Toronto-Dominion Bank's CEO Discusses F4Q12 Results - Earnings Call Transcript

| About: Toronto-Dominion Bank (TD)

Toronto-Dominion Bank (NYSE:TD)

F4Q12 Earnings Conference Call

December 6, 2012 3:00 PM ET

Executives

Rudy Sankovic - Senior Vice President of Investor Relations

W. Edmund Clark - Group President and Chief Executive Officer

Colleen Johnston - Group Head, Finance and Chief Financial Officer

Bharat Masrani - Group Head, U.S. Personal and CB of TD Bank Group and President, CEO of TD Bank, N.A.

Mark Chauvin - Group Head and Chief Risk Officer

Timothy Hockey - Group Head, Canadian Banking, Auto Finance and Credit Cards of TD Bank Group, President and Chief Executive Officer, TD Canada Trust

Mike Pedersen – Group Head, Wealth Management, Insurance, and Corporate Shared Services

Analysts

John Reucassel - BMO Capital Markets

Michael Goldberg – Desjardins Securities

Steve Theriault – Bank of America Merrill Lynch

Robert Sedran – CIBC

Brad Smith – Stonecap Securities

Peter Routledge – National Bank Financial

Gabriel Dechaine – Credit Suisse

Sumit Malhotra – Macquarie Capital Markets

Mario Mendonca – Canaccord Genuity

Rudy Sankovic

Good afternoon and welcome to TD Bank Group's fourth quarter 2012 investor presentation. My name is Rudy Sankovic. I’m the Head of Investor Relations for the bank. We will begin today's presentation with remarks from W. Edmund Clark, the bank's CEO, after which Colleen Johnston, the bank's CFO, will present our fourth quarter operating results. Mark Chauvin, our Chief Risk Officer, will then offer comments on credit quality, after which we will entertain questions from those present in the room and from prequalified analysts and investors on the phone. Mike Pedersen, Group Head, Wealth, Insurance, and Corporate Shared Services will also discuss the acquisition of Epoch Investment Partners that we announced earlier today. After that we will entertain questions from those present in the room and from prequalified analysts and investors on the phone.

Also present today to answer your questions are Tim Hockey, Group Head, Canadian Banking, Auto Finance and Credit Cards, Bharat Masrani, Group Head, US P&C Banking, and Bob Dorrance, 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 and there are risks that actual results could differ materially from what is discussed and that certain material factors or assumptions were applied in making these forward looking statements. Any forward-looking statements contained in this presentation represent the views of management and are presented for the purpose of assisting the bank's shareholders and analysts in understanding the bank's financial position, objectives, and priorities and anticipated financial performance. Forward looking statements may not be appropriate for other purposes.

I would also like to remind listeners that the bank utilizes non-GAAP financial measures to arrive at adjusted results to assess each of its businesses and to measure overall bank performance. The bank believes that adjusted results provide the reader with a better understanding of how management views the bank’s performance. Additional information on items of note, the bank’s reported results and factors and assumptions related to forward looking information are all available in our 2012 MD&A available on TD.com.

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

W. Edmund Clark

Thanks, Rudy, and thanks everyone for joining us this afternoon. Colleen is going to be up shortly to discuss our fourth quarter results, but let me start by sharing my thoughts on the year as a whole.

Fiscal 2012 was a very strong year for TD with all of our businesses delivering positive earnings growth despite a number of headwinds. Total earnings for the bank were up by 10% and EPS grew 8%, in line with our 7% to 10% medium term objective. We also passed the $7 billion mark in earnings for the first time.

We achieved these results by staying on strategy and doing what we said we were going to do. Our Canadian and U.S personal and commercial banking businesses recorded strong loan growth and deposit growth throughout the year, though personal loan volumes in Canada have moderated in recent quarters.

We also continued to focus on growth opportunities we’ve identified in auto lending and credit cards. In particular we announced our agreement to acquire Target’s US credit card portfolio which we expect to close in the first half of next year upon receipt of regulatory approvals. This acquisition will help us meet two key objectives. It supports our strategy of optimizing our North American balance sheet and in fact will accelerate our progress on closing our loan deposit gap in the United States by a full year. It also significantly expands our North American credit card capabilities, building on last year’s MBNA acquisition.

Our wealth business performed well in 2012, despite difficult markets. We maintained our leadership position in direct vesting. We grew our advice base business and gathered new assets at an impressive pace. Insurance had a disappointing finish to the year, given the additional reserves we took in relation to unfavorable developments in prior year Ontario Auto claims. However, the business’s core fundamentals remain quite strong.

Wholesale finished the year on a very strong note with all of our businesses reporting well in choppy markets. We maintained our top three data stats in Canada which included achievements in a number of areas. To highlight just a few, we were number one in equity block trading, number one in syndications, number two in corporate debt under-running and number three in announced M&A.

We also continued to grow our franchise fixed income and foreign exchange businesses. In addition to these good results in our business segments, we made our object for limiting our core expense growth across the bank to 3% this year by getting more efficient at what we do and reinvesting the savings in additional productivity enhancing measures. We also raised our dividend twice, delivering an 11% increase to our shareholders and increasing our target payout ratio while continuing to build our Basel III capital position.

