess, maybe just ask it another way, like, is that comfortably above 11% organic?
Bharat Masrani, CEO
That’s my view. Yes, we believe we will be comfortably over 11%. I provided some calculations indicating that it could even increase over time, so we feel very confident about our capital position.
Doug Young, Analyst
Okay. Thank you.
Bharat Masrani, CEO
And I know, Doug, you didn’t ask, but many asked me what negotiations would be and I am not going to talk about any specific issues on those negotiations with First Horizon. We have just started a discussion. We have a fantastic relationship. It’s a great franchise and so we will see where we get to.
Operator, Operator
Thank you. The next question is from Gabriel Dechaine, National Bank Financial. Please go ahead.
Gabriel Dechaine, Analyst
Doug covered most of the questions I had, but I want to clarify something. Are you considering selling down any Schwab ahead of the Cowen transaction? You might be getting mixed signals about capital, but it relates to your actual quarter results compared to expectations, especially with the impact of Cowen and First Horizon factored in, which brings you to a number closer to 11%. I’m curious about what you're thinking, as we want to feel more assured about that figure being comfortably above 11%.
Bharat Masrani, CEO
I am not sure how you calculate your numbers, Gabe. So at some point I have … chance to look at your numbers. But the numbers I gave you, there is a pathway here for TD to be in excess of 12% by next year.
Gabriel Dechaine, Analyst
Yeah.
Bharat Masrani, CEO
And this is even after closing First Horizon and Cowen, and so when you look at the first fiscal half of next year, we think we have a clear pathway to be over 12%. And if the timing were to change, we have got other capital levers. So I don’t know what else I can tell you to clarify it further, I mean, that’s the way we are thinking about it and feel very comfortable.
Gabriel Dechaine, Analyst
Okay. I appreciate that. Thanks.
Operator, Operator
Thank you. The next question is from Ebrahim Poonawala from Bank of America. Please go ahead.
Ebrahim Poonawala, Analyst
Good morning. Good afternoon. I guess, Bharat, just wanted to follow up on the deal, two questions. One, should we be concerned that maybe there is a supervisory issue in the U.S. that could have an impact on your organic business in the United States as we think about TD Bank USA, your ability to grow or any of that, can you answer that question?
Bharat Masrani, CEO
I can't comment on our confidential discussions with our regulators as that's not something any Bank typically addresses. However, regarding First Horizon, we are actively working with our regulators as part of our application process. I can't provide any further details. The other questions you're asking seem to be hypothetical, and we are continuing to grow our Bank. Leo is doing an excellent job, but I'm not sure how many stores we opened last quarter.
Leo Salom, President and CEO, TD Bank, America's Most Convenient Bank
Six.
Bharat Masrani, CEO
Six stores were opened, and I am sure Leo would be happy to answer any questions about the loan growth we are experiencing and the tremendous momentum we have in the U.S.
Ebrahim Poonawala, Analyst
Right. No. I think, again, Bharat, I am sure you will appreciate we are in uncharted waters here. The only proxy parallel comes to mind is M&T, Hudson City, which took three years between announcement and close and I think that’s what some investors are trying to handicap. Maybe, I guess, the second question for you asked someone putting up $13 billion to buy First Horizon. Just talk to us how do you get comfort around franchise attrition, right, like, you heard about that from investors. It is an extremely competitive market. If I am an employee at First Horizon getting called from 15 other banks, how do you retain that and make sure there’s no not meaningful attrition in the franchise if, let’s say, the deal timing gets pushed out by 12 months?
Bharat Masrani, CEO
I can't comment on the timing. However, when we announced the deal, we put a structure in place to ensure we have adequate retention, and we feel confident about that. First Horizon as a franchise continues to perform in line with expectations, as I shared during the acquisition announcement in February 2022. We are very pleased with the transaction and are working hard to complete it.
Ebrahim Poonawala, Analyst
Got it. Thank you.
