2013-12-08

Rudy J. Sankovic

Good afternoon and welcome to TD Bank Group’s Fourth Quarter 2013 Investor Presentation. My name is Rudy Sankovic, and I am the head of Investor Relations of the bank.

We will begin today’s presentation with remarks from Ed Clark, the bank’s CEO; and Bharat Masrani, our COO; after which, Colleen Johnston, the bank’s CFO, will present our fourth quarter operating results. Mark Chauvin, Chief Risk Officer, will then offer comments on credit quality; after which, we will entertain questions from those present and from prequalified analysts and investors on the phone. We’d like to keep the call to a maximum of 1 hour given how busy the day has been for the analyst community.

Also present today to answer your questions are Tim Hockey, Group Head, Canadian Banking, Auto Finance and Wealth; Mike Pedersen, Group Head, U.S. Banking; Bob Dorrance, Group Head, Wholesale Banking; and Riaz Ahmed, Group Head, Insurance, Credit Cards and Enterprise Strategy.

As you know, we shifted executive responsibility for some of our businesses effective July 1. It might be helpful to provide guidance on who will address your questions this quarter. For Canadian P&C and Wealth, Tim; U.S. P&C, Mike; and Bob will cover Wholesale. Riaz is also available to answer questions with respect to Insurance and Credit Cards.

Please turn to Slide 2. At this time, I’d like to caution our listeners that this presentation contains forward-looking statements. There are risks that actual results could differ materially from what is disclosed and that certain material factors or assumptions were applied in making these forward-looking statements. Any forward-looking statements contained in this presentation represent the views of management and are presented for the purpose of assisting the bank’s shareholders and analysts in understanding the bank’s financial position, objectives and priorities and anticipated financial performance. Forward-looking statements may not be appropriate for any other purposes.

I’d also like to remind listeners that the Bank uses non-GAAP financial measures to arrive at adjusted results to assess each of our — 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. Ed and Bharat will be referring to adjusted results in their remarks.

Additional items — information on items of note, the Bank’s reported results and factors and assumptions related to forward-looking information are all available in our 2013 Annual Report.

With that, let me turn the presentation over to Ed.

W. Edmund Clark

Thank you, Rudy, and welcome, everyone. Thank you for joining us this afternoon. Colleen is going to be up to discuss our fourth quarter results, but I’d like to start by talking about the year as a whole. So 2013 was a strong year for TD’s key retail franchises in terms of their fundamentals. But that did not translate into strong earnings growth for the Bank. Total Bank earnings were up 1% for the year, and earnings per share were flat as record results in the Canadian and U.S. Retail Banking and Wealth were largely offset by challenges in our Insurance and Wholesale business. These headline numbers are not what we would hope for. But, excluding the impact of the Insurance losses we recorded in the third quarter, adjusted EPS would have been up a solid 6% for the year. And the strong performance of our large retail businesses and the investments we have made in future growth mean we are very well-positioned for 2014 and beyond.

Our Canadian Personal and Commercial Bank had a very good year in 2013, earnings up 11%. Personal loan volumes held up well, business lending roles are robust 12%. And we made further investments in our growth strategies; most notably, signed agreement to become the primary insurer of Aeroplan Visa credit cards starting January 1, a deal that entrenches our #1 position in credit cards in Canada.

We also levered great results on the expense front, achieving a record low efficiency ratio. And we did all this while continuing to be recognized by J.D. Power and Ipsos as a leader in customer service across our distribution channels, from branches to ATMs, phone, from online to mobile. Mobile, we rank first for the number of mobile customers in Canada.

Wealth had a record year, with our Direct Investing, Advice, and Asset Management businesses, all performing well. We continue to grow net new client assets and now have over $ 1 trillion in assets under administration and assets under management when you include TD Ameritrade.

On the manufacturing side, a number of our retail funds were recognized for their strong risk-adjusted performance at the Lipper Awards again this year.

And we completed the acquisition of Epoch Investment Partners, strengthening our competitive position in investment management and adding capabilities to advance on U.S. wealth strategy. One year after announcing the acquisition of Epoch, we couldn’t be more pleased with how the business has performed. Assets under management have grown steadily from the $ 24 billion that we announced at closing to $ 40 billion today, including some funds transferred Epoch from internal and external advisors. In addition, client retention has been excellent; we’ve won several new mandates; and investment returns have been strong. In short, Epoch is delivering everything for which we hoped, and the combined team is working very effectively together.

As you may have seen today, we announced that we have extended the TD Ameritrade’s Stockholders Agreement. We like our current ownership structure in TD Ameritrade. This provides the public shareholders with increased certainty around what will happen in January 2016. We also announced that we plan to sell 5.5 million shares we currently hold in TD Ameritrade.

