The Toronto-Dominion Bank Management Discusses Q1 2014 Results - Earnings Call Transcript

Feb.27.14 | About: Toronto-Dominion Bank (TD)

The Toronto-Dominion Bank (NYSE:TD)

Q1 2014 Earnings Call

February 27, 2014 3:00 pm ET

Executives

Rudy J. Sankovic - Senior Vice President of Investor Relations

W. Edmund Clark - Chief Executive Officer, Group President and Non-Independent Director

Bharat B. Masrani - Chief Operating Officer

Colleen M. Johnston - Chief Financial Officer and Group Head of Finance, Sourcing & Corporate Communications

Mark R. Chauvin - Chief Risk Officer and Group Head of Risk Management for Corporate Office

Michael B. Pedersen - Group Head of U.S. Personal & Commercial Banking, Chief Executive Officer of TD Bank and President of TD Bank

Timothy D. Hockey - Group Head of Canadian Banking, Auto Finance & Wealth Management, Chief Executive Officer of TD Canada Trust and President of TD Canada Trust

Riaz E. Ahmed - Group Head of Insurance, Credit Cards and Enterprise Strategy

Analysts

John Aiken - Barclays Capital, Research Division

John Reucassel - BMO Capital Markets Canada

Jason Bilodeau

Michael Goldberg - Desjardins Securities Inc., Research Division

Steve Theriault - BofA Merrill Lynch, Research Division

Robert Sedran - CIBC World Markets Inc., Research Division

Peter D. Routledge - National Bank Financial, Inc., Research Division

Mario Mendonca - TD Securities Equity Research

Sumit Malhotra - Scotiabank Global Banking and Markets, Research Division

Meny Grauman - Cormark Securities Inc., Research Division

Darko Mihelic - RBC Capital Markets, LLC, Research Division

Rudy J. Sankovic

Good afternoon, and welcome to TD Bank Group's First Quarter 2014 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 Ed Clark, the bank's CEO; and Bharat Masrani, our COO; after which Colleen Johnston, the bank's CFO, will present our first quarter operating results. Mark Chauvin, Chief Risk Officer, will then offer comments on credit quality, after which we will entertain questions from those 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 Wealth Management; Mike Pedersen, Group Head, U.S. Banking; Bob Dorrance, Group Head, Wholesale Banking; and Riaz Ahmed, Group Head, Insurance, Credit Cards and Enterprise Strategy. Riaz also has responsibility for the capital and treasury activities of the bank.

Please turn to Slide 2. At this time, I'd like to caution the -- our listeners that this presentation contains forward-looking statements, 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'd also like to remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results to assess each of its businesses and to measure overall bank performance. The bank believes that adjusted results provide readers with a better understanding of how management views the bank's performance. Ed and Bharat will be referring to adjusted results in their remarks.

Additional information on items of note, the bank's reported results and factors and assumptions related to forward-looking information are all available in our Q1 2014 report to shareholders.

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

W. Edmund Clark

Thanks, Rudy, and welcome, everyone. Bharat and Colleen are going to be up shortly to discuss our first quarter results in detail, so let me just go give you some of my thoughts about the quarter as a whole.

Well, frankly, TD performed very well in the first quarter. Earnings were up 6% on the year and crossed the $2 billion threshold for the first time. Earnings per share were also up 2% to a new high of $1.06 on a split basis. This impressive performance was driven by record retail earnings and a very strong quarter in wholesale. In addition to these positive results, we are pleased to declare a dividend increase of $0.04 this quarter, which is equivalent to $0.08 on a pre-split basis. With this increase, our dividends paid for the fiscal year will rise by more than 13% year-over-year and our payout ratio will be much closer to the midpoint of our 40% to 50% target range. As we said when we adopted the higher range in the third quarter of 2012, we intended to reach the midpoint through steady dividend growth, and we've delivered on our commitment, a great result for our shareholders. In fact, since the third quarter of 2012, our quarterly dividend will have risen by over 30%, including today's increase.

The $0.04 increase is larger than we have delivered in the past, and that is because it may be our only dividend increase this year. While we recognize that our investors have enjoyed the recent pattern of twice-per-year dividend increases, we've decided to take this opportunity to give ourselves more flexibility with respect to the timing of dividend increases. Investors should not read anything into this shift. Clearly, our dividends will increase in line with earnings, and we intend to continue to be guided in deciding the size of dividend increases by the desire to move to the midpoint of our target range.

With respect to capital allocation, we ended the quarter with the Basel III common Tier 1 ratio up 8.9%, almost level with last quarter. Now that is in despite the impact of the Aeroplan acquisition, the impact of the CVA capital charge and the IFRS phase 2.

Overall, I'm very pleased with where we stand. The year is off to a good start and we have great momentum in our core businesses. The U.S. recovery is gaining strength, enough that the Fed has begun tapering its quantitative easing program, and it now seems clear that U.S. GDP growth is likely to outstrip Canadian GDP growth. We are well positioned to benefit from this rebalancing in North American economic activity given our strategy of diversifying our earnings outside of Canada. In addition, the exchange rate has moved in our favor, which is obviously reflected in our results this quarter.