Let me now look ahead to 2013. We said that last year that we would have to work hard to reach the bottom end of the 7% to 10% range for adjusted EPS growth and we did. We also said though that we thought it was even tougher next year and that is still my view. The headwinds we’re facing have not abated. In the last few months consumer loan growth in Canada has slowed and the housing market has cooled. We are already seeing the impact on our Canadian retail bank. Persistent worry about weakness in the global economy and continued concern about the fiscal situation in Europe and the United States are keeping interest rates low, putting more pressure on margins and the regulatory bar keeps getting raised.

On the other hand, it’s important to keep a balanced view of the outlook, even in our base case in the countries that matter to us, Canada and the United States, GDP growth is in the 2%, 2.5% range. There’s significant upside in the United States both in the short and the medium term. The right fiscal deal with an appropriate balance of adjustment between short term withdrawal stimulus and longer term actions to address structural issues could reduce the fiscal drag implied in current forecast and more importantly, it could unlock the burden of uncertainty weighing on business decisions. Better growth in the United States would obviously benefit Canada.

Let me tell you what I think this means for our business. In Canada we’ll continue to focus on building our domestic banking business, credit card and auto finance businesses, but even with strong growth in these areas, I would expect to see some earnings rotation away from Canadian personal and commercial banking as a whole next year.

Our wealth business should be a source of above average growth. With the strong asset growth we’ve recorded, we are well positioned to benefit from an improvement in market conditions and to today’s announcement of our agreement with Epoch Investment Partners, we have taken an important step forward with our growth strategy for wealth. Mike will provide more color on the transaction shortly, but let me take a moment to say how excited we are about bringing Epoch into the TD board.

We have previously indicated that we’d be interested in adding asset management capability in the United States and global equities and that’s precisely what this acquisition does. Epoch is a successful investment manager and we are confident that we are getting good value for money. Epoch has a strong growth track record and a culture very similar to ours. This deal will strengthen TD’s wealth management business in Canada and be a pillar of our developing US wealth strategy.

On the insurance side, excluding the impact of additional reserves, our insurance business earned roughly $600 million this year. But with reinsurance costs rising and the possibility of higher claims costs, we are currently looking at earnings growth in the 7% to 10% range next year, relevant to the $600 million run rate.

TD Bank, America’s most convenient bank will be an important part of our story next year. We remain committed to our $1.6 billion earnings target for fiscal 2013 and we are confident that we can get there by leveraging our service and convenience model to keep growing market share.

In wholesale, we’ll continue to focus on delivering 15% to 20% returns despite higher capital requirements. We’re further investing in building our franchise model. In addition to these ambitious plans for each of our business segments, we will maintain an unrelenting focus on lowering our costs while improving our operations. That’s a must in today’s economic environment. We are targeting core expense growth at or below our 2012 level which will allow us to pursue positive operating leverage while continuing to invest strategically in our businesses. That means managing our expenses aggressively, but we are going to do this in the TD way, by rethinking and reengineering our businesses in ways that both enhance the customer and employee experience and strengthen our resilience as an organization.

Before I hand things over to Colleen, let me comment on the fact that there's been a lot of media speculation lately about acquisitions in the banking sector. Now normally, I would not respond to media speculation, but this is a good opportunity for me to provide an update on TD's appetite for large acquisitions in the United States because while there's been a lot of media speculation, we're not actually aware of anything big for sale in the United States.

When we look at our U.S. Personal and Commercial bank, we feel very comfortable with where we are today. With the scale we have in our footprint and our proven organic growth strategy, we are not compelled to make acquisitions and we have made that point quite consistently. In 2012, we were also very clear that we did not want to do a large transaction. Our focus was tuck-in deals and asset portfolios, and we are still interested in those.

As we look ahead to 2013, we are seeing signs of improvement in the U.S. economy that make larger deals more feasible. However, given the position strength that we are operating from today, any prospective transaction would have to satisfy certain criteria, the most important of which is that the deal meet our financial hurdles and is supported by the market, particularly if significant equity financing is required. It would be a mistake to believe that we have a bias in favor of doing a large deal. We do not. Indeed large deals contemplate a whole set of issues and the thresholds to do one are obviously higher.

The good news is that we have choices. Organic growth by itself, organic growth process series of smaller deals or the option of opportunistically taking advantage of a larger deal that might arise that fits our core strategy. Our primary focus remains organic growth. We remain cautious on acquisitions and we'll only do a deal large or small if it fit our timing and our price. We don’t intend to comment further on this subject.

To close, 2012 was a very good year for TD, reflecting consistent performance in our Canadian and U.S. retail businesses and a good result from our wholesale bank. Next year brings continued challenges, but I am confident that we have all the tools and resources we need to overcome them and continue delivering sustainable earnings growth given our proven business models, experienced management team and tremendous people.

Let me finish with a word to them. I am very proud of the 85,000 people who make TD a better bank, and whose dedication in meeting the needs of our customers and clients, was recognized by J.D Power and Ipsos again this year. You are the driving force behind our success. On behalf of the Board and the senior executive team, thank you for all your tremendous effort. I would also like to make special mention of our employees in the United States who worked tirelessly in recent weeks to support our customers and each other through the recovery of super storm Sandy. You have inspired all of us with your heroic actions.

