Earnings Call Transcript - TD Q2 2025

Operator, Operator

Good morning, everyone. Welcome to the TD Bank Group Q2 2025 Earnings Conference Call. I would now like to turn the meeting over to Ms. Brooke Hales, Head of Investor Relations. Please go ahead, Ms. Hales.

Brooke Hales, Head of Investor Relations

Thank you, operator. Good morning, and welcome to TD Bank Group's second quarter 2025 results presentation. We will begin today's presentation with remarks from Raymond Chun, the bank's CEO; followed by Leo Salom, President and CEO, TD Bank, America's Most Convenient Bank; after which Kelvin Tran, the bank's CFO, will present our second 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 present today to answer your questions are Sona Mehta, Group Head, Canadian Personal Banking; Barbara Hooper, Group Head, Canadian Business Banking; Tim Wiggan, Group Head, Wholesale Banking and President and CEO, TD Securities; and Paul Clark, Senior Executive Vice President, Wealth Management. Please turn to Slide 2. Our comments during this call may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially. I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results. The bank believes that adjusted results provide readers with a better understanding of how management views the bank's performance. Ray, Leo, and Kelvin will be referring to adjusted results in their remarks. Additional information about non-GAAP measures and material factors and assumptions is available on our Q2 2025 report to shareholders. With that, let me turn the presentation over to Ray.

Raymond Chun, CEO

Thank you, Brooke, and good morning, everyone. We had a strong quarter, and I'm looking forward to walking you through the details in a minute. Before we discuss that and share updates on our strategic review and AML remediation, I'd first like to comment on the current environment. Despite a recent tariff de-escalation between the US and China, that's temporary in nature, there continues to be a high degree of macroeconomic and policy uncertainty. This has made it difficult for businesses to make long-term decisions and created economic distortions, such as inventory stockpiling and purchases being pulled forward to avoid tariffs. This fluid environment has also driven volatility in capital markets and created angst for some households. In Canada, housing activity has slowed and the job market has continued to soften with notable losses in trade-exposed sectors. With the election in Canada now behind us, there's a new opportunity for bilateral discussions with the US. And I've been encouraged to see the new federal government working alongside the provinces on opportunities to create economic growth, including those that eliminate interprovincial trade barriers. There are no quick fixes to the challenges our country is confronting. This is going to take time and considerable effort. As a major employer and participant in the economic growth in both Canada and the United States, TD has an important role to play. We stand ready to engage and work productively with governments in both countries. Despite an uncertain external environment, our focus remains constant. We're staying close to our nearly 28 million clients, providing advice and supporting them through this period. Within TD, we will continue to prudently manage risk as we drive our businesses forward, ensuring we can be there for our clients as their needs evolve. With that, let's turn to the next slide. I'll start with an update on our strategic review. This quarter, we completed the sale of approximately $9 billion in correspondent loans. We also communicated plans to wind down our US point-of-sale financing business, which services third-party retailers. This business is comprised of a series of bespoke arrangements with each retailer, which impacts its profitability and scalability. Exiting this business is accretive to US retail ROE and frees up capacity to invest in a proprietary bank card business. In addition, through the strategic review, we are identifying opportunities to innovate to drive efficiencies and operational excellence. We are structurally reducing costs across the bank by taking a disciplined look at our operations and processes to find opportunities to automate and reengineer them. Kelvin will provide more details on our restructuring program in his remarks. These efforts will create capacity to accelerate digital and AI investments to upgrade capabilities and scale relationship banking. We are identifying growth opportunities and making good progress across each of our four pillars of our strategic review. TD will host an Investor Day on September 29 where we will look forward to presenting a clear direction for the bank's future and our refreshed medium-term financial targets. Please turn to Slide 4. In Q2, the bank delivered a strong quarter with earnings of $3.6 billion and EPS of $1.97. We saw robust trading and fee income in our markets-driven businesses and volume growth year-over-year in Canadian Personal and Commercial Banking. Impaired PCLs decreased quarter-over-quarter, reflecting strong credit performance broadly across asset classes. And we added to our performing reserves for policy and trade uncertainty, taking a prudent approach with more than $0.5 billion in reserves added over the past two quarters. Ajai will share more details shortly in his remarks. As of quarter-end, the bank's CET1 ratio was 14.9%. We made good progress on our share buyback this quarter, repurchasing 30 million shares for a total of $2.5 billion. We still intend to deploy $8 billion of the proceeds from the Schwab share sale for our current NCIB. We have the capacity to execute the NCIB as planned while maintaining very strong capital levels in this uncertain environment. Please turn to Slide 5. This quarter, we saw strong execution across our business. The Canadian Personal and Commercial Banking segment delivered growth on both sides of the balance sheet. In RESL, we continue to enhance speed to decision and to provide tailored customer advice by referring more complex deals to our mobile mortgage specialists. As you know, our single greatest opportunity is to deepen relationships with our more than 15 million customers in Canada. We are executing against that with continued strong referrals to the Business Bank and Wealth. In addition, the Personal Bank achieved record credit card penetration rates with new checking account customers. In the Business Bank, loans were up 6% year-over-year, reflecting growth across our Commercial business. In US retail, we demonstrated resilience and momentum with six consecutive quarters of consumer deposit growth and core loans up 2% year-over-year. Our US Wealth business also has momentum. Total client assets were up 15% year-over-year, with mass affluent client assets up 26% year-over-year. We continue to prioritize and execute on our AML remediation and have made significant progress on our US balance sheet restructuring. Leo will provide an update in his remarks. Wealth Management and Insurance had a strong quarter, reflecting our diversified business mix. TD Asset Management added $5.3 billion in net institutional assets, and our Advice business delivered strong net asset growth. We continue to innovate in TD Direct Investing, the only bank-owned brokerage in Canada to offer partial shares trading. We are seeing great momentum with an 83% increase in partial shares adoption by our Gen Z and millennial clients within the last six months. TD Insurance continued its digital transformation with over 46% of new sales this quarter completed digitally from end to end as we build our position as the leading digital direct insurer in Canada. In Wholesale Banking, we continue to demonstrate the power of our broader platform with record revenue of $2.1 billion. This quarter, the Trading business benefited from market volatility. We are navigating challenges in the market while executing against our strategy. Across the bank, we are delivering for our clients. This quarter, both TD Auto Finance in Canada and US Retail in Florida were recognized by J.D. Power with the highest ranking in customer satisfaction. Please turn to Slide 6. We recognize that leadership in digital and mobile is critical. We are investing in these areas and enabling capabilities such as trusted data and AI. This quarter, we announced plans to open a new office in New York City for Layer 6, TD's AI research and development center. TD has over 800 AI patent filings. And according to Evident AI, our portfolio is in the top 10 amongst banks globally. Last quarter, I mentioned that we have deployed a Generative AI virtual assistant in our contact centers to drive efficiency while enhancing the customer experience. We are now beginning to deploy this GenAI virtual assistant across our branch network, driving further colleague and customer experience and efficiency benefits. This year, we launched the next AI enhancement in our fraud operation and insurance claims to enhance our detection of suspected fraudulent auto and residential claims. This helps improve our response time to customers of genuine claims and continues our development of AI and insurance, which has been heavily engaged in machine learning for over a decade. TD continues to innovate for our clients, colleagues, and communities. Please turn to Slide 7. In March, we published our 2024 Sustainability Report, providing an update on our efforts to protect the bank while adapting business practices to meet changing market conditions and the evolving needs of our stakeholders. Before I turn it over to Leo, I want to thank our colleagues across the bank for their tremendous dedication and efforts. Together, we are writing the next chapter of this great institution's story. We will continue to invest in our talent and our culture. With that, over to you, Leo.