Now low interest rates, slow personal loan growth in Canada and a demanding regulatory environment continue to affect the fundamentals of our business. On the other hand, we expect to see some normalization of interest rates in 2015, and as we have noted before, we will benefit meaningfully from that shift because of the structure of the business and the structure of our balance sheet. Until then, we are focused on striking the right balance between managing near-term profitability and investing in future growth. Improving upon our [ph] productivity is obviously key. By finding inefficiencies today, we can fund increased investment in our business and distribution channels.

Clearly, expense growth was elevated in the first quarter. We remain committed to achieving positive operating leverage and expect expense growth to decline later in the year. We believe that the combination of positive operating leverage, the embedded revenue opportunities we have in our growth businesses and support from a favorable exchange rate should enable us to reach the bottom end of our 7% to 10% target range for total bank EPS growth this year after adding back the insurance losses we announced in the third quarter of 2013. We will have to work hard, of course, to make sure that we achieve that result. But of course, you would say that is what we're paid to do, and we're feeling increased confidence that we will succeed.

With that, let me turn it over to Bharat.

Bharat B. Masrani

Thank you, Ed, and good afternoon, everyone.

As Ed said, fiscal 2014 is off to a very good start, with a record performance in our combined retail operations and a strong quarter in wholesale. Let me review the key drivers of these results.

Our Canadian Retail segment delivered 5% earnings growth this quarter. Personal loan and deposit volumes were solid, and business lending continued to grow at double-digit rates. Our Canadian credit card business saw higher transaction volumes driven by the Aeroplan acquisition, and our Canadian wealth business benefited from healthy asset and fee income growth, as well as stronger trading volumes. Core net interest margins were stable. Earnings were further supported by a continued improvement in credit, as well as positive operating leverage.

Offsetting these positive drivers are insurance business, so net income declined for the quarter as the severe winter led to an increase in weather-related claims, consistent with the experience across the industry. Looking ahead, we continue to feel quite good about the outlook for Canadian Retail.

As you know, this is our first quarter with Aeroplan. And we are off to a great start with much stronger account growth than we had anticipated. We could not be more pleased with the first month of activity. As expected, the competitive response has been fierce. This is good news for consumers, but we feel very confident about our offering.

Our U.S. Retail segment also had a good first quarter, with net income up 5% from a year ago, excluding TD Ameritrade. The Target and Epoch acquisitions made a strong contribution, as did our ability to deliver stronger organic loan and deposit growth than our peers, and underlying credit quality improved. The major drag on growth in the quarter was a lower level of security gains. As we indicated on the Q4 call, this will be a factor for the rest of the year. As a result, while we expect good growth in our operating businesses and continued good fundamentals, we expect our U.S. Retail segment to deliver a modest increase in U.S. dollar earnings in fiscal 2014.

Our Wholesale segment delivered strong results in the first quarter, reflecting robust growth in trading-related income and high advisory and underwriting fees. ROE was 21%.

TD Securities made further strides in building out its U.S. dollar fixed income business globally. Being approved as a primary dealer by the Federal Reserve Bank of New York will be beneficial in this process.

We are very pleased with the performance of our Wholesale business in the quarter. While trading revenue is likely to ease from this quarter's level, we expect our Wholesale segment can continue to deliver 15% to 20% annual returns.

To wrap up. The year has started on a positive note. Our core businesses are generating good organic growth. And our earnings will get a lift from recent acquisitions: the first full year impact of Epoch in the U.S. wealth business and of Target and Aeroplan in our U.S. and Canadian credit card businesses. As Ed mentioned, we're also benefiting from a stronger U.S. dollar, partly reflecting the outperformance of the U.S. economy.

At the same time, we face a difficult operating environment marked by low interest rates, heightened global volatility and a full regulatory agenda. It will take energy and hard work to navigate these headwinds and achieve our goals for earnings growth and expense management while continuing to invest in the future, but I'm confident that with our proven strategy, strong brand and experienced team, we have everything we need to succeed.

With that, I'll turn it over to Colleen to review our results.

Colleen M. Johnston

Well, thanks, Bharat, and good afternoon, everyone.

Let me take you through our results. Please turn to Slide 4. And we'll start with the highlights. We delivered record adjusted EPS of $1.06, up 6% year-over-year. Total bank adjusted net income of $2 billion was also up 6%. This marks the first $2 billion quarter for the bank. Our segment results include Retail-adjusted earnings of $1.8 billion, a new record, up 8% over last year, including the impact of a stronger U.S. dollar; Wholesale net income of $230 million, up 44% due to strong trading results; and the Corporate segment posted a loss of $38 million. Overall, a strong result for the bank this quarter.

Please turn to Slide 5. This slide presents our reported and adjusted earnings this quarter, with the difference due to 5 items of note. There are 2 items that I'd like to highlight: the $196 million after-tax gain on the previously announced sale of TD Waterhouse Institutional Services and the $115 million after-tax impact of charges related to the acquisition of the Aeroplan Visa credit card program and TD's share of the existing portfolio. Please note, this item impacts Canadian Retail and not our Corporate segment.