With that let me turn the call over to Colleen.

Colleen Johnston

Thanks Ed, and good afternoon everyone. Let me take you through our results. Please turn to Slide 4 and I'll start with a brief review of the full year. 2012 total bank adjusted net income was $7.1 billion, an increase of 10% from last year and adjusted EPS was $7.42, up 8% year-over-year. Both results are new records for TD. Earnings growth was solidly within the Bank's 7% to 10% medium EPS growth objective, a good accomplishment given the many headwinds we faced this year.

In total, our retail businesses delivered adjusted earnings of $6.2 billion, up 10% from 2011 and represented 88% of total Bank earnings. TD Canada Trust had a good year, delivering $3.4 billion in adjusted earnings, up 12% over 2011, driven by good volume growth, the acquisition of MBNA and higher fee income.

Wealth and Insurance delivered good results, with earnings of $1.4 billion, up 4%. Higher fee based revenue in wealth and solid premium growth in insurance were partially offset by higher claims in insurance.

U.S. P&C delivered a record year with over $1.4 billion in adjusted earnings U.S. dollars, up 10% as a result of strong loan and deposit volume growth and higher fee-based revenue, partially offset by higher expenses to support growth and the impacts of the Durbin amendment. This 10% earnings growth was achieved despite the fact that the Durbin amendment took 10% off the bottom line.

Wholesale Banking had a good year with earnings up 8%, as stronger results in core businesses were partially offset by lower security gains. Adjusted operating leverage for 2012 was 2% and we finished the year with a strong Basel III pro forma common equity Tier 1 ratio of 8.2%. Overall, this was a strong year for TD.

Please turn to Slide 5. Looking to the quarter, our results were solid with adjusted EPS of $1.83, up 5% year-over-year and total Bank adjusted net income of $1.8 billion, up 6% from last year. Retail adjusted earnings of $1.5 billion were up 8% from last year – sorry, 6% and Wholesale net income of $309 million was up 10%. The Corporate segment loss was $29 million. Overall, a solid quarter and a strong finish to 2012.

Please turn to Slide 6. This next slide presents our reported and adjusted earnings this quarter with the difference due to five items of note. This quarter includes a reserve related to super storm Sandy, which had a $37 million negative impact on earnings. The charge mainly reflects increased PCL on loans in the severely affected areas, plus a charge related to damages to our premises.

Please turn to Slide 7. Canadian P&C had a solid quarter, with adjusted net income of $831 million, up 10% from last year.

Adjusted operating leverage was 2% this quarter with revenues up 12% compared to last year and expenses up 10%. The acquisition of MBNA added 10% to adjusted revenues, 8% to expenses, 23 basis points to NIM, and $91 million to PCL. Loan and deposit growth were good this quarter with the retail business generating good, but slowing lending volume growth. Real estate secured lending volumes were up 6% versus last year, auto lending was up 3%, and all other retail volumes, excluding MBNA, were down 2%. Retail deposits showed strong growth, up 10%. Business lending growth remains very strong, up 15%, and business deposit growth was up 10%.

Expense growth was elevated in the fourth quarter due to the timing of business investments, marketing initiatives, and employee-related costs. Credit performance remains strong with PCL and personal banking, excluding MBNA, up 1%, primarily due to adjustments related certain past due accounts. Excluding this item, personal credit quality was strong. Excluding the impact of MBNA, margin was down 11 basis points compared to last year due to the low rate environment, competitive pricing, and portfolio mix. Margin was down three basis points sequentially.

As noted previously, we expect margins to decline by a couple of basis points per quarter in 2013. In Q1 2013 margins may be down by approximately 7 basis points as the credit mark release from the MBNA portfolio, which was embedded in NII, will not recur in 2013.

Let me briefly comment on MBNA, which was a strong contributor to earnings growth this year. The deal significantly strengthened our market share, moving us from number five to number two and earnings were ahead of our original expectations, helped primarily by much better than expected credit quality. Integration costs have been higher than expected with $150 million to $200 million of additional expenses expected in 2013. These costs will be shown as an item of note. Integration is scheduled to be fully complete by mid-2014.

Please turn to Slide 8. The Wealth business had a good quarter, while the Insurance business posted a disappointing performance. Wealth earnings were up 6% year-over-year. Higher fee-based revenue from asset growth and higher net interest income from improved net interest margins were partially offset by lower transaction revenues due to decreased trading volumes. Asset growth was strong, mainly due to net new client assets.

Insurance earnings were downs 37% year-over-year. Revenue declined due to unfavorable prior year claims development in the Ontario auto market and weather-related events, partially offset by premium growth and the inclusion of MBNA. The core fundamentals of the business remain strong. Expenses across the segment were up 1%. The contribution from TD Ameritrade was lower this quarter, down 6% on lower TD Ameritrade earnings, partially offset by increased economic ownership and a weaker Canadian dollar.

Please turn to Slide 9. U.S. P&C delivered strong adjusted net income of U.S. $358 million for the quarter, up 23% from last year. The increase was primarily due to strong organic growth, lower effective tax rate and gain on sales of securities, partially offset by the impact of the Durbin amendment. Average loans were up 16% year-over-year, including a 37% increase in residential mortgages and a 10% increase in business loans, and average deposits excluding government deposits and TD Ameritrade IDAs were up 7%.