Leo Salom, President and CEO

Okay. Thank you, Ray, and good morning, everyone. Please turn to Slide 8. I am very pleased with the progress we've made on our US AML remediation, which, as we've said before, is our top priority. We're executing against our remediation plan with focus and purpose. And operationally, we continue to make enhancements to our transaction monitoring coverage and investigative practices. As we said we would do last quarter, we implemented the final round of planned scenarios in our transaction monitoring system. Work is progressing on the use of specialized AI to detect, isolate and automate our risk mitigation activities, and teams are continuing to work on the implementation of the machine learning tools with these capabilities expected to come online next month. In addition, we rolled out a streamlined workflow of our investigative practices, including the introduction of updated procedures for analyzing customer activity. These changes complement the updated procedures we introduced last quarter. It is important to note, we're also making progress with data staging in relation to the look backs. Finally, we are continuing to implement risk reduction measures across our program. For example, this quarter, we introduced further enhancements to our cash deposit requirements at TD stores. Collectively, these measures will help us manage the bank's financial crimes risk and coupled with our improved monitoring, enable us to detect, escalate and report potential activity of interest earlier and more effectively. While we still have work to do, we remain on track with our planned remediation activities and are building the foundational AML program that we need for the years ahead. We'll continue to provide updates every quarter. Please turn to Slide 9. I'd also like to provide an update on our balance sheet restructuring activities. You'll recall this effort has two critical objectives. First, to strictly comply with and maintain a buffer to the asset limitation, and second, to ensure that we can continue to serve our clients and communities as their needs evolve. We made meaningful progress against our objectives this quarter. As of March 31, the first reporting date for the asset limitation, our two-quarter average assets were approximately $405 billion versus the OCC's asset limitation of $434 billion. At the end of the fiscal quarter, total assets were $399 billion, reflecting the closing of the correspondent mortgage sale. Since the end of the fiscal quarter, we have also paid down an additional $7 billion of bank borrowings. We expect to further reduce our assets in the upcoming quarters using the proceeds from the loan sales, investment maturities, and normalized cash levels to pay down additional short-term borrowings. And as Ray mentioned, we communicated plans to gradually wind down the approximately $3 billion in our point-of-sale financing business, which services third-party retailers as part of our efforts to reduce non-scalable and niche portfolios that do not fit our focused strategy. I remain confident that we will largely complete the loan sales we identified last October by the end of the fiscal year, and with the execution of our loan reductions and paydown of short-term borrowing, we expect to comfortably meet the 10% asset reduction we guided to in October. Turning to the investment portfolio rotation. We continue to expect to complete the investment portfolio repositioning no later than the first half of calendar 2025. To date, we have sold approximately $23 billion notional for an upfront loss of just under $1.3 billion pretax. The investment portfolio repositioning is expected to generate an NII benefit in fiscal 2025 at the upper end of the $300 million to $500 million pretax estimated range we provided in October. Collectively, we expect these actions will enable us to improve return on equity through fiscal 2025 and into fiscal 2026. With that, I'll turn it over to Kelvin.