Please turn to Slide 6. Canadian Retail delivered a good quarter with a record adjusted net income of $1.3 billion, up 5% year-over-year. The increase was driven by good loan and deposit volume growth; higher fee income, primarily in wealth; and favorable credit performance, partially offset by higher weather-related insurance claims.

Loan and deposit growth was good this quarter. Total loan growth was 5% year-over-year, with real estate secured lending volume up by 4% and business lending growth up a strong 13%. Card growth was strong at 14% due mainly to Aeroplan. Personal and business deposits increased by 4% due to strong growth in core checking and savings accounts, partially offset by lower term deposit volume.

NIM increased 2 basis points sequentially mainly due to the Aeroplan card acquisition. We expect margins to be relatively stable over the next couple of quarters, depending on product mix, seasonal factors or rate moves. Credit performance continues to be strong, with PCL in personal banking down $17 million from last year primarily due to lower bankruptcies, principally in credit cards. Business banking PCL remained stable.

Adjusted expenses were up 5% due to the impact of merit increases; higher variable compensation, particularly in the wealth business; and the Aeroplan card acquisition. Operating leverage was positive at 50 basis points.

While we've consolidated the Canadian wealth and insurance businesses into Canadian Retail, we continue to provide disclosure on those businesses. The wealth business made a strong contribution with 19% earnings growth, driven by strong asset growth, with assets under management up $16 billion or 8%. The insurance business experienced severe winter weather in December and January, which has increased current year claims. February weather has also been harsher than prior years.

Excluding the 44% decline in insurance earnings, Canadian Retail earnings rose 12% versus last year. Overall, a good performance for Canadian Retail.

Please turn to Slide 7. U.S. Retail, which includes the U.S. personal and commercial banking businesses, U.S. credit cards, U.S. TD Auto Finance, U.S. wealth business and TD Ameritrade, delivered 16% adjusted net income growth year-over-year. U.S. Retail excluding TD Ameritrade had adjusted earnings of USD 398 million, an increase of 5% over last year. The increase reflects the Target and Epoch acquisitions and good organic growth, partly offset by securities gains, which declined by USD $52 million versus the same quarter last year.

Adjusted revenue increased by 24% year-over-year due to the Target and Epoch acquisitions, good organic loan and deposit growth, partially offset by lower net interest margins, excluding Target, and lower gains on securities sales. Excluding Target, average loans were up 9% year-over-year, with a 10% increase in personal loans and a 9% increase in business loans. Average deposits increased by 9%.

Our net interest margin was down 6 basis points sequentially. The negative impact of acquired loan accounting more than offset an improvement in core margins. While deposit margins have steadily improved over the past several quarters, we are now facing pressure on loan margins given the competitive environment.

PCL increased by $46 million due to the Target card portfolio, partially offset by improved credit quality and lower losses related to acquired credit impaired loans. Adjusted expenses were up versus last year due to Target and Epoch acquisitions, investments in growth initiatives, partially offset by productivity improvements. Earnings from our ownership stake in TD Ameritrade in U.S. dollars were up 35% year-over-year mainly due to higher underlying earnings.

All in, a good result for our U.S. Retail business. While the fundamentals of the business remain strong, earnings growth in the U.S. is expected to be modest this year, as security gains in 2014 will be materially lower than in 2013.

Please turn to Slide 8. Net income in our Wholesale business of $230 million was up 44% compared to the first quarter last year. The increase in revenues was primarily driven by higher trading-related revenue, advisory and underwriting fees that benefited from improved volumes and strong underwriting activity. Revenue was up by 20% over last year due to strong trading-related revenue and strong fees from advisory and underwriting businesses. Trading-related revenue was $408 million, above our normalized level of $300 million. Noninterest expenses were up by 5% compared to last year due to higher variable compensation, in line with higher revenue. ROE this quarter was 20.6%.

Please turn to Slide 9. The Corporate segment posted an adjusted loss of $38 million in the quarter compared to a gain of $49 million last year. The Q1 loss represents a more normalized result in Corporate segment. The change versus last year was due to lower gains from treasury and hedging activities, prior positive -- prior year positive tax items and reduction of allowance for incurred but not identified credit losses related to the Canadian loan portfolio, partially offset by the gain on sale of TD Ameritrade shares.

Please turn to Slide 10. Core expenses for the year, excluding the impact of foreign exchange and acquisitions, were up by 5.5% over last year. Excluding higher variable compensation, expenses rose 4%. The elevated rate of expense growth this quarter was due to a number of timing-related items, in particular lower productivity gains, which are expected to increase as the year progresses. As such, our rate of expense growth is expected to decline as we move through the year.

Expenses were down $159 million quarter-over-quarter, excluding FX, M&A and higher variable compensation. We remain focused on delivering positive operating leverage at the bank -- at the bank level, for the year.

Please turn to Slide 11. Our Basel III Common Equity Tier 1 ratio was 8.9% in the first quarter, down 10 basis points versus Q4 of '13 despite the inclusion of the CVA charge, the impact of pension accounting changes and the acquisition of Aeroplan balances.