Our U.S. Personal and Commercial Bank had a landmark year in 2013, achieving $ 1.6 billion earning target we set out 3 years ago. Bharat will have more to say about this remarkable achievement, but let me take this opportunity to say how proud I am of our team at America’s Most Convenient Bank for meeting this ambitious goal, despite the headwinds, very significant headwinds. We succeeded by delivering on our promise of legendary service and convenience, executing on our “take share” strategy, and billing the business with acquisitions like Target, a signature win that has put us in a position to win more business or providing strong support to our bottom-line results.

In addition to this impressive performance in our larger retail businesses, we did face some challenges in 2013. Our Insurance business had a difficult year. We continue to see good premium growth, with the last three quarter and the third quarter — recorded in the third quarter, related to severe flooding in Alberta and an increase in reserves for Ontario auto had a significant impact on our full-year results. As we said at that time, we believe the auto insurance business in Ontario can be a good business and one that strengthens our franchise. However, the operating environment remains challenging, and so we continue to refine our business model.

Our Wholesale bank also saw a drop in earnings this year largely due to higher levels of securities case last year, but also related to lower trading revenue this year. Nonetheless, business did produce return on equity within our 15% to 20% target range, and I am very pleased with how we manage to continue to deliver on our strategy of being a top 3 integrated dealer.

Finally, on the expense front. We ended the year above our 3% target for core expense growth, excluding acquisitions and FX. While I’m disappointed with this result, I am comfortable with the reasons for it. The additional costs were partly related to litigation matters connected to a commercial dispute in our wholesale business, as well as higher variable expenses in our Wealth Management business reflecting stronger-than-expected revenue growth, this is a good problem to have.

Adding it all up, I’m pleased with our performance this year. The strength of our underlying earnings is reflected on our robust Basel III capital position, which ended the year at 9%, while absorbing the impact of the repurchase of 9 million shares. As we suggested last year, when we increased our target payout ratio, we also delivered healthy dividend growth. Dividends paid are up 12% in this fiscal year, which helped drive a 22% total shareholder return for the year.

We also announced the two-for-one stock split today, which will take effect in January. In order to facilitate the split, we increased the dividend by $ 0.01.

It has almost been 15 years since we last split our stock in July of 1999. And during that time, investors in TD have enjoyed a compound annual total shareholder return of 11%.

Let me now turn to the year ahead. At the start of this fiscal year, I said we would have to work hard to get into the 7% to 10% range, and we came close, as I said earlier, delivering 6% EPS growth, excluding the insurance losses, following 8% EPS growth in 2012. I think, we’ll have to work just as hard next year to get into the bottom end of that medium-term range measured against our 2013 earnings, excluding the insurance losses. We’ll have some win at our back from the investments we made in our growth strategies like Target, Epoch and Aeroplan. But the operating environment remains challenging, and we don’t expect much relief in 2014.

Interest rates are still low in absolute terms and persistent rate weakness in Europe and Asia suggests that the low rate, and therefore, lower revenue environment could be with us for some time longer.

And while the U.S. economy is showing welcoming signs of recovery, we expect more subdued growth in Canada, reflecting a slowing housing market and consumer — and continuing consumer deleveraging.

So let me talk what all that means for each of our businesses. We feel quite good about Canada’s retail growth prospects, which include Wealth and Insurance next year.

On the banking side, we expect solid volume growth, stabilizing margins and continued good expense management. And we expect to complement that with stronger growth in Wealth, leveraging the power of the TDCT relationship, as well as in cards as we bring Aeroplan on board.

We are also feeling very good about the long-term prospects of the U.S. Retail. While we won’t see those long-term prospects fully reflected in earnings growth next year, loan volumes remain very impressive. And we are starting to see the stabilization improvement in core margins as we had expected. Target is also expected to continue to perform very well. But the strength in core earnings will be offset by a smaller contribution from security gains, given the backup in longer-term rates. Overall, we expect our U.S. Retail bank retail, which will include U.S. Wealth and Epoch next quarter, to deliver modest earnings growth in 2014.

In our Wholesale bank, we will continue to focus on delivering 15% to 20% returns while continuing to build out our franchise model in Canada and the United States.

To wrap up, we delivered good results in 2013 and invested in our businesses and distribution channels to power future organic growth. With our deposit-rich balance sheet, we are well-positioned to benefit from a normalization interest rates, when they occur, but we are not basing our plan on assuming that they will. Rather, we are focused on innovating the businesses we acquired, leveraging organic growth to maximum effect, and improving operational efficiency.