Kelvin Tran, CFO

Thank you, Leo. Please turn to Slide 10. TD delivered a strong quarter. Total bank PTPP was up 5% year-over-year after removing the impact of the US Strategic Card portfolio, FX and insurance service expenses. Revenue grew 9% year-over-year driven by higher trading-related and fee income in our market-driven businesses, including fees from TD sale of Schwab shares and volumes in Canadian Personal and Commercial Banking. Expenses increased 12% year-over-year with approximately 25% of the growth driven by variable compensation commensurate with higher revenues, foreign exchange and the impact of the US Strategic Card Portfolio. Impaired PCLs declined quarter-over-quarter, reflecting strong credit performance. Performing PCLs increased quarter-over-quarter, reflecting policy and trade uncertainty. Please turn to Slide 11. As Ray noted, we are undertaking a restructuring program to reduce structural costs and create capacity to invest to build the bank for the future. We incurred restructuring charges of $163 million pretax this quarter and expect to incur total restructuring charges of $600 million to $700 million pretax over the next several quarters. The restructuring program is expected to generate savings of approximately $100 million pretax in fiscal 2025 and annual run rate savings of $550 million to $650 million pretax. Cost savings will be driven by workforce and real estate optimization, asset write-offs and business wind-downs and exits as part of the strategic review. We expect this will result in approximately 2% reduction to our workforce. Whenever possible, we will look to achieve this through attrition, and we will redeploy talent in areas where we are accelerating our capabilities. Through this restructuring program and the strategic review more broadly, we are innovating to drive efficiency and structurally reduce the bank's cost base. We expect fiscal 2025 expense growth, assuming fiscal 2024 levels of variable compensation, FX, and US Strategic Cards Portfolio to be at the upper end of the previously communicated 5% to 7% range, reflecting investments in governance and control and investments supporting business growth, net of expected productivity and restructuring savings. Please turn to Slide 12. Canadian Personal and Commercial Banking delivered continued volume growth on both sides of the balance sheet. Average loan volumes rose 4% year-over-year with 3% growth in personal volumes and 6% growth in business volume. This quarter, tariff uncertainty weighed on the Canadian housing market, and we saw slower purchase activity. In TDAF, we had record Q2 originations, which may reflect customers pulling forward auto purchases in anticipation of tariffs. Average deposits rose 5% year-over-year, reflecting 4% growth in personal deposits and 8% growth in business deposits. Net interest margin was 2.82%, up 1 basis point quarter-over-quarter, primarily driven by higher loan margins. As we look forward to Q3, we again expect NIM to be relatively stable. Expenses increased, reflecting higher technology spend and other operating expenses. Please turn to Slide 13. US Retail demonstrated resilience and business momentum while executing against our balance sheet restructuring program. Core loans grew 2% year-over-year. In key areas of focus, bank card, home equity, middle market, and small business, balances grew 11%, 9%, 8%, and 6% year-over-year, respectively. As you know, we are focused on enhancing ROE in US retail. We are assessing relationship profitability across our loan portfolio. Net interest margin was 3.04%, up 18 basis points quarter-over-quarter, reflecting the impact of the US balance sheet restructuring activities, normalization of elevated liquidity levels, which positively impacted NIM by 11 basis points and higher deposit margins. As we look forward to Q3, we again expect NIM to deliver substantial expansion, reflecting the benefits from ongoing balance sheet restructuring activities and further normalization of elevated liquidity levels. Expenses increased $189 million or 13% year-over-year, reflecting higher governance and control investments, including cost of $110 million for US BSA/AML remediation this quarter and higher employee-related expenses. We continue to expect US BSA/AML remediation and related governance and control investments of approximately $500 million pretax in fiscal 2025. We expect similar investments in fiscal 2026. Please turn to Slide 14. Across these diversified businesses, the Wealth Management and Insurance segment is firing on all cylinders. Wealth Management revenue was up 13% year-over-year, with growth across fee-based revenue from higher market levels, transaction revenues and elevated trading activity in volatile markets, and net interest income from higher deposit volumes and margins. Insurance delivered gross written premium growth of 10% year-over-year. Expenses increased this quarter, reflecting higher variable compensation, technology spend supporting business growth initiatives and employee-related expenses. Segment ROE remains very strong at nearly 47% and Wealth Management's peer-leading ROE is driven by robust returns across all of our businesses. Please turn to Slide 15. Wholesale Banking had strong performance despite increased market volatility and the decline in capital markets activity. Expenses increased, reflecting higher technology and front office expenses, along with investments in our growth platforms. We continue to execute on our strategy to be a leading integrated North American investment bank with global reach. Please turn to Slide 16. Corporate net loss for the quarter was $161 million, a smaller loss than the same quarter last year, reflecting higher revenue from treasury and balance sheet activities, partially offset by higher net corporate expenses, which were primarily driven by higher governance and control costs. Please turn to Slide 17. The common equity Tier 1 ratio ended the quarter at 14.9%, up 177 basis points sequentially. Strong internal capital generation was offset by the increase in RWA, excluding the impact of FX. The Schwab share sale increased CET1 by 238 basis points. We repurchased 30 million common shares under our share buyback program this quarter, which reduced CET1 by 40 basis points. Our average LCR for the quarter was 141%. The bank remains comfortable that it can operate at more typical LCR levels. However, while actions have been taken to manage liquidity buffers down, the proceeds from the Schwab share sale, we continue to keep LCR elevated in the near term. With that, Ajai, over to you.