We are pleased to announce a dividend increase of $0.04 or 9% from the current level on the heels of last year's 12% growth. As Ed mentioned, the frequency of our announcements on dividend changes will not necessarily be twice a year. We've demonstrated our commitment to increasing our dividend payment payout ratio toward the midpoint of our 40% to 50% range. Starting this quarter, we are allocating capital to our businesses based on an 8% Common Equity Tier 1 requirement compared to 7% last year.

Overall, we continue to remain well positioned for the evolving regulatory and capital environment.

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

Mark R. Chauvin

Thank you, Colleen, and good afternoon, everyone.

Please turn to Slide 12. Performance across the bank's credit portfolios remained strong during the quarter, with several notable highlights. First, annual loss rates in Canadian Retail real estate secured lending and commercial loans continued to run at very low levels, as evidenced by trailing 4-quarter loss rates of 1 basis points and 13 basis points, respectively. Second, completion of the Aeroplan cards acquisition at the end of December improved the already strong credit quality of the Canadian cards portfolio, resulting in a combined loss rate of approximately 3%. The wholesale bank recorded another quarter of no credit losses, coupled with a reduction in gross impaired loans to a very nominal level. And lastly, improvements evident in U.S. retail credit quality during the past year contributed to material reductions in commercial gross impaired loans and credit losses during the quarter.

The net result was a reduction in the bank's total credit losses on both a year-over-year and quarter-over-quarter basis when adjusted for acquisitions and a weakening Canadian dollar. While it is unrealistic to expect further improvements in credit quality, I believe credit quality will remain stable for the balance of the year based on current economic forecasts.

With that, I'll turn it back to Rudy.

Rudy J. Sankovic

Thank you, Mark. We will now open it up for questions.

Question-and-Answer Session

Rudy J. Sankovic

[Operator Instructions] For those participating in the room, can I ask you to identify your name and firm before asking your question? Before ending the call today, I will ask Ed to offer some final remarks. So why don't we get started in the room, then?

John Aiken - Barclays Capital, Research Division

John Aiken with Barclays Capital. Colleen, you mentioned some disappointment in terms of the expense growth in the quarter leading to -- stemming from productivity initiatives. Can you give us some sort of sense as to what these initiatives really are and what we're going to see in terms of potential revenue growth versus expense growth through the remainder of the year?

Colleen M. Johnston

So just to take a step back, John, we do a very rigorous analysis every quarter of the sources of our expense growth and the reductions in that growth. So we look at what the increase in our base expenses is, our variable compensation, our projects and initiatives spend, any special or sort of unusual items and then our productivity gains. So we have a very good handle on all those various moving parts. And as I mentioned in my remarks, if we look at what we would call an elevated level of expense growth in the quarter, the fact is that we do expect our rate of productivity gains to increase as we go throughout the year. So we did have the restructuring charge at the end of the year, and a number of those items are still -- there's a bit of a lag effect in terms of when those actually start to affect our expenses. So we talked about the rationalization, for example, of some of our premises and some store consolidation and brand consolidation. We've really looked across the bank at a whole variety of other initiatives that will help to permanently reduce our cost base. So they really go right across the board. We are looking at initiatives, our strategic sourcing area and the work that we do in terms of leveraging our scale and buying power, and we have some pretty significant savings coming from that as well. So really, the goal is to make sure that we can manage the rate of -- if you look at the project and initiative spend in our base growth, is certainly to try to neutralize a fair amount of that through the productivity gains. So we do expect our rate of expense growth on a full year basis to be below what you're seeing here today, excluding the effect of variable compensation.

Rudy J. Sankovic

John?

John Reucassel - BMO Capital Markets Canada

John Reucassel, BMO Capital Markets. Just the dividend. I guess you indicated you might not have another one, increase, this year that -- and you just wanted more flexibility. Could you talk about why you feel the need or the board feels the need for more flexibility now? What's changed now versus 2 years ago or...

W. Edmund Clark

I think, when we -- 2 years ago, when -- we were down at somewhat less, actually, than 40% payout ratio. And so we said, well, let's start a program to get ourselves much closer to the new midpoint range. And that seemed to say, well, I think if I was a shareholder, and as you know, I am a shareholder, a very large shareholder, it would feel better if we didn't sort of just every year do an increase. So we really said we're going to fast-track this and every 2 quarters do it. And so then when we came to this year, we said, well, why not? We haven't got all the way here, but we've got a significant way here with a -- or a more significant -- really twice what we've been -- the pattern that we've had. Why don't we get that so the shareholders can see? Well, we're pretty close now to get there. And it does have the added benefit that says, who knows where the world will be in the next 2 or 3 years, but we can break this pattern of every twice a year always having a dividend increase. So it just seemed the prudent thing to do to go achieve both goals, get ourselves more rapidly to the payout ratio and buy ourselves that flexibility that we get.

John Reucassel - BMO Capital Markets Canada

But just to be clear, if you expect EPS growth of 7% over time, pick a number, you'd expect dividends to grow in line with that earnings...