We also continue to streamline our cost base, with our goal to reducing core expense growth, excluding acquisition effects [ph], to below — well below this year’s levels. The payout from the work we’ve already done on this front is significant and will allow us to maintain an even higher project and initiative spend next year as we strive to improve customer experience and extend our leadership position across North America.

It’s an exciting time to be at TD, and I’m very proud of our people, almost 90,000 strong. You’ve made TD the best customer-driven banking franchise in North America.

On behalf of the senior management team, thank you for your hard work. I can’t wait to see what you’re going to accomplish for us together next year.

With that, let me turn things over to Bharat, who as you know, is our incoming COO. He’s been back in Canada since July and he’s going to share a few thoughts with you on how the tradition — the transition, not tradition; but Riaz is going to going to maintain the tradition, is going. Bharat.

Bharat B. Masrani

Thank you, Ed, and good afternoon. It’s great to be back in Canada. Transition is going extremely well. As you heard, since returning in July, I have spent much of my time reacquainting myself with our Canadian operations. This has included traveling across the country to meet with employees and customers. Everywhere I go, I see evidence of the tremendous expansion in our Canadian franchise over the last decade. I’m so impressed with what the team has achieved in building our businesses and laying the foundation for future growth.

The key message remains one of continuity. And so, the TD story will continue to be about growth, about building great franchises, about creating real value for our customers and clients and sustaining a work culture that unlocks the full potential of our employees.

As you know, for the past — for the last 7 years, I’ve been focused on growing our U.S. operations; and as Ed said, we recently reached a milestone there. I want to take this opportunity to salute my U.S. colleagues for their outstanding efforts in delivering on our $ 1.6 billion earnings target. When we announced that target at our 2010 Investor Day, we were yet unaware of all the hurdles we would have to overcome. At the time, a starting point for full-year earnings was $ 900 million. In the 3 years since, we lost about $ 650 million in net income to the unforeseen effects of Reg E, Durbin and Dodd-Frank, as well as margin pressure from the low rate environment. But we found ways to replace the last income and generate an additional $ 700 million in net income after tax.

Security gains, as part of our capital management activities, helped as did improved credit conditions and a series of acquisitions that enhance our capabilities and expanded our footprint. But over and above this, we delivered peer-leading, loan deposit and fee growth. In fact, our underlying organic growth was well ahead of our 2010 target. None of this would have been possible without the hard work and dedication of the entire team at TD Bank, America’s Most Convenient Bank. I know this is just the beginning for our incredible U.S. team.

I’ll now turn it over to Colleen to review our results. Colleen?

Colleen M. Johnston

Thanks, Bharat, and good afternoon, everyone. Let me walk you through our results. Let’s start with a brief review of 2013.

For the full year, total Bank adjusted net income was $ 7.2 billion, an increase of 1% from 2012; and adjusted EPS was $ 7.45, flat year-over-year growth. These results were negatively impacted by the Q3 insurance losses related to severe weather-related events in Alberta and Toronto, and increased general insurance claims, which totaled $ 0.45 per share. Excluding this impact, adjusted EPS would have increased by 6% compared to last year and Canadian retail results would have increased 11% year-over-year.

TDCT had a record year, delivering $ 3.8 billion in adjusted earnings, up 11% over 2012, driven by good volume growth, lower credit losses and effective cost management.

Wealth Management delivered record results with earnings up 15%. Higher fee-based revenues, improved trading activity and the Epoch acquisition, all contributed to the growth in earnings.

Our Insurance business had a difficult year, with earnings down 61% due to the charges I mentioned previously. We believe the auto insurance business can be a good business. However, the operating environment remains challenging, and we continue to refine our business model.

U.S. P&C had a record year, with adjusted earnings of U.S. $ 1.6 billion, up 13% as a result of strong loan and deposit volume growth, higher fee-based revenue, increased gains on sales of securities and the acquisition of Target’s card portfolio, partially offset by higher expenses to support growth, and lower margins, excluding Target.

Wholesale Banking had a softer year, with earnings down 26%, primarily driven by lower security gains and a tougher trading, and investment banking environment, partially offset by lower expenses. We finished the year with the strong pro forma Basel III, common equity Tier 1 ratio of 9%. Overall, we were pleased with our results in a number of our businesses.