Ajai Bambawale, Chief Risk Officer

Thank you, Kelvin, and good morning, everyone. Please turn to Slide 18. Gross impaired loan formations were 21 basis points, a decrease of 4 basis points or $400 million quarter-over-quarter. The decrease was recorded broadly across the Canadian and US Consumer and Business and Government Lending portfolios. Please turn to Slide 19. Gross impaired loans decreased $587 million quarter-over-quarter to $4.87 billion or 51 basis points. The decrease was reflected in the Canadian Personal and Commercial, US Retail and Wholesale segments, with the largest contribution from the Business and Government Lending Portfolios and a $197 million impact from foreign exchange. Please turn to Slide 20. Recall that our presentation reports PCL ratios both gross and net of the partner share of the US strategic card PCLs. We remind you that US card PCLs recorded in the Corporate segment are fully absorbed by our partners and do not impact the bank's net income. The bank's provision for credit losses increased $129 million or 8 basis points quarter-over-quarter to 58 basis points. The increase is largely reflected in the Canadian Personal and Commercial Banking and Wholesale Banking segments. Please turn to Slide 21. The bank's impaired PCL was $946 million, a decrease of $270 million quarter-over-quarter, reflected across the Canadian and US Consumer and Commercial Lending portfolios. By asset class, the largest quarter-over-quarter decreases were in the US Cards portfolios related to seasonal trends, coupled with the impact of a prior quarter model update and the US Commercial Lending portfolio. Performing PCL was $395 million compared to a recovery of $4 million in the prior quarter. The current quarter performing provisions primarily relate to policy and trade uncertainty and were recorded in the Canadian Personal and Commercial, US Retail, Wholesale Banking and Corporate segments. Please turn to Slide 22. The allowance for credit losses was $9.6 billion, a decrease of $9 million quarter-over-quarter due to a $231 million impact from foreign exchange and lower impaired allowance, largely offset by performing reserves in the Consumer and Business and Government Lending portfolios, related to policy and trade uncertainty and applied through overlays and an update to our macroeconomic forecast. Please turn to Slide 23. In light of recent events, we have provided additional disclosure regarding industries most exposed to elevated policy and trade risk. These industries represent 9% of the bank's gross loans and acceptances. Though the ultimate credit impact will depend on a range of factors, including the magnitude and duration of tariffs and government stimulus. While the industries of focus are broad, exposure to borrowers most sensitive to these risks is small, representing less than 1% of the bank's gross loans. We will continue to work closely with our customers through these challenging conditions. Now, in summary, the bank exhibited strong credit performance this quarter, evidenced by lower gross impaired loan formations, gross impaired loans and impaired PCLs. As a result of the ongoing policy and trade risks, we have reviewed our credit portfolios and bolstered our reserves in excess of $500 million over the past two quarters. That being said, there are many potential scenarios that could play out that may impact the economic trajectory and credit performance, some of which could drive fiscal 2025 PCL results beyond the 45 to 55 basis points range I previously provided. However, TD is well positioned to manage through this period, considering our prudent provisioning, broad diversification across products and geographies, our strong capital position and our through-the-cycle underwriting standards that have served us well through challenging conditions in the past. With that, operator, we are now ready to begin the Q&A session.

Operator, Operator

We will take the first question from Matthew Lee at Canaccord Genuity. Please go ahead.

Matthew Lee, Analyst

Good morning. Thanks for taking my question. I wanted to ask Leo one here. When I think about the repositioning of the US portfolio, you've talked a bit about $500 million in NII benefit in 2025. But the program could continue into the first half of 2026. So does that kind of imply that there's maybe a further couple hundred million of NII benefit that could be felt from the repositioning in '26?

Leo Salom, President and CEO

Thank you for your question, Matt. As you know, the trade incurs an initial loss, but you will see the net interest income recapture from the higher interest rates on the investment bond portfolio over the next three years. You can expect next year's figure to be slightly higher than this year's to account for the calendarization effect. This trend will continue into the third year, and thereafter, depending on market conditions, those investment bonds will adjust to market rates at that time.

Matthew Lee, Analyst

And then we should be thinking about NIM as expanding in 2026 beyond 2025 based on the repositioning?

Leo Salom, President and CEO

Yeah. So maybe if I could just take a moment on there because I know that our NIM is moving. We saw an 18 basis point improvement in the quarter. There's a number of factors that are influencing NII right now. First, as Kelvin described, we are running down some of the excess liquidity that we had built up late last year. Second, as you called out, the investment bond repositioning is starting to trickle through the P&L. And then, obviously, the tractor on-off rates right now represent a tailwind for the business. So we do expect that the NII trajectory over the next few quarters to be quite positive. And we do expect that NIM expansion for Q3 will be a substantial increase, mirroring what we saw in Q2. I should state, because for the second quarter, we did have one extraordinary item, which is we did change the amortization period for some of our deferred product acquisition costs. That was about a $46 million charge we took. We would not expect that to reoccur in Q3.

Matthew Lee, Analyst

Okay, that’s helpful. I’ll pass the line.

Leo Salom, President and CEO

Thank you, Matt.

Operator, Operator

Thank you. The next question is from John Aiken from Jefferies. Please go ahead.

John Aiken, Analyst

Good morning. Ray, I wanted to clarify something I thought I heard in your prepared commentary. In reference to the exit of correspondent loans at the point of sale in the US, you mentioned that the proceeds would be redirected into the proprietary bank card operation. Did I understand that correctly? Additionally, has this been disclosed before, or is this a new initiative?