W. Edmund Clark

Absolutely. And in fact, I think, probably in our case, still a little faster than the 7% but not as much faster as we have been doing because we're not quite there to the midpoint. So we would definitely -- we have a very strong view that dividends should grow in line with earnings.

Rudy J. Sankovic

Okay, thanks, John. Yes, Jason?

Colleen M. Johnston

But I think it's worth adding, and I -- we've made this point, but if you look now -- and having done this large increase earlier in the year, if we don't increase the dividend again in the year, that'll still mean that our dividend growth on a year-over-year basis is about 14%. And if you take that versus, let's say, the low end of our 7% to 10% range, the dividend growth is literally double the EPS growth, which to Ed's point, does get us pretty close to the midpoint of our range. So we think it's great to get there sooner.

Rudy J. Sankovic

Jason?

Jason Bilodeau

Jason Bilodeau from Macquarie Capital Markets. For Bharat and Mike, the outlook for U.S. Retail seems pretty muted, but it sounds like a lot of that has to do with the securities gains. So if we sort of look through those, can you talk about the core banking business? Given the volume growth that you guys got, is that going to be growing earnings year-on-year at a good pace? Or is the rate environment just still very challenging for you guys?

Michael B. Pedersen

No, I think the issue is the securities gains year-over-year. I think, it's public, based on our previous disclosures that there were $295 million of gains last year and it'll be significantly less than that this year. You saw that in the first quarter. In terms of the core business, as you can see, growth is very strong and significantly stronger than the industry in both loans and deposits. So we're clearly building the franchise. Colleen commented on margins, and we held up well in Q1. And looking forward, we expect deposit margins to be fairly stable. But we are seeing some industry pressure in loan margins in some categories. In -- for example, in business banking, the competitors are being more aggressive both in terms of price and structure. We're being very disciplined in both respects, and so far, so good, both in terms of margin and in terms of our volumes, which continue to be strong. But it is difficult right now to predict what lending margins will be. There is noise and uncertainty. So that's why we've characterized it as Colleen did earlier.

Jason Bilodeau

And sorry, Ed, I missed it in your opening remarks. You did, I think, mention something about a rate increase. Did you mean the U.S. in 2015? Was that...

W. Edmund Clark

Yes, what I said in my remarks -- I mean, who knows? I think we're in a very unusual -- but we've been in a very unusual economic position for some time, and that continues. And I think there is uncertainty about, is the U.S. in a pause right now, or did it just have bad weather? I think we come down that it's in a -- that it's not in a pause. It just had bad weather, and that fundamentally, the U.S. recovery is going there, but there is a question on that. And I think how deep the issues are going to turn out to be for China, you can go either way. I hear a lot of experts either way. But barring that, if -- our view, which is that China's may slow down a bit, but it's going to continue to have pretty good growth. United States, the Federal Reserve we do believe will continue its tapering program. We got rid of the monetary quantitative easing. And if the U.S. recovers, then I think most observers would say long-end rates, which are not short-end rates. I think that's still a way away, but I think longer-end rates, which are the key rates that affect the -- a lot of our core deposits, should continue to back up in 2015. But we may be in for the -- this part of 2014, a pause in the marketplace as the market tries to figure out United States and China, where this is going.

Rudy J. Sankovic

Michael?

Michael Goldberg - Desjardins Securities Inc., Research Division

Michael Goldberg, Desjardins Capital Markets. Consumer lending slowing down, we see from all the banks that have reported, but business lending is more robust. Ed, what do you attribute the stronger growth in business lending in Canada to? And Mike, if you want to comment, are you seeing a similar trend in the United States? And also, if I can ask, Ed, when you said who knows where the world might be, looking out over the next couple of years, what are the type of fears that you have about where the world might be over that time?

W. Edmund Clark

Well, to take your -- you would love -- I'd love to be able to answer that 100% of the business growth in loans in Canada is all productive investments in a non-real estate sector. I don't think that would be an accurate description. So I do think it is a mixture, that we're continuing to see a fair amount of activity in the real estate side, but we also are seeing productive investments. And clearly, that's what Canada needs if it's going to participate in the upsurge in the United States and I think regain some of its export share in the American import market. We've got to have Canadian firms investing. And so this is a good thing, that, that growth is. I don't think I have any particular insights in what I worry about. I think I worry about what I've already talked about. I mean, I worry that can China manage this transition? Because it is often the case in economies like China and emerging markets where you can get to one level of GDP and you find it hard to get to the next level because it requires fairly significant institutional shifts in your economy and in your political structure. And they're going through that, of how they make it a more market-driven economy and how they have a more market-driven banking system. And so you always worry that, that will stumble. And I think we see that when China stumbles, the emerging market world stumbles. I think that's pretty clear. I think you worry could the United States stall? But as I come down, my view is I think the United States has got, now got take-off momentum here. I think it's reported, repaired its balance sheet. I think what's going on in the housing market, I think, again, you could see some pullback given how fast this recovery is. It's actually recovered faster than I think, but I'm very positive on the United States. And I think Europe remains a mixed bag. I think there are parts of Europe that are clearly repairing themselves and getting out of their difficulties. And there are obviously a few countries that you continue to worry about. You hope they'll get more a reformist zeal because that's what they're going to have to do to continue to grow.