Operator, Operator
Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Scott Chan, Analyst
Hi. Good afternoon, all. I will stay away from First Horizon and maybe ask about Cowen that just closed. Riaz, on Cowen, what are you kind of seeing on the ground there in terms of now and when you announced the transaction? I know it’s been difficult capital markets, but is Cowen going to be operated separately still or do you still have collaboration or some collaboration integration plans between the two?
Riaz Ahmed, Group Head, Wholesale Banking
Thank you for that, Scott. Regarding the closing yesterday, I want to emphasize the level of enthusiasm that both the TD Securities leadership and the Cowen team felt when we announced the closing. There was a remarkable amount of energy in the room. We have conducted a significant amount of pre-integration work, and although we will need to operate separately for a few weeks to finalize all our regulatory and organizational structures, we will be working towards a full integration shortly thereafter. People are very excited about this. We have established an early operating model and a go-to-market strategy, creating even more excitement than we experienced at the announcement seven months ago. It is truly thrilling, and we feel very positive about the future. Jeff Solomon and his team, along with the TD Securities leadership, are eager to collaborate and move forward with growing our business.
Scott Chan, Analyst
Have you passed out any cost or revenue synergies over the medium term? I assume it’s most of the latter potential and I don’t know if there’s examples that you see right now on it?
Riaz Ahmed, Group Head, Wholesale Banking
I would say we are essentially in the same position we were when we announced the transaction, Scott, when we discussed having $300 million to $350 million in revenue synergies and mentioned that we would generate about $100 million in net income annually. As you know, we did not disclose any expense synergies at the time of the transaction.
Operator, Operator
Thank you. The next question is from Paul Holden from CIBC. Please go ahead.
Paul Holden, Analyst
Thank you. Good afternoon. I will limit myself to one question on First Horizon, I want to try something very specific, I understand you are not going to comment on more general type question. So the OCC released its schedule of Community Reinvestment Act evaluations on Feb 28th. So update is obviously interesting between when you provided the last update and the more current update and that schedule shows that TD will be reviewed in September this year. Are the results of that evaluation something that’s required for this merger approval, is that one of the potential reasons for the delay?
Bharat Masrani, CEO
Yeah. Let’s not talk about the delay in First Horizon, because I think, I have said enough on that. Regarding CRA, our current rating is outstanding.
Leo Salom, President and CEO, TD Bank, America's Most Convenient Bank
That’s correct.
Bharat Masrani, CEO
And when you say that the exams will be done in September, I don’t know, Leo, I think this is the longest exam period that goes on before you get any reports back.
Leo Salom, President and CEO, TD Bank, America's Most Convenient Bank
Yeah. And Paul, just to be clear, on an annual basis, the OCC will review an institution based on several different risk ratings, including the CRA rating. This is standard operating procedure, not related to any transaction, and is part of the normal regulatory review process.
Lemar Persaud, Analyst
Thanks. It seems like the Bank is going to be able to answer most of my questions on First Horizon right now, but maybe I will try one of them. In the outside chance the deal doesn’t get regulatory approval or an agreement to extend isn’t achieved, would it be fair to suggest the $435 million termination fee would not apply in this case?
Bharat Masrani, CEO
I think the deal terms are in the document that we filed and Lemar best for you to check that as to what the technicalities are there in that all the details around it.
Lemar Persaud, Analyst
Okay. And then maybe turning to Canadian P&C Banking. Can you talk to what’s driving the weaker business deposit growth? It looks like it’s a drop for two consecutive quarters. So it be fair to suggest this is just the deployment of some excess COVID deposits?
Paul Douglas, Group Head, Canadian Business Banking
Yeah. It’s Paul. Thanks, Lemar. If you look back to the early part of the pandemic, you would see that TD outgrew most of the banks for quite a while in the early part of the pandemic. Some of that is just the reversal of that now that we have ended and that has to do just with the makeup of our book compared to others. Then in addition, as Leo spoke about, there is a seek for yield here going on. We are not losing any accounts. The core business is quite strong. Some of the excess deposits that our Commercial Bank customers hold are chasing yield and our policy has always been to be very disciplined around margins and so we have lost some deposits.
Operator, Operator
Thank you. The next question is from Joo Ho Kim from Credit Suisse. Please go ahead.