Raymond Chun, CEO

You're referring to the winding down of our RCS business, which is our third-party credit card operation. This involves a $3 billion portfolio that we will be winding down. The capital generated from this will be redirected to our proprietary credit card business that we have been developing organically over the past several years.

John Aiken, Analyst

Fantastic. Thank you. Sorry about the misperception on my part. And then Kelvin, in relation to the restructuring charge, again, I apologize if I missed this. But did you give us a breakdown in terms of which segments will be more or less impacted by this?

Kelvin Tran, CFO

No. The impact is pretty broad-based across the bank. In terms of nature, it will affect the workforce, real estate optimization, asset impairment, type decommissioning, and the wind down of some businesses as discussed earlier.

John Aiken, Analyst

Okay. Thanks. I’ll requeue.

Operator, Operator

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

Gabriel Dechaine, Analyst

Hi, I just want to ask about your excess capital position. So, if I look at where you are today, I factor in the amount of buybacks you're still committed to at current prices and then this restructuring charge, and it leaves me with a pro forma ratio of about just under 14%. So still a good amount that I think most investors and myself anyway look at is, well, those are the funds that are still remaining from the Schwab sale that you said you're using some of that for internal investment. And if there's anything remaining, you could be increasing the buyback or buy back more stock than what you've announced already at some point in time. Just wondering what the current view is and what the potential is for another large buyback is macro climate certainly dicier? Maybe there's other initiative investment initiatives you have in mind? So maybe you can provide some clarity. Thanks.

Raymond Chun, CEO

Gabe, I appreciate the question. Let me start by saying, as I said in my prepared comments, on the current NCIB, our commitment is still to execute the $8 billion NCIB buyback. And as we get through our strategic review, and as I stated at the Investor Day, we'll sort of lay out for you where we think we're going to deploy some of that capital. Some of that is certainly from, we're seeing significant organic growth opportunities. And we're still looking at rightsizing some of the portfolios from a scale those businesses that may not be core to our business. And so we're looking at some of those opportunities. And at the end of all of that, we will assess the current market. I mean, these are uncertain times, and there certainly is value in being well capitalized as we think forward. But as we move through this uncertainty and as we get through our strategic review, if we still then feel that we have excess capital, as I've said before, then we then look at as another opportunity to do another buyback.

Gabriel Dechaine, Analyst

There could be more costs associated with the funds, and we shouldn't automatically assume a significant buyback is coming or that more investment isn't required.

Raymond Chun, CEO

Yes. I think that's part of our strategic review. We'll definitely be looking at how we deploy some of that capital, and then we'll assess the opportunity for a buyback later in the year and sort of closer to next year.

Gabriel Dechaine, Analyst

Okay. Thanks for that. On the bond portfolio repositioning, I understood you mentioned it would be completed by the end of this quarter. We're roughly halfway through, and it should be done by the midpoint of the calendar year. That's fine. Regarding the guidance on the NII uplift, are you still expecting a $300 million to $500 million NII uplift? That's not annualized; it's the actual impact for this fiscal year, right? I assume that's due to more successful reinvestment. Is that the gist of it?

Leo Salom, President and CEO

Gabe, good morning. It's Leo. Yes, the short answer, we are virtually complete the actual investment bond portfolio. We had indicated we'd be done by the end of the calendar. I think we'll will be done virtually over the next few days and weeks. I'm pleased on where we are with regards to the work market have been constructive and so we were able to complete it a little bit ahead of schedule. Now with regard to the impact, what we have indicated, and Kelvin mentioned it in his prepared remarks, we had given back in October, a range of $300 million to $500 million, and we can confirm to you right now that it will be on the upper end of that range. That is an in-year 2025.

Gabriel Dechaine, Analyst

Yeah, great. So just to add another question, the corporate net interest income has seen a significant increase. You mentioned treasury activities. Are there any specific unusual factors contributing to that, or is it a new standard rate?

Kelvin Tran, CFO

Hi, it's Kelvin. That's right. The treasury activity that we're mentioning relates to the investment from the proceeds of the Schwab share sale. We sold those shares we had, cash coming in, and those are invested, generating higher NII in the corporate segment. And then you would expect that NII to come down over time as we redeploy that cash to buy back shares.

Gabriel Dechaine, Analyst

Got it. Thank you.

Raymond Chun, CEO

Thanks, Gabe.

Operator, Operator

Thank you. The next question is from Doug Young at Desjardins Capital Markets. Please go ahead.

Doug Young, Analyst

Hi, good morning. I just wanted to clarify something regarding the exit from the point-of-sale business. Are you referring to the target credit card books and the other retailer credit card books? Am I understanding this correctly?

Leo Salom, President and CEO

No, Doug. Let me clarify that. We have three businesses within our overall card portfolio. The first is our Proprietary Bank Card business, which we consider core, and we've undertaken several initiatives in that area that I can elaborate on. The second is our co-branded card offering, where we have two key partners, Nordstrom and Target, which are both strategic relationships that we value highly. Lastly, there's our point-of-sale financing business, formerly known as our Retail Card Services business. Despite having strong partnerships with many top retailers nationwide, this business doesn't scale as effectively. We recognized that transforming this segment would require substantial investment resources, and during our evaluation of where to allocate capital for optimal returns, we decided that investing in our core Proprietary Cards business was more critical. To be clear, both our Proprietary Cards and co-branded cards remain central and strategic long-term priorities for us.