NIM was 348 basis points, down 12 basis points versus last year, primarily due to the low rate environment and strong growth in lower margin products, especially mortgages. We continue to remain comfortable with our previous NIM guidance of 350 to 375 basis points. Accounting noise will continue to create some bumpiness and occasionally cause us to fall outside of our range.

We will continue to see deposit compression due to the low interest rate environment, but our expectation is that loan growth will exceed deposit growth thereby helping our NIMs. The target acquisition which we expect to close in the first half of calendar 2013, upon receipt of regulatory approvals will increase our NIMs. Total adjusted PCL was up 55% from last year, primarily due to new regulatory guidance on loans discharged and bankruptcies and timing in the acquired credit impaired portfolio. The underlying credit quality of the loan portfolio continues to improve. Adjusted expenses were down 4% from elevated levels last year. During 2012, we opened 41 new stores, bringing us to 1,315 stores in the U.S.

Looking to next quarter, we are seeing some early softness in volumes and fee income associated with lower transaction levels in the aftermath of super storm Sandy.

Please turn to Slide 10. Wholesale delivered a strong quarter in difficult markets, with net income of $309 million, up 10% from a good quarter last year. The increase was due to higher trading related revenue and improved underwriting and advisory fees and reduced expenses in core businesses, partially offset by lower security gains in the investment portfolio. Total trading related revenue in the quarter was strong at $316 million, which was in line with our normalized expectation of $300 million per quarter. Non-interest expenses were down 5% compared to last year, due to lower infrastructure costs and legal provisions. Annualized ROE for the quarter was strong at 30.3%. We continue to target medium term ROEs in the 15% to 20% range despite higher capital requirements.

Please turn to Slide 11. On an adjusted basis, the corporate segment posted a loss of $29 million in the quarter. Results were down from last year, due to higher net corporate expenses largely offset by the favorable impact of other items including tax. The loss in Corporate was below our guidance due to positive treasury and hedging-related results. I won't be providing a range for corporate segment going into 2013. As you've observed the corporate segment is inherently difficult to predict and the number can be somewhat volatile. Having said this, going forward, I expect the quarterly loss on average will exceed the average of 2012, but will likely come in below my prior guidance.

Please turn to Slide 12. We continue to focus on slowing the rate of expense growth to position us for the revenue headwinds of the slow growth economy and the sustained low interest rate environment. Our focus is on initiatives that will permanently improve efficiency, making productivity a competitive advantage for TD. At the all-bank level, Q4 adjusted expenses were up 8% versus Q3. This is consistent with the pattern of higher Q4 expenses seen in past years, which has been followed by a drop off in expenses in the first quarter of the next year. As mentioned in Q3, elevated expense levels in the fourth quarter were primarily due to business volume and seasonality, higher project and initiative spend and marketing campaigns.

Excluding expenses added by recent acquisitions and foreign exchange adjusted expenses grew by 3% in 2012 in line with our target growth rate. Next year we're targeting a rate of expense growth at or below the rate of growth in 2012. In order to achieve this goal, all parts of TD are participating in our productivity agenda and we're integrating expense best practices into their business.

Key levers for 2013 will be lowering our cost from external vendors through sourcing and procurement, optimizing branch and store resources relative to volumes across our network; and process improvements that will make it easier to deliver a leading customer and employee experience.

Within the tighter expense framework, we continue to invest in a branch network, adding 65 new branches and stores this year, 24 in Canada and 41 in the United States and we plan for higher project and initiative spend in 2013.

Please turn to Slide 13. Looking at capital our fourth quarter Tier 1 capital ratio was 12.6% and our pro forma Basel III ratio was 8.2%. We are well-positioned for the evolving regulatory environment.

With that I'll turn the presentation over to Mark.

Mark Chauvin

Thank you Colleen and good afternoon everyone. Please turn to Slide 14.

As a reminder the debt securities classified as loans and the acquired credit impaired loan portfolios have been excluded from the credit slides. Setting aside one-time items which I will discuss in a minute, our Canadian credit quality remained strong while the U.S. portfolio continues to improve. There were three one-time items that have led to some noise this quarter. First, our Canadian personal results reflect an adjustment related to HELOC accounts. The impact of the adjustment is a $162 million increase in gross impaired loans and $22 million increase to PCL. With an average current loan to value of 53%, we expect ultimate losses on the newly impaired HELOC accounts to be minimal.

Secondly, in line with recent guidance from U.S. regulators, a small portion of our performing U.S. personal loans have been reclassified to non-performing status. The change was made to reflect cases where a loan has been discharged through bankruptcy proceedings, but where our borrower continues to make payments.

The regulatory guidance requires that we classify the loan as impaired and write it down to the value of its collateral, which is also consistent with accounting standards. The impact of the change was a $49 million increase to gross impaired loans and a $30 million increase to PCL. As these largely consist of longstanding loans that have always made their payments, we expect to recover a substantial portion of this account as the loans continue to pay down.