Michael Goldberg - Desjardins Securities Inc., Research Division

Just to elaborate. Are you seeing signs, when your people talk to clients, business clients, of improving business confidence?

W. Edmund Clark

Yes, I think definitely. I think that -- I think the worry perhaps of [ph], I think, reduce significantly on both sides of the border. Mike, do you want to?

Michael B. Pedersen

Yes. So our loan growth was obviously very strong during the quarter, up 15% overall, and 9% excluding Target. Personal lending was up 10%. Business lending up 9%; within that, 9% excluding Target. And our lending growth, as I said before, was significantly higher than our competitors'. Industry-wide, I don't see dramatic decreases in loan volumes. And I echo Ed's comments that I've seen a lot of clients in the last quarter right through our footprint, Maine to Florida, and there is improving sentiment when I talk to commercial and business clients. The one area where I would say there's obviously a slowdown is mortgages. So if you look at our year-over-year growth, it was 12.3%, which is obviously still strong, but quarter-over-quarter, if you ignore the modest sale we made, it was more like 8% annualized. So that's a pretty fast rate of slowdown. So we still believe we'll outgrow the market, and that's because we are underpenetrated against our customer base. And we are improving our sales force and our capabilities, but we're seeing a slowdown. So industry originations were down 58% year-over-year, and the refi boom has clearly ended. So it'll be interesting to see what happens in the spring selling season and after the winter weather, but our goal is to continue to outgrow. And I would just point out that even with -- after the sales, pretty flat mortgage growth in the quarter, we still had 9% lending growth overall. So we've got lots of loan businesses, lending businesses where we're doing well and lots of diversification and opportunities for growth.

W. Edmund Clark

Tim, do you just want to comment on Canada, both personal and commercial?

Timothy D. Hockey

On the business side, as you know, we had strong growth, Michael, up 13%. We are seeing that in the industry overall, the market share numbers that we get, a few months dated, would say that, that growth in business lending in Canada is starting to slow down. It's starting getting into the high singles as opposed to low double digits. We've been gaining share, which has been contributing to that extra growth rate. We, frankly, are doing it in what we call the mid-market, the 1 to 5 range. Small business is fairly flat for us. There is increasing consumer and business confidence which is contributing that, but frankly, we're seeing the benefits of the investments we've made and just adding net new clients, as opposed to individual existing clients look to invest more in productivity gains. So it's a good news, general, broad-based story. Ag lending, for example, agricultural lending, up 27%, so some good underlying numbers. On the consumer front, we are seeing some good consumer uptick. We had a stronger, even ex Aeroplan, consumer lending growth. Real estate secured lending seems to be a nice story for us. So whereas we were seeing a year-over-year slide, sort of inexorable over the last 7 or 8 quarters in personal lending growth, that actually has started to rebound a little bit. So that's good going into the spring market. So generally, on balance, a little bit of slowing perhaps on the business side but still good market share gains and a slight acceleration perhaps on the consumer side.

Rudy J. Sankovic

Great. Thanks, Michael. Why don't we go to the phones, operator?

Operator

Your next question comes from Steve Theriault from Bank of America.

Steve Theriault - BofA Merrill Lynch, Research Division

A question for Riaz, if I could, on insurance. I don't think many of us are surprised this is a poor quarter for insurance given the weather that we've seen close to home here. But looking ahead, though, I was hoping, Riaz, you could address earnings power. And I know you're -- be loath to give guidance, but can you help us understand a bit how the combination of poor weather this year, any move to reprice home insurance, any changes you've made or are looking to make to your positioning in Ontario auto, how do you see that impacting your earnings power over the course of the next year or so? And is there any reason not to expect you get back to sort of that $150 million of core run rate sooner rather than later, appreciating Colleen's comments that February was another difficult weather month, but outside of that?

Riaz E. Ahmed

Steve, thank you. So you're right to point out that weather has been difficult from December and right through into February. And one of the things that is obviously of concern to the industry more broadly is the increasing volatility in the weather in the summer and the winter. So I think that what you'd expect is that there will be a fair bit of repricing that is occurring and, in fact, has already started. I think consumers are becoming more aware of their coverages and prices. And so I think all of that, from a consumer education perspective, is a good thing, and the industry is going to need to work to make sure that it continues to earn decent returns. I think, in that respect, particularly on the auto and Ontario auto side, it is still early to say, because, as you know, some of the industry participants already have their pricing schedules from fiscal, which they will just be starting to implement now, and others have not. So we haven't seen any market impact of that yet, but I anticipate that it will be coming for the balance of this quarter and -- for the balance of this fiscal year, I mean. And then the industry continues to be hopeful that the -- that Ontario will do more on the cost reform front. So I think there is a lot of uncertainty, and as you point out, we'll all be concerned to ensure that we're continuing to deliver good returns to shareholders. And it is hard to give you particular guidance on that because I think we're just right in the middle of it. I'd also remind you that a fair bit of our business is life and health driven, and the smaller part is general insurance. So I think overall I wouldn't be overly concerned about the volatility on the general insurance side of it.