Doug Young, Analyst

Okay. That's clear. And then one other, can you talk about any other businesses that you would be thinking from a wind-down perspective? And I would assume it's not just the US, this would be across all of your different areas. But anything else that you would highlight in terms of business exits or wind down?

Raymond Chun, CEO

I would say not on this call, but we certainly are looking at all of our options and going through all of our product services and businesses. And some of that we will share as we get to the Q3 call and then certainly, we'll have more to share as we get to Investor Day.

Doug Young, Analyst

Fair enough. I figured I'd try. And then just maybe lastly, the Canadian banking, it seemed like there was a sequential decent drop in non-interest income. Maybe I've got that wrong. But is there anything in particular that went through in the Canadian banking on the revenue side that was abnormal? Or what would have caused the sequential decline in the non-interest income line?

Sona Mehta, Group Head, Canadian Personal Banking

Hi, Doug, it's Sona. I'll take that. Sequentially, it would have been three less days sequentially and on a year-over-year basis. Also, you might recall we had a leap year last year. So there was one fewer day effectively this Q2. That's about a 1% impact to revenue on a Q2 year-over-year basis or $40 million. Overall, the business fundamentals for CAD P&C are solid. And beyond the NII piece on the other income, there were a collection of smaller Q2 impacts. I can give you a couple of examples. We would have seen moderated foreign currency spend, both on the debit and credit side as consumers had a little more caution, especially with cross-border purchases. We saw some lower merchant acquiring revenue in the business bank and some small timing items. So, no one big thing on the other income side for Q2, but rather a collection of smaller things. So really, I'd say a few factors, the biggest is days in leap year. But I would say as we look ahead, we're encouraged by the late Q2 volume momentum. We read that as a positive sign for Q3 and we're expecting quarter-over-quarter NIM stability, as Kelvin had noted. So overall, we're feeling confident heading into Q3.

Doug Young, Analyst

Appreciate the color. Thank you.

Operator, Operator

Thank you. The next question is from Paul Holden from CIBC. Please go ahead.

Paul Holden, Analyst

Thank you. Good morning. Want to get a better understanding of what drove the sequential decline in impaired PCLs in Canadian P&C banking, like, listening to Ray's opening remarks regarding the macro backdrop, which I think makes sense would suggest sort of higher impaired PCLs, but obviously, we saw it lower. So just wondering what drove that and if there's anything we can take away from that trend in terms of forward expectations?

Ajai Bambawale, Chief Risk Officer

Well, thanks, Paul. It's Ajai. Let me give you an overview of what's happening on impaired PCLs, and I'll go to Canadian P&C as well. So, as I said in my prepared remarks, impaired PCLs, they're down substantially $270 million. We've seen it in Canadian P&C. The numbers in US retail are quite big, Corporate segment as well. Numbers went up slightly for Wholesale. If I look at Canadian P&C, the numbers are down across asset classes. So RESL numbers are down. Auto numbers are down. Cards numbers are down, and Commercial numbers are down. They are not large dollars, but I'd call them quite symbolic because it's really telling us that if you keep this tariff issue aside, we were really seeing peak PCL and good quality. And I think the fact that rates have come down have helped borrowers. And then if I turn to US retail, again, the number is down there quite a bit. Cards is a big contributor. But as I said in my prepared remarks, there are two factors there. One is seasonality. And the second is we put a model update in the last quarter. So, quarter-over-quarter, there is a decline. But there are other asset classes that have come down. So for example, the Commercial numbers in the US are down a fair bit. Auto is down, but part of Auto is seasonality, but RESL and other parts of other consumers are also down. So this is not just a one-off. Yes, there's seasonality and this model issue is certainly a factor and a contributor. But I think on a broader basis, we're seeing good credit quality. And then just finally on Wholesale. Wholesale numbers went up a little bit. It's $28 million. And that's because we took some incremental PCL for three existing borrowers in telco, cable, media, power and utility and CRE office. And we did have two impairments there as well in forestry. So that's the overall picture on impaired PCL. And I do view it as quite a positive development.

Paul Holden, Analyst

Okay. Second question is with respect to the cost restructuring. And what I'm really going to try and get at is sort of roughly what proportion could we expect to benefit bottom line, i.e., operating efficiency? And one of the reasons I asked just looking through some of the numbers in the sub-pack, I've seen Canadian P&C, FTE year-over-year is down roughly 6%. So you've had significant headcount reduction, but expenses are still up 5%. So obviously, the composition of expenses is changing. So, again, I think it just raises the importance of the question, how much of the cost restructuring gets redeployed into other initiatives, investments and how much of it has dropped through to improved efficiency?

Kelvin Tran, CFO

It's Kelvin. I'll take that. Yeah. So we see significant opportunities to continue to invest in the business to drive future growth. And one area, as you would expect, is on the digital AI technology front. And so that spend does not always translate into specific FTEs, but those are investments that are important investment for us.

Paul Holden, Analyst

Okay. So if I understand the answer then that most of it gets redeployed into investments into the business?

Kelvin Tran, CFO

Correct. That's correct.

Paul Holden, Analyst

Okay. That’s it for me. Thank you.

Operator, Operator

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

Sohrab Movahedi, Analyst

Okay. Thank you. Maybe if I can just start off with Leo. I mean, Leo, obviously, lots of good work getting done, lots of moving parts. In the first half of the year in US dollars, US Retail has done around $1.2 billion. What do you think the second half of the year will be from an earnings contribution perspective?