Thirdly, in response to the devastation caused by super storm Sandy, we have taken a one-time provision of $54 million. This amount is not reflected in our credit slides, but is listed as an item of note in the supplemental information package. Early indications are that our customers are well insured and we think it's unlikely that this number will be exceeded. In conclusion, we do not consider these events to be an early indicator of future challenges in our credit portfolios.

Now I'd like to turn the presentation over to Mike.

Mike Pedersen

Thanks, Mark. We're on Slide 15. So let me begin by reiterating that TD's wealth strategy is focused on organic growth, primarily by targeting existing TD customers in both our Canadian and U.S. Retail and Commercial Banking businesses, but as Ed said, we have said since last year that we would be interested in acquiring an asset management firm with strong U.S. and global equities capabilities and Epoch provides us with deep global and U.S. equities expertise, which we think will be very important to our clients going forward.

It's also highly complementary to TD's existing strengths in fixed income and Canadian securities. Epoch has grown their AUMs every year since their inception, including right through the financial crisis. They have an extremely experienced management team, a highly disciplined investment process and a proven track record of delivering strong risk-adjusted returns for their clients. So the strategic rationale for this culmination is simple. For TD, we immediately and significantly strengthen our U.S. Wealth business and we also broaden our offer for both retail and institutional clients in Canada. For Epoch, it strengthens an already strong business model, but maybe most importantly, we believe our cultures are strongly aligned.

From a financial perspective, the deal will enable both businesses to grow faster. We expect the transaction to have minimal earnings impact in 2013 and to be accretive in 2014. We plan to fund the purchase with cash and we expect that they have minimal negative impact on our Basel III common equity Tier 1 capital ratio as well. So to sum up, we're extremely pleased with today's announcement. We believe it's great news for Epoch clients, for TD's clients and for our shareholders. Rudy?

Rudy Sankovic

Great. Thank you very much, Mike. We will now open it up for questions. To give everyone a chance to participate, please keep one question and then re-queue if we have time. For those participating in person, can I ask you to identify your name and firm before asking your question? And before ending the call today I will ask Ed to offer some final remarks. So why don’t we get started with questions from the room please? Go on.

Question-and-Answer Session

Rudy Sankovic

John Reucassel, BMO Capital Markets

John Reucassel – BMO Capital Markets

Sure. I’ll start it off. Yes, sorry. John Reucassel, BMO Capital Markets. Excuse me. I know you don’t want to answer questions on large acquisition, so I’m going to try and ask one anyway. When you say it has to meet strategic priorities, is that in end market presumably and how does that roll in, how do you view investment in TD Ameritrade as part of helping to fund a large transaction? And then maybe tie in, how you feel – you talk about the U.S. getting better, but the regulatory environment seems to be uneven, Trulo [ph] those comments last week about solo capital, those type of things. Could you put that in context please?

W. Edmund Clark

So you listen to me about as much as my kids I think. So I guess just to repeat this, I’ll start with and then I’ll try to pick up your points. I think the point that we’re making – always that we’ve made all along is we do not need to acquire banks in order to grow in the United States because we have such a powerful organic growth model and we’ve been growing branches, more than 40 new stores this year and we’ve had 88% deposit growth this year, 16% loan growth. You don’t take a machine like that and say, ‘boy you need to do something to get it kick-started.’ We’ve got a fantastic machine. So we don't need to do bank acquisitions. Second point is, we are not aware of any large bank that's for sale today. So, we are talking about a hypothetical situation, but if there has been so much media comment about it, that you have to sit there and say okay.

I guess the question maybe we're hoisted on our own petard, we said clearly to the market what our focus was for 2012. I guess the question is perpetually that. So, for the next 10 years, we say, we'll never do a large deal and I think we say, we're going to get ourselves of that petard and say, clearly, if a large deal came up, it would be irresponsible to say no matter what price, no matter what our situation, we would absolutely never look at it. But what we are clearly saying is, large deals have a much higher threshold than any other deal because they involve a degree of complexity and you have to be practical. A large deal requires some financing, depending on the size of the deal and if the market doesn't like that, then you can't go do the deal. So there is a practical limit that's put on by the market.

But I think, we're trying to tell people, chill out a little here, there is nothing for sale and we are not chasing large deals and then we'll see when the world comes whether we look at it. I think we would look at TD Ameritrade in a completely different – we don't put the two together and say, we've always liked the TD Ameritrade space. I think it's obviously been a tough space over the last few years. The remarkable thing is how well TD Ameritrade is. It's growing its assets about twice as fast as its competitors. And so it's been able to hold its earnings together because it's been able to grow its volumes and offset any margins. And so, we think when we look at that, this is a pretty attractive option and we don’t know why I wouldn't put the two together. As to Trulo [ph], we wouldn't anticipate, we were running the U.S. – our U.S. entities, whether they're TD Securities or TD Ameritrade or TD Bank, America's Most Convenient Bank, we capitalize them as you know on a fully implemented Basel III standard and at this stage certainly we have no indication that when they put these holding companies together the rules for those will be significantly different than what a Basel III would lead you to do and we're already capitalized to that.

Rudy Sankovic

Next question please. Thank you, John. Mike?

Michael Goldberg – Desjardins Securities

Michael Goldberg, Desjardins Securities. Just want to follow-up on that question. I'm going to misbehave also and then I have my own question. You said Ed, that you have several criteria for anything big, including support from financial markets. How would you know in advance that you would have that support from financial markets if we didn't know what it was that you were planning to do or is there some other thing that you're getting at that would give you that indication that you'd have that support?