Joo Ho Kim, Analyst
Hi. Thanks and good afternoon. Just wanted to go back to your net interest margin comment. You had mentioned that it may moderate in terms of improvement from here and when I look at the results this quarter, you were up 2 basis points sequentially at the all Bank level. So I am curious, is that sort of the improvement that we should think about as we go forward that maybe 1 basis point to 2 basis points in the low single-digit kind of improvement? Just curious if you could quantify what you see for the remainder of the year?
Kelvin Tran, CFO
Hi, it’s Kelvin. I’ll take that. The 2 basis point quarter-over-quarter increase you mentioned refers to the all-inclusive net interest margin, and we usually focus on non-trading net interest margin. When adjusted, the quarter-over-quarter growth is actually a positive 6 basis points. Last quarter, we saw a margin expansion of 12 basis points, and this quarter it’s 6 basis points. While we anticipate some moderation, we expect the margin expansion to remain positive for the rest of 2023, though the trend will likely be similar in terms of moderation. It’s worth noting that many only pay attention to short-term rates, which have risen significantly over the past few quarters. Although there may still be further increases, they will be smaller than before. Long-term rates are also important. In Canada, the relevant rate is five-year, and in the U.S., it’s seven-year. These rates re-price over time, and the on rate is higher than the off rate. This means that even if short-term rates do not increase, all else being equal, the re-pricing of these rates will continue to support margin expansion.
Nigel D'Souza, Analyst
Good afternoon. Thank you for taking my questions. The first one I had for you was on your performing credit loss provisions this quarter. I noticed that there was a build in the Canadian P&C Banking segment, but a reversal in U.S. Retail. Just wondering what drove that, because typically, we don’t see a divergence in performing PCLs across those segments?
Ajai Bambawale, Chief Risk Officer
Yes, Nigel, it's Ajai. Let me address that. It's important to look at these trends over a longer timeframe. If you examine the year-over-year figures, you'll see that both Canada and the U.S. have experienced increases in performing loans. You are correct to note that this quarter saw a decline in U.S. performing loans. There are two reasons for this. First, we had repayments on some high-risk loans, which led to the release of the associated allowance. Second, we updated our methodology regarding consumer loans, as we realized we were inaccurately predicting the transition from Stage 1 to Stage 2. This correction resulted in a reversal. If you exclude these two factors, you would have actually observed a slight increase in U.S. performing loans as well. I hope that clarifies things for you.
Nigel D'Souza, Analyst
That’s helpful. And then the last question I had just quickly was on variable rate mortgages, any update on the portfolio how it’s tracking? And just a question of the monthly mortgage payment, just trying to understand if the higher rate leads to an immediate pass-through of an increase in the monthly mortgage payment proportion of it is capitalized and then pass-through later on or trigger point? Just trying to understand the dynamics of how the monthly payments are tracking relative to mortgage rates for variable?
Ajai Bambawale, Chief Risk Officer
I can start generally with credit quality and then I will pass it on to Michael Rhodes. So what I would tell you is, generally across the resi book, our credit quality is strong. So if I look at delinquencies and I see the quarter-over-quarter change, it’s nominal. It’s basically one beat to that in Halo. Formations, resi is flat. Charge-offs, I would say, near zero. So if I look at quality in many different ways, the quality is strong. The books we are watching, we are definitely watching the variable interest rate mortgages, in particular, the trigger point population. We are watching rate renewal risk across both the variable and fixed books as well. But overall, we are seeing strong quality. We are actually seeing customers come forward when they hit the trigger rate, and keep in mind when they had to trigger rate, there’s no requirement to repay us, but we are very encouraged by what we are seeing, where they are voluntarily coming forward and making principal payments. But I will pass it to Michael for a few minutes.
Michael Rhodes, Group Head, Canadian Personal Banking
Ajai, you mentioned the dynamics of our variable mortgages, where as interest rates increase, the amount you amortize decreases. This could eventually lead to a situation where you end up with negative amortization, meaning the principal of the loan actually increases each period. Then, either at a specific trigger point or at renewal, everything gets reset.