Leo Salom, President and CEO

It's great to speak with you, Sohrab. We won't provide guidance at this point, but I can share that we feel optimistic about the second half. We're anticipating positive Net Interest Income due to factors like reduced excess liquidity and the repositioning of investment bonds. These elements should create favorable conditions as we head into the latter part of the year. We've also witnessed significant growth in our Wealth business, ongoing collaboration with TD Cowen in Commercial Banking, and sustained growth in our retail consumer deposit franchise, which will lead to increased service fees. Overall, we expect our revenues to remain strong. On the expense side, we anticipate a slowdown in the growth rate of expenses in the second half, due to our year-over-year financial position and productivity improvements aimed at managing governance and control activities. Although expenses related to Anti-Money Laundering will see a slight increase based on first-half spending patterns, we expect overall expense growth to moderate. As Ajai mentioned, the credit portfolio is in good health. With all these factors considered, we are optimistic about the second half of the year. Ray and I have emphasized our commitment to enhancing our return on equity each quarter this year and into next year. As we approach our Investor Day, we'll offer more clarity on this objective. In summary, we feel very positive about the second half of the year.

Sohrab Movahedi, Analyst

Okay. That's really helpful. And if I can just sneak one more in for Ajai. I mean, I think, Ajai, you said tariffs aside, everything is fine actually. But if you think about the complex environment, the tariffs, all the puts and takes, where do you think you will actually see deterioration? Will it be in the, I'll call it, the business and corporate lending stuff? Or do you think it will be in the consumer stuff?

Ajai Bambawale, Chief Risk Officer

Thank you, Sohrab. You could observe the effects in both areas. If the macroeconomic situation worsens, it will impact consumers. We have established our reserves for consumer, business, and government lending. I believe there could be a more significant effect on non-retail as we have allocated the reserves accordingly. The majority of the $500 million we mentioned is focused on business and government. Initially, we assessed the industries affected by tariffs, which is the 9% figure we disclosed. Then, we took a closer look at borrowers who are most sensitive to tariffs. We examined the financial implications broadly across the 9% rather than just a smaller segment and considered the potential ratings migration. Based on this analysis, we structured our reserves. So, while a considerable portion of the $500 million is for business and government, there is some allocated for consumer as well, since a deterioration in the macroeconomic environment would also affect consumers.

Sohrab Movahedi, Analyst

Okay. Was the write-down in the equity markets and the markdowns in the equity investment portfolio related to tariffs? Is it part of Wholesale Banking?

Tim Wiggan, Group Head, Wholesale Banking

Yeah. It's Tim Wiggan. So I would attribute that to our strategic portfolio mark-to-market on our strategic portfolio, which would correlate more to index declines within quarter. And so if you see a normalization quarter-over-quarter in the S&P, that can reverse. So it was a factor in the quarter, but it was a mark-to-market event.

Sohrab Movahedi, Analyst

I see. Okay. Thank you for that clarity. That’s it from me.

Operator, Operator

Thank you. The next question is from Mike Rizvanovic from Scotiabank. Please go ahead.

Mike Rizvanovic, Analyst

Hi, good morning. I have a question for Leo regarding the AML spend. It seems that the guidance indicates that the $500 million will continue into 2026. Many investors, including myself, had the impression that this amount might decrease at some point. While I'm not asking for guidance for 2027, do you still expect that these expenses will eventually decrease, or will they remain at a consistent level for AML?

Leo Salom, President and CEO

Mike, I'm glad to address that by first confirming our confidence in the guidance we provided for 2025. We believe we will remain within the $500 million guidance. From the first to the second quarter, we spent approximately $196 million. We anticipate a slight increase as we delve deeper into our remediation delivery programs, but I feel assured about that guidance. Our intention was to give the market an idea of what 2026 looks like. Currently, we expect the spend to be similar, although the distribution of the spend may shift slightly, with potentially less focus on remediation and more on validation work and monitoring costs. While the composition may vary, we expect the overall spending level to remain consistent. I wouldn't want to speculate on 2027 or 2028, but I believe our program is progressing well. We're making significant strides on the remediation plan, meeting milestones, and tracking effectively, so I remain optimistic about our expense guidance.

Mike Rizvanovic, Analyst

Okay. So, no color. You can't really provide any color on potentially drawing that to some extent, lower at some point in the future?

Leo Salom, President and CEO

Well, there's no question as we start thinking about those outer years. I would expect that the raw remediation program management expenses that we're incurring today will fall off. We could have a slight uptick in some of our run costs. But net-net, there will be a decline at some point in the future.

Mike Rizvanovic, Analyst

Got it. That's helpful. And then maybe a quick one for Sona. Just on the Mortgage business in Canada. It does look like TD saw a bit of a decline sequentially. And I think there has been quite a bit of underperformance versus most of your peers just in terms of your RESL balances in, say, P&C segment. Can you help me understand what's driving that? I was sort of under the impression that with the big push from the mortgage mobile specialist, sorry, that you probably could see at least market level growth and maybe even some outperformance on some of those initiatives. But I'm just a little bit confused as to why you would be underperforming just given some of those new distribution channels that you sort of introduced the last couple of years?