W. Edmund Clark

It's pretty sneaky to ride in on a question that I wasn't going to answer and then say, I'd like to ask one too, but I think the simple answer, no. There's nothing sneaky or complicated in this. I think, I believe that we have the best leader of a security dealer, certainly in Canada and one of the best in the world and I think Bob can tell me exactly what kind of deal and price the market would support or not that you don't have to go out and test the market to find that answer. I think the answer is fairly – will be fairly evident to us.

Michael Goldberg – Desjardins Securities

Let me get to my original question, and it's about insurance and the weakness that you had this quarter. How much did higher claims, adverse development and these factors are in dollar terms actually impact the pre-tax contribution from insurance this quarter, and of that, how much of that was from claims; of that, how much of that was from adverse development; and what gives you confidence that there won't be further adverse development?

Mike Pedersen

So, the way we think about the year is that insurance is a business with a fair bit of cyclicality. So, normalized earnings, as you heard, might have been around $600 million, so $150 million a quarter. This obviously hit us in the fourth quarter. You can see from the numbers that the full year impact of the adverse development compared to 2011 was about $131 million, and in terms of the quarter it was probably roughly two-thirds adverse development and one-third the weather-related events. There were four big storms in August. That’s more than we would normally expect. That included three big storms in August, sorry, and super storm Sandy in the last bit of the year.

Michael Goldberg – Desjardins Securities

You're confusing me in talking about two-thirds from this and one-third from that. Can you just give it to me in dollar terms?

Mike Pedersen

Well, we don't disclose the amount of the CATS and the severe weather events, so I'd rather not do that, but if you think about the fourth quarter and think about it in normalized earnings terms of say 150, think about the difference, two-thirds, the impact of adverse development, one-third the impact the severe weather events.

Rudy Sankovic

Anyone else in the room? So why don't we turn to the phones. Operator, could you start us off please?

Operator

Your next question comes from the line of Steve Theriault from Bank of America. Please go ahead.

Steve Theriault – Bank of America Merrill Lynch

Thanks very much. Question for Mike Pedersen or maybe for Ed on Epoch. Can you talk a little bit about how autonomous you expect Epoch to remain from TDAM? Also how long do you have to keep parties at Epoch locked up for, so to speak? And can you tell me what the mix of AUM is at Epoch U.S. versus non-U.S.

Mark Chauvin

On the question of autonomy, this is an extremely well-run business. It has been successful in growing, as I said, every year including through the crisis, extremely experienced management team. In these types of acquisitions what you're buying is the management team. So we expect them to continue to run the business as they have with the obvious caveat that they will do so within the framework of TD’s governance and risk paradigms. They will work very closely with TD Asset Management there are some synergies that we will be able to realize. For example, we have some third-party advisory mandates that we are going to be able to bring in-house. There are certain things that are being done inside TD Asset Management in Canada now that we will likely ultimately have Empire doing. So I think the answer is that we are going to try to interfere as little as possible with the obviously successful formula that Epoch has.

W. Edmund Clark

Just to underscore what Mike said, I think when you buy an asset like this you want to leave it alone. I think the one thing we will do is actually helping to grow more because there is business that we can send its way. But the key is that Epoch will stand as an entity and grow itself and I think it will just grow faster with the business that we can roll to it naturally.

Rudy Sankovic

Okay, thanks Steven. Why don’t we – next question please?

Operator

Your next question comes from Robert Sedran from CIBC. Please go ahead.

Robert Sedran – CIBC

Hi there. Good afternoon. A question on the margin I guess in the U.S. I gather Target is going to materially change the guided range there, but without that you are at the low-end or even slightly below the low-end of your 350 to 375 range. So, given the structural challenges that they are on the margin, how can you be comfortable that this range is or this quarter is about as low as it get. Is there anything unusual in the quarter that may reverse going into next year?

Bharat Masrani

Robert, as we have thought previously this number will be volatile. Once in a while we will breach the range that I had put out, but just to understand the dynamic of the business, on the deposit side for sure there is compression, zero rates in the U.S., but the offsetting side for us is that, as Ed talked about it earlier and Colleen mentioned as well, we’ve got a very good organic growth numbers for our loan business. We grew our loan 16% and that helps us on the margin side obviously, but I guess Robert you are asking to look forward. I think the key point here – and I know this is what probably people are thinking is what does this do, given the volatility in this number regarding the $1.6 billion target that we have set out there. I can tell you I’m continued to be committed to that target. I am comfortable with that target. When you look at Target acquisition, the portfolio will help us as well as our de novo strategies. You've seen the numbers we've delivered. We opened 41 stores. We plan to open 35 more next year. Colleen talked about the productivity agenda that applies to the U.S. as well. So overall, when I look at it, yes, there will be volatility in this number, but am I comfortable, am I committed to the target we've set out? Absolutely. So I think that's probably a wider perspective as to how you should look at this?

Rudy Sankovic

Mike?