Steve Theriault - BofA Merrill Lynch, Research Division

So I can appreciate it, it takes time. Would you say you're becoming any less competitive in any of the -- your core markets? Like are you moving -- is everybody moving at a similar pace in terms of, say, repricing on the home side?

Riaz E. Ahmed

No. I think -- look, our objective is to make sure that our customers are getting the coverage that they need. And we'll deliver it to them at the most competitive price. And what we want to make sure is that our book, for whatever variety of reasons, is profitable in all segments and that we are not seeing unnecessarily adverse selection and those kinds of things that we want to protect in terms of our direct model. But no, I think we don't plan on being uncompetitive in this space.

Operator

Your next question comes from Robert Sedran with CIBC.

Robert Sedran - CIBC World Markets Inc., Research Division

Just quickly, a point of clarification, Colleen. I guess, is the reason that the average common equity in the U.S. Retail has gone up almost $2 billion, is that the 8% from 7% move you talked about in your capital slide?

Colleen M. Johnston

So if you're talking -- are you talking in U.S. dollars now?

Robert Sedran - CIBC World Markets Inc., Research Division

Yes.

Colleen M. Johnston

So yes, U.S. dollars, I believe the increase was smaller than that, unless you're talking about old segment to new segment disclosure. So yes, there was a fairly large increase in the capital. It was over $1 billion related to the move from 7% to 8%. That was the main reason for the increase.

Robert Sedran - CIBC World Markets Inc., Research Division

Okay. And my question revolves around Target. I guess there was a fairly major data breach in the U.S. during the quarter. And my understanding is that the financial implications to TD are immaterial and in fact may be 0. So first, can you confirm that? And then second, just perhaps some color in terms of what it's meant strategically from a spend and new card usage and new card development perspective, and whether there's been any lasting impact on the numbers from that.

Riaz E. Ahmed

Robert, it's Riaz. I'll take that, if it's okay. So yes, I'm happy to confirm that there's been -- we've seen very little impact in terms of fraud losses arising from that particular incident. And I can't tell you how pleased we are with how the partnership is working out between Target and ourselves in terms of making sure that we have vigilance and appropriate response to this issue. There is -- in terms of its impact on spending levels and balance levels, we would expect that the growth rate might reduce a little bit, but I don't think it is going to be anything material. The program overall, since we've acquired the portfolio, has done fantastically well, and a slight reduction in the growth rate won't change the fact that it will continue to be fantastic.

Robert Sedran - CIBC World Markets Inc., Research Division

But you have seen a bit of a reduction in the gross -- growth rate, but you're not expecting it to continue, basically.

Riaz E. Ahmed

Correct.

Operator

Your next question comes from Peter Routledge with National Bank Financial.

Peter D. Routledge - National Bank Financial, Inc., Research Division

Your common equity capital position is quite strong, so I want to ask a question about noncommon. First of all, it doesn't look to me like you have any worries about noncommon this year because maturities are out into 2015 and later. So part a would just be, can you confirm that? Part b would be, what are the prospects of a framework emerging for Tier 2 nonviable contingent capital in the next little while? And what are the stumbling blocks?

Riaz E. Ahmed

Peter, it's Riaz. The -- so you are right that there -- we don't have any urgency in terms of the need to issue additional Tier 1 or Tier 2 capital. We were pleased to see the preferred share market open in January with 3 substantial issues. And so I think that removes at least some uncertainty in that part of the capital structure. And so we think -- and the market received those issues fairly well, and those issues are trading quite nicely. So that was good to see. As you know, we've spent a lot of time with institutional fixed-income investors to do educational sessions around what the conversion features should look like and how that might affect their view. I think the good thing overall is that the amount of capital that supports the same risks through the Basel III transition has increased substantially. So overall, if you're a subordinated debt holder, the probability of default has gone down materially, and so the importance of the conversion features has diminished compared to the pre-Basel III world. That being said, I think there is still a fair amount of work to do just to make sure that we get the alignment of the conversion features between the preferred shares and the sub-debt to preserve as much as we can the hierarchy of claims. And secondly, I think the industry is anxiously awaiting the Department of Finance's guidance on bail-in, and we'll have to see how that plays out. So we hope all of that -- that those developments come out a little more rapidly so that we can move ahead to resolve that part of the capital structure.

Peter D. Routledge - National Bank Financial, Inc., Research Division

Ultimately, you'll have to replace your sub-debt, in particular, with NVCC sub-debt. Keeping [ph] everything aside, the cost of financing that part of your capital structure, the way I see it, it won't be material one way or the other, i.e., you won't get a benefit or you won't have a higher cost. Is that a fair assumption from -- sitting from here?