Nigel D'Souza, Analyst
And just to clarify, I assume that trigger point is 1% or 5% of some sort of loan balance amount, is that how it works?
Michael Rhodes, Group Head, Canadian Personal Banking
It depends if it’s a HELOC or if it’s a mortgage. For mortgages, it’s linked to your loan to value at, I think, it’s 80%.
Ajai Bambawale, Chief Risk Officer
80% uninsured, I think, it’s 105 for insured or is it the same for both?
Bharat Masrani, CEO
It’s 105 for the other one.
Operator, Operator
Thank you. The next question is from Darko Mihelic from RBC Capital Markets. Please go ahead.
Darko Mihelic, Analyst
Hi. Thank you. Just a quick numbers question for Leo. I am looking at the U.S. Retail segment and the non-interest income. I realize overdraft fees are significantly lower. But when I look at this quarter’s number, is it fair to say, Leo, that this is about the bottom or is there still some more downside to this line item?
Leo Salom, President and CEO, TD Bank, America's Most Convenient Bank
Thank you for the question, Darko. We have fully implemented all the overdraft measures that we identified last year, and this quarter, you are indeed seeing the full impact of those changes. This includes the daily limit of overdraft charges, the change in the threshold at which a client begins to incur an overdraft, the 24-hour grace period, and the elimination of fees. You are looking at a complete quarter's worth of impact, so this represents the bottom. I would expect that as we continue to grow our core checking and card base, we will see additions to our fee income line.
Darko Mihelic, Analyst
Okay. Great. That’s very helpful. Thank you. A question for Bharat. You have given us a rough roadmap to 12% common equity Tier 1. There is, of course, a small possibility that the regulator increases the DSP this summer in June, with 50 basis points, let’s say, pertained increase. Do you have the capability of overcoming a 50 basis point increase in the minimum ratio or would you need to raise equity for that?
Bharat Masrani, CEO
We have the capability to meet that if that turns out to be the case. But these are hypothetical questions, but you asked me a straight question, I will give you a straight answer.
Operator, Operator
Thank you. The next question is from Ebrahim Poonawala from Bank of America. Please go ahead.
Ebrahim Poonawala, Analyst
Hey. Thanks for taking my question, again. Just two quick follow-ups. One, Leo or just sticking with the U.S. non-interest income, any sense of the impact if there are changes and it’s easy to credit card late charge fees what that would mean for TD?
Leo Salom, President and CEO, TD Bank, America's Most Convenient Bank
Yes. Thank you very much, Ebrahim. Obviously, the CFPB has come out with some proposed rulings. It’s still early. I expect there to be some evolution in terms of what that final proposal is going to look like. So I’d prefer not to speculate at this point in time in terms of the total impact. What I would say is, credit card late fees as a percent of our total U.S. Retail revenues is a relatively small percentage. So in any event, it would be manageable.
Ebrahim Poonawala, Analyst
That’s helpful. And just one quick one, Riaz for you. We have seen a significant growth in the loan book in Wholesale Banking. One, do you expect that to be sustainable, what’s the driver of that?
Riaz Ahmed, Group Head, Wholesale Banking
Well, Ebrahim, as you know, over the course of the last four quarter or five quarters, there’s a lot of loan demand and we are in a fortunate position of being able to be particularly selective and grow our…
Operator, Operator
Thank you. There are no further questions registered at this time. I’d like to turn the call back over to Bharat Masrani.
Bharat Masrani, CEO
Thanks so much. Thanks very much, Operator, and thank you, everyone, for joining us this afternoon. Again, a great quarter from TD, terrific 8% earnings growth, $4.2 billion in earnings. So very happy with the start to the year. And once again, I want to take this opportunity to thank our TD bankers around the world for once again delivering for all of our stakeholders. And Paul, congratulations again, 47 great years at the Bank and it’s a good thing, you are not going away far. So we look forward to working with you in your other capacities at the Bank. And Barb congratulations on your new position with the Canadian Commercial Bank. Thank you, and we will see you in 90 days.
Operator, Operator
Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.