Please turn to Slide 5. Turning to Q4, we delivered adjusted EPS of $ 1.90, up 4% year-over-year. Total bank adjusted net income of $ 1.8 billion was also up 4%. Our segment results include retail-adjusted earnings of $ 1.8 billion, up 19% over last year. Wholesale net income of $ 122 million, down 61% largely due to lower security gains and elevated expenses. And the Corporate segment posted a loss of $ 53 million. Overall, a very strong result for our retail businesses, with a softer wholesale quarter.

Please turn to Slide 6. This next slide presents our reported and adjusted earnings this quarter with the difference due to 7 items of note. There a few items this quarter I’d like to highlight: Litigation charges were related to the previously-announced regulatory settlements; restructuring charges of $ 90 million after-tax. We indicated last quarter that we are going to take a harder look at our expense base in order to drive permanent efficiencies for the future. More on this to come in a moment. Setup cost of $ 20 million, after-tax, for Aeroplan as we get ready to become the primary Aeroplan visa card issuer in January 2014.

Please turn to Slide 7. Canadian P&C delivered a strong quarter, with adjusted net income of $ 948 million, up 14% year-over-year. Loan and deposit growth was good this quarter. Total loan growth was 5% year-over-year, with real estate secured lending volumes up 4% and business lending growth up a strong 12%. Personal and business deposits increased due mainly to strong growth in core checking and savings accounts, partially offset by lower-term deposit volume.

NIM was down by 2 basis points sequentially, mainly due to lower deposit margins from the low-rate environment. We expect modest downward pressure on NIMs, with quarterly margins bumping around in 2014, depending on product mix, seasonal factors or rate moves. Credit performance continues to be strong, with PCL in Personal Banking down $ 66 million from last year, primarily due to lower bankruptcies, principally in credit cards. Business banking PCL declined by $ 16 million due to higher commercial recoveries.

Adjusted expenses were relatively flat versus last year as volume growth and investment in the business were partially offset by broad-based productivity gains. Operating leverage was 250 basis points due to good expense management. Overall, a great result.

Please turn to Slide 8. Looking at our Wealth and Insurance segment. Wealth had a record quarter, with earnings up 26% year-over-year due to higher fee-based revenue from growth in client assets and market appreciation, improved trading volume, and a positive contribution from the Epoch acquisition.

Our Insurance business reported earnings of $ 141 million, an increase of 50% over last year due to higher insurance revenue, primarily from premium volume growth. Insurance claims increased by 3%, primarily due to higher current year claims and volume growth, partially offset by lower unfavorable prior year claims development and lower cost of weather-related events. Wealth and Insurance expenses increased from last year, primarily due to the inclusion of Epoch and higher variable compensation.

The contribution from TD Ameritrade was $ 77 million, up $ 26 million or 51% from last year due to higher trading activity, increased fee-based revenue and increased investment gains.

Please turn to Slide 9. The U.S. Personal and Commercial Bank had a good quarter, with adjusted earnings of US$ 384 million, an increase of 7% over last year. The increase reflects the Target acquisition, strong organic growth and improvement in credit quality. Adjusted revenue increased by 18% year-over-year due to the Target credit card acquisition, strong organic loan deposit and fee growth, partially offset by a lower margin and lower gains on security sales. Excluding Target, average loans were up 10% year-over-year, with a 14% increase in personal loans and an 8% increase in business loans. Average deposits increased by 11%.

As we mentioned last quarter, our level of security gains at $ 15 million was significantly below the $ 60 million to $ 80 million guidance. We expect that next year’s gains will be meaningfully lower than that range per quarter as there is much less need to sell securities at an elevated pace. We believe we’ve now immunized our AOCI as much as we can through security sales, reclassification to held-to-maturity and more capital-friendly hedging strategies. As well, the recent spike in loan rates has reduced the gains in the portfolio. Our net interest margin was up by a 9 basis points sequentially, as a benefit of recent increases in long-term rates and a — the positive impact of acquired loan accounting more than offset loan margin pressures. After normalizing for acquired loan accounting, we expect our margins to continue to stabilize or increase slightly from the current level.

Driven by the improvement in credit quality and business loans, adjusted PCL decreased by $ 25 million or 12% from the elevated level last year. PCL is likely to move up from these levels over time. Adjusted expenses were up versus last year due to Target expenses and investments in growth initiatives, partially offset by productivity improvements. All in, a strong results for our U.S. business.

Please turn to Slide 10. Net income for our wholesale business of $ 122 million was down 61% compared to the fourth quarter of last year. This was driven by lower security gains, higher noninterest expenses in the quarter and a higher effective tax rate. Revenue was down by 17% over last year due to lower security gains in the investment portfolio, partially offset by higher trading related revenue. Trading revenue was driven by approved fixed income markets. Trading revenue in Q4 was $ 342 million, above our normalized level of $ 300 million.