Mike Pedersen

Rudy, if I can just jump in. I failed to answer the second part of the previous question around retention of the team at Epoch. There are very strong retention mechanisms in place. We have five-year contracts in place for the most senior people in the organization and retention mechanisms for every single employee in the Company.

Rudy Sankovic

Thank you. Thanks Robert. Why don't we get to the next question please?

Operator

Your next question comes from Brad Smith from Stonecap Securities. Please go ahead.

Brad Smith – Stonecap Securities

Thank you. I just had a quick question, I think in the MD&A around the U.S. Banking unit, there was some mention of securities gains in the quarter and of course when I look at the noninterest income, there's quite a significant increase in securities gains. Can you quantify that in the U.S. P&C Bank?

Bharat Masrani

I don't think we have come out exactly what those numbers are on a regular basis. I don't think it would be appropriate for me to get and try and reconcile every dollar there, but I think the bigger perspective for you to understand, Brad on this is that, we do manage our balance sheet. You are well aware as to how we do that. Given the rate environment, our duration strategy requires us sometimes to trigger security gains, because that's how we manage our balance sheet, including how we tractor within our U.S. business. In addition, as you're probably aware, under Basel III there will be capital volatility because of the unrealized gains as to how they are treated under Basel III. So it also makes sense for us to make sure that these capital benefits we have do indeed become firm under Basel III. So there is an overall strategy here that we're following, and I think that's the best way to give you that perspective and we will continue to do so until this rate environment forces us there because that is part of our overall strategy to manage our U.S. balance sheet.

Brad Smith – Stonecap Securities

Thanks Bharat. Just in the September 30 filing for the operating company, there was a $42 million securities gain. Would the amount in the segment be larger than that?

Bharat Masrani

I can't comment on that. Maybe Colleen can help there.

Colleen Johnston

Yeah. That's about the right number for the quarter, Brad.

Brad Smith – Stonecap Securities

Thank you very much.

Rudy Sankovic

Thanks, Brad. Next question please.

Operator

Your next question comes from Peter Routledge from National Bank Financial. Please go ahead.

Peter Routledge – National Bank Financial

A question for Ed. It's not about acquisitions, you’d be glad to know. But it's sort of the flipside of it. There was certainly some concern about acquisitions. It's reflected I think in that share price the last month or two. Why not go the other way? Why not announce 2% normal course issuer bid like some of your peers have done? Failing that, why not just stop the 1% discount? Outside a large transaction at some point in the future, why not actively try to keep share count level?

W. Edmund Clark

Yes, I think the simple answer, what I have said and I may well be that we are approaching the point where we'll have to solidify our capital strategy. I think we haven't yet heard what the DCIB charge is going to be, what the timeframe for implementing that is. So what we’ve basically said and as mentioned earlier, we haven't heard what the U.S. holding company rules are going to be otherwise I say we don't anticipate that it would have an impact on us. So I think at this point we've been in that capital accumulation mode and said we would address the issue after that once we did. I think the other thing is that, so far, we have been blessed where we can redeploy excess capital at well above our cost of equity. Many banks are not in that position and so buying back their shares is the only alternative that they have, but if you look at the MBNA deal, you look at the Target deal, if you look at those deals, those are spectacular deals for the shareholders. So you always have to sit there and say, if you happen to be strategically positioned where you can create economic profit for your shareholders, you'll always pause and say, well do I want to give it away and destroy value by buying at a lower return to the shareholders and taking advantage of these small opportunities that seem to be coming our way.

Peter Routledge – National Bank Financial

Okay. Thanks.

Rudy Sankovic

Thanks Peter. Next question please.

Operator

Your next question comes from Gabriel Dechaine, Credit Suisse. Please go ahead.

Gabriel Dechaine – Credit Suisse

Just a question on the Canadian margin. You’ve got the margin excluding MBNA down 3 basis points. Does that 3 basis points include any positive credit mark that was on the MBNA transaction? I mean I think it was about 4 or 5 basis points impact from that this quarter?

Mark Chauvin

Yeah. This quarter it's about net neutral. The breakdown of the 3 basis points was call it, a little over third being the deposit margins, about a third of that being a reduction in the amount of real estate breakage costs and then the rest is sort of mix.

Gabriel Dechaine – Credit Suisse

So when it says excluding MBNA, it also excludes any positive impact from the credit mark. Is that right?

Mark Chauvin

True.

Colleen Johnston

Yes.

Gabriel Dechaine – Credit Suisse

Okay, I got you. Now like people ask you this every quarter basically, but what's your plan to stabilize the margin in 2013 or this quarter basically what we should expect?

Mike Pedersen

Given I can't actually stabilize or increase the level of absolute interest rates. It's going to be a little difficult to stabilize margins, but that's I think our story in the past and going forward that we are impacted by the absolute low level and protracted low level of interest rate.

Gabriel Dechaine – Credit Suisse

Okay. And then last one for Ed, just the big picture, loan growth in Canada is still pretty strong. If it does continue and then all housing prices have started to show some weakness, but if mortgage growth and consumer leverage keeps growing at a pretty healthy clip, what would the likelihood of Wall Street implementing the countercyclical buffer be? Do you have any thoughts on that?