Sona Mehta, Group Head, Canadian Personal Banking

Thanks for the question, Mike. This is Sona. I'll start with a quick overview of the macro context. We've noticed that buyers are hesitating and are more cautious, leading to an increase in inventory, which is now at about five months. The CREA housing sales have been 9% to 10% lower on a year-over-year basis for the last three months, indicating a shift from early Q1 when we anticipated a strong spring due to favorable interest rates. However, uncertainty is impacting buyer confidence, and much has changed in the past four months. Regarding our competitive position, we operate as a multichannel lender over the long term. In this current market, our broker originations have slowed down slightly. Nevertheless, we maintain strong relationships and continue to compete effectively for profitable business. It's worth noting that despite the broader market challenges, our proprietary channels, including our branch and MMS ecosystem, have shown resilience. Originations in these areas are up double digits year-over-year, and we saw a quarter-over-quarter increase of $1.5 billion, even though the average growth appears flat on a sequential basis. This quarter, we experienced higher pay downs in January and February; however, we ended the quarter on a positive note with strong momentum. Overall, the fundamentals remain strong. Our key focus is on enhancing the efficiency of our ecosystem and ensuring specialization. The branch mortgage referral system that I mentioned during the Q1 call has tripled referrals in Q1 and continued its growth into Q2. So far this year, the branch MMS referral ecosystem has performed exceptionally well. Overall, we have good momentum as we head into Q2, and we're prepared to leverage speed and expertise as the market improves.

Mike Rizvanovic, Analyst

That's great insight. Just one quick follow-up. So would you be expecting to trend in terms of loan volumes with the industry? I'm just not sure if there's a dynamic of protecting margins or maybe focusing on more profitable accounts that would maybe lead to a little bit of underperformance going forward.

Sona Mehta, Group Head, Canadian Personal Banking

I think, Mike, profitability should always be a factor. And so we will compete to win profitable business, and then leverage our strength in channels where we can differentiate on speed and customer experience, but profitability is important.

Kelvin Tran, CFO

Sona, do you want to elaborate a little bit on just the pay-down dynamics that you're seeing as well?

Sona Mehta, Group Head, Canadian Personal Banking

Sure, Mike, I can explain that. In Q1, we experienced some seasonal trends towards the end of the quarter, which interestingly continued into February this year. Both January and February turned out to be months with significant paydowns for us. Our book tends to have a slightly more premium focus, and when customers have more disposable income, like from year-end bonuses, and when the market has more liquidity, we noticed that prepayments in January and February increased by double digits compared to the previous year. This contributed to some of the softness we saw late in Q1, as well as the transition point into early Q2 in February. These trends are likely more indicative of our premium book.

Mike Rizvanovic, Analyst

Okay, got it. Thank you very much for the color. That’s helpful.

Operator, Operator

Thank you. The next question is from Lemar Persaud from Cormark Securities. Please go ahead.

Lemar Persaud, Analyst

Thank you. I want to ask about the liquidity coverage ratio, which is currently at 141%. You're indicating that it will likely remain elevated for a while due to the proceeds from the Schwab shares. What would be a more typical level considering the changes at TD? Should we aim for around 130% and how quickly can we expect to reach that level? Any insights would be appreciated.

Kelvin Tran, CFO

It's Kelvin. I'll take that. We see the liquidity coverage ratio in a normal range of 125% to 135%, with 130% being right in the middle. To add a bit more detail, last year when we increased liquidity, some of that was on a one-year basis, so it will take some time for those to expire. However, we are comfortable with normalizing to a level between 125% and 135% over time as we recover.

Lemar Persaud, Analyst

And is that something that we could expect in the next year? Like I'm just wondering if you could just provide some time frame on…

Kelvin Tran, CFO

Yes, the answer is yes, because the two biggest factors are the proceeds from the Schwab sale, which will primarily be used for share buybacks. Additionally, some of the liquidity raises will take about a year to 18 months to normalize. Over that period, we expect to see a decrease in those amounts, leading to normalization.

Lemar Persaud, Analyst

Okay. Thanks. And then a question on credit here. I appreciate the disclosure on the industry focus from tariffs. But wondering if there's any color you can add as to what industries make up that kind of less than 1% cohort. Is it focused in any of these specific industries like automotive, agriculture or anything that you've highlighted on your Slide 23? Or is it kind of well diversified amongst these kind of industries of focus?

Ajai Bambawale, Chief Risk Officer

It's diversified across various industries. Some notable ones include automotive, agriculture, manufacturing, transportation, and retail. These are where the most sensitivity lies, but the industries mentioned are not limited to just one sector, making it quite diversified.

Lemar Persaud, Analyst

Okay. And then how is your watch list kind of evolved over the last quarter?

Ajai Bambawale, Chief Risk Officer

Good question. Positively, and the watch list has been coming down, and it's actually down across all business segments.

Lemar Persaud, Analyst

Okay. Thanks. Anything you could share in terms of magnitude of changes in that watch list?

Ajai Bambawale, Chief Risk Officer

I don't have all those numbers in front of me. But I think if I look at my embeds, I wouldn't say there's a huge movement, but they are positive movements.

Operator, Operator

Thank you. There are no further questions registered at this time. I would now like to turn the meeting over to Raymond Chun. Mr. Chun?

Raymond Chun, CEO

Listen, let me just thank everyone for joining the call. And just again, I'll end with thanking our more than 100,000 colleagues across Canada, US and globally for all your support and all the hard work, and we look forward to chatting with all of you next quarter. Thank you.

Operator, Operator

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