Noninterest expenses were up by 13% compared to last year due to litigation matters associated with a commercial dispute, partially offset by lower operating costs.

Please turn to Slide 11. The Corporate segment posted an adjusted loss of $ 53 million in the quarter, compared to a loss of $ 29 million last year.

Please turn to Slide 12. Core expenses for the year, excluding the impact of foreign exchange and acquisitions, were up by 3.9% over last year. We ended the year above our 3% expectation, driven primarily by litigation expense in wholesale and higher variable expenses in Wealth due to higher than expected revenues in the fourth quarter. It may be helpful to provide you with a breakdown of our 4% core expense growth this year.

Productivity initiatives reduced our cost base by over 2%, offsetting underlying growth and base expenses. Increased investment in the business and higher pension costs driven by low interest rates drove the overall increase in expenses year-over-year. I mentioned earlier that we’ve taken restructuring provision in the quarter. This is expected to help optimize our branch network and to streamline other operations across TD to drive permanent efficiencies. We anticipate these actions will reduce our run rate next year, but be partially reinvested in the business. We’re targeting at 2014 core expense growth well below 2013 levels, including the savings realized from productivity initiatives.

Please turn to Slide 13. Our Basel III Common Equity Tier 1 ratio was 9% in the fourth quarter, an increase from 8.9% in Q3, primarily due to organic growth, but partially offset by our share buyback program and volume growth. We expect the Q1 ’14 Basel III CET1 ratio to decline modestly due to the previously announced Aeroplan card acquisition from CIBC and the phase in OSFI CVA rules.

We were pleased to announce our stock dividend which will have a two-for-one stock split effect in January. To facilitate the split, we’re adding $ 0.01 to our quarterly cash dividend. We’ve repurchased over 9 million shares under our share repurchase program. This should help EPS growth by approximately 1% next year, all things being equal. Overall, we continue to remain well-positioned for the evolving regulatory and capital environment.

Please turn to Slide 14. I’d like to briefly comment on 2 items. Starting in Q1 of 2014, we’ll be presenting our retail segments slightly differently. There will be 2 retail segments in Canada, the realigned segment will include Canadian Wealth, excluding TD Ameritrade and Epoch and Insurance, in addition to the current Canadian Personal & Commercial Banking business. The U.S. Retail Segment will include the existing U.S. P&C business, but add U.S. Wealth, Ameritrade and Epoch. There’ll be no changes to either wholesale or the Corporate segments. In order to facilitate transition to the realigned segment presentation, we plan to continue to provide net income information for the Canadian P&C and Wealth and Insurance businesses. We also plan to restate the 2-year historical information before the end of Q1 ’14, so that everyone will have time to understand the impact before we formally start reporting on this new basis. Also, the enhanced disclosure task force has been working hard on improving risk-based disclosures and in October of 2012 published 32 recommendations. This was a major priority for OSFI and the Canadian banks during 2013. Sincere thanks to the TD team for their extraordinary efforts in making this happen. We’ve outlined the recommendations and references to TD’s disclosures on our IR website. Additional enhancements to these disclosures are expected in 2014. Our IR team will be happy to review any of the 32 disclosures with you. With that, let me turn the presentation over to Mark.

Mark R. Chauvin

Thank you, Colleen and good afternoon, everyone. Please turn to Slide 15. Q4 continues to reflect the strong credit performance we’ve seen throughout 2013. Total PCL for 2013 was just under $ 1.6 billion, an improvement of $ 188 million or 11% over 2012, after absorbing increased credit losses resulting from the Target acquisition. At the same time, loan volume grew by $ 36 billion or 8%. This translates into a full-year PCL rate of 37 basis points for 2013 versus 46 basis points last year. Canadian gross impaired formations remain flat year-over-year with strong volume growth in the Personal and Commercial portfolios. Canadian Personal and Commercial loss rates were at the lowest level experienced during the last 5 years.

And in the U.S., a recovery in Real Estate has led to improved loan-to-values across the residential real estate portfolio and commercial credit quality continues to improve.

Looking forward, I expect more of the same. Consistent strong credit quality throughout 2014 which should translate into stable loss rates, assuming the economic environment plays out as we expect. Now, I’ll turn the presentation back to Rudy.

Rudy J. Sankovic

Thank you very much, Mark. And I’ll now open it up for questions and to give everyone a chance to participate, please keep to one question and then requeue if there’s time. For those participating in person here in the room, can I ask you to identify your name and firm before asking your questions. And before ending the call today, I will ask Ed to offer some final remarks. So why don’t we get started in the room?

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