W. Edmund Clark

Obviously this is dangerous territory, but I would be surprised at that. I think it's becoming quite clear that Canada is well in the lead of implementing Basel III versus all the other major jurisdictions in the world. I think if the housing market reheated up, then I think the government would say, is there other non-monetary policy rules that they could do to continue to tighten down on it. But I think right now, that's a question for a year from now, not for now. I think for now people are trying to step back and say what has been the impact of the rule changes and how much of that is flowing through and how much is still to flow through and I think there's going to no action for a while here, would be my view.

Gabriel Dechaine – Credit Suisse

Okay. Thank you.

Rudy Sankovic

Thanks Gabriel. Next question please.

Operator

Your next question comes from Sumit Malhotra from Macquarie Capital. Please go ahead.

Sumit Malhotra – Macquarie Capital Markets

Good afternoon. First for Colleen, just on your comment in your prepared remarks about the Canadian banking margin. Did you say the adjustment from Q4 to Q1 – sorry, not the adjustment, the decline would be 7 basis points, strictly on the reversal of the MBNA credit card?

Colleen Johnston

So partially – I assume it on the fact that we will not have another credit mark in Q1 and partially then just ongoing margin compression, because obviously, starting next year, we'll be just publishing the margin on a basis including MBNA. So we just wanted to caution, so it wasn't a surprise when you came along to Q1 to see that you'll have both effects.

Sumit Malhotra – Macquarie Capital Markets

That’s helpful. The aggregate decline would be seven and then from that level all else equal it would be in the range that Tim has talked about in previous quarters, which is something like 2 basis points a quarter, all else equal?

Colleen Johnston

Yeah, that's right. I'll ask Tim to confirm, but yeah, that's exactly right.

Tim Hockey

Yeah. You got the math right.

Sumit Malhotra – Macquarie Capital Markets

Okay, thank you. And then just over to U.S, the Bank has made references over the last couple of years since you did the FDIC and South Financial Group transactions about the accounting back and forth between – if I can call it that, between net interest income and PCL. This quarter, the 11 basis point decline, are you in a position to help us think through how much of that is what you would consider to be a core decline versus how much is accounting, because it certainly seems like in order for margin to get back into your range before the Target deal, you're counting on some of the accounting noise to go back in your favor, if that's the right way to put it.

Colleen Johnston

Yeah, Sumit, it’s Colleen again. I'd say it's about half and half. About half of the decline was accounting related and half was core margin related and that they are largely due and this is a broader issue just around accretion generally which is not necessarily smooth on a quarter-to-quarter basis. So you will see a little bit of bumpiness because of that effect.

Sumit Malhotra – Macquarie Capital Markets

And is it right to say that for margin to actually go up in this business, again prior to Target that you would need some of that to go the other way?

Colleen Johnston

Again I think that will – it will over time that stabilizes. Needless to say I think that becomes more of a quarter-to-quarter issue and then I think we'd already reference the mix issue and Bharat had commented on that, with the expectation of continuing strong loan growth that the margins on the lending side are thicker than on the deposit side. So that should actually help us as well. And then Target, I'll provide some guidance as we get closer to close, because Target will actually have quite a significant impact on the margin, but I will help you walk through what that will do on a line-by-line basis so you can adjust your models.

Sumit Malhotra – Macquarie Capital Markets

Thanks for your time.

Rudy Sankovic

Thanks Sumit. Next question please.

Operator

Your next question comes from Mario Mendonca from Canaccord Genuity. Please go ahead.

Mario Mendonca – Canaccord Genuity

Just one quick question on expenses for Bharat in the U.S. On an adjusted basis, expenses were down fairly significantly year-over-year. Now what I'm having a little difficulty understanding is whether that's just a reflection of how high the expenses were last year, or if there was something more specific to what happened this quarter?

Bharat Masrani

No, Mario. It's ongoing expense management. We have been on the productivity agenda for a while and we are within the numbers that Colleen talked about for the Group as to what you should expect from a year-over-year perspective. And to keep this in perspective, some of those numbers may seem higher in some quarters for the U.S. business, because we do have new stores and investments that we make. So that's why sometimes you do see those numbers jump around a lot and finally there was an adjustment year-over-year once we migrated to IFRS. That had some impact as well, but overall, I think the message I would leave on expenses is that we are part of the productivity agenda. Our numbers will be higher than what Colleen has pointed out because of the investments we are making in our plant, in new stores and other initiatives.

Mario Mendonca – Canaccord Genuity

Thanks very much.

Rudy Sankovic

Thanks Mario. Next question please.

Operator

There are no further questions on the phone. Please continue.

Rudy Sankovic

Great. Thank you very much then and I will turn it over to Ed for some final remarks.

W. Edmund Clark

I just want just reiterate what I said at the start. I actually think it was a great year and I really do want to take the opportunity to thank our employees. I think what they managed to do is plow through a whole set of issues that came our way, a lot of headwinds that we had to deal, and produce great results, and I think it really underscores what a powerful underlying operating model that we have that we can overcome those headwinds. I want to thank all the shareholders for supporting us. I wish everybody the best of the season, and we look forward as a management team to continuing to perform in the interest of the shareholders in 2013.

Rudy Sankovic

Thanks Ed. And with that we will end the meeting and thank everybody for their time today. Thank you.

Operator

Ladies and gentlemen, this concludes the conference call.

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