Riaz E. Ahmed

Yes, I would not expect it to be a benefit. And I think part of what we're working with the various participants in this -- the fixed-income buyers is to say that, actually, it shouldn't cost a lot because the probability of default has dropped quite significantly. So -- and I would maintain that the quality of sub-debt that the banks are issuing today, with the increased level of capitalization underneath it, is actually better than what it was in pre-Basel III world. So I -- but I do think that initially there are likely to be some premium to get the structure out, but over time, I think we -- I would expect it to settle back in.

Operator

Your next question comes from Mario Mendonca with TD Securities.

Mario Mendonca - TD Securities Equity Research

Colleen, first, I need to understand how important the yield accretion is. It -- these portfolios have been around for a while now. Could you size the increment to NII from yield accretion this quarter in the U.S.?

Colleen M. Johnston

Mario, we don't tend to comment on the specific movements in accretion, but if you look at what happened quarter-over-quarter, last year, we -- sorry, last quarter we had a positive number that was accretion related, related in fact to the Target portfolio. So that didn't recur this quarter, and in fact, we saw other amounts of accretion decline. And as you know, part of this -- there's really 2 things that are happening here, one of which is that you see a shift in the geography of the P&L, and that's really more accounting driven, that, as you know, the sum -- the good news on -- when we have a better credit performance than expected on these acquired portfolios, the good news goes to net interest income, but the bad news goes to PCL. So you can see a shift between those 2 lines. So there's that general noise. And I would say accretion, to a certain extent, is declining slightly over time as the value of those -- or as the total amount of outstanding balances of the acquired portfolios decline as well. So as we've said, that -- in fact, the 6 point -- basis point decline in the margin quarter-over-quarter was entirely due to accretion. In fact, if you excluded the accretion, we were up quarter-over-quarter.

Mario Mendonca - TD Securities Equity Research

So looking at the PCLs, then, in the U.S., I can't tell whether that's related to the accretion, essentially the bad news in the analogy you were using. Or was there something more fundamental going on with U.S. personal PCLs? Because they did look elevated [indiscernible]...

Colleen M. Johnston

Yes, so what happened to PCLs in the quarter. So on the face of it, it looks like our PCLs are up in the U.S. on a year-over-year basis, but if you exclude the impact of including Target, the Target business, which just obviously was included in this quarter but we didn't have in Q1 of last year, our PCL was down on a year-over-year basis, and -- as were our PCLs down in Canada as well. So PCL continues to be a tailwind for the bank. And part of that shift was in the NII.

Mario Mendonca - TD Securities Equity Research

Right. So not yield accretion, then. It's been mostly target.

Colleen M. Johnston

Well, it -- no. No, there was another element that related to this as well. So it's the good -- so in this case, the good news went to PCL.

Mario Mendonca - TD Securities Equity Research

I get it, okay. One final thing, then. When Ed was talking about looking at earnings growth in 2014, he made it clear that you'd have to add back the insurance loss. When you talk about total bank operating leverage being positive for the year, would you apply the same basis that Ed is?

Colleen M. Johnston

So yes, I would. So in any of the numbers that we talk about, we assume that we've added back that $0.45 impact on the old basis, and that's our new starting base for looking at how we performed in 2014. The operating leverage calculations have changed as well now that we -- the claims line is shown separately than the revenue line in insurance. But that doesn't relate to the fact that we are, in fact, adding back all of the amounts that -- the losses that we announced in Q3 last year in establishing the base earnings.

W. Edmund Clark

Come on, Mario, are you trying to get some daylight between Colleen and me?

Mario Mendonca - TD Securities Equity Research

I was, I was.

Operator

Your next question comes from Sumit Malhotra with Scotiabank.

Sumit Malhotra - Scotiabank Global Banking and Markets, Research Division

This question is for Mike Pedersen, perhaps for Ed as well. Looking at U.S. loan growth in the quarter, specifically on the consumer side, I know you talked about the year-over-year numbers being still very solid, Mike, but when we look at resi mortgages, HELOCs, auto, all relatively flat. And the question I wanted to ask here is -- I think we can agree that TD has had a pretty good track record at avoiding some of the missteps in stepping out on the risk curve of some of its competitors. And when we hear about one of your larger U.S. competitors starting to lend in the subprime mortgage market again, we hear about some very aggressive terms in pricing in auto, how much of the slowdown in consumer loan growth is -- or in the U.S. at least in the quarter is the fact that you may no longer be comfortable with some of the lending practices you're seeing, or starting to get less comfortable with that?

Michael B. Pedersen

So I'll comment on mortgages and HELOCs and so personal lending. I'll let Tim comment on auto. So I would say, none of it. We're not changing our underwriting approaches, either for any reason or in response to anything that's going on in the industry, and are still seeing nice growth. But it will slow down, the housing-related credit, but no changes in underwriting, and we still think we'll outperform in terms of growth.

Timothy D. Hockey

As far as the auto loan market in the U.S., it is still hypercompetitive. We've actually scaled back a little bit on both our numbers of dealers as well as our originations in the last quarter. So call it a 1.5 billion number, down from 2 billion plus in the tail end of last year. Our mix is changing a little bit. We're actually going a bit more to the prime and super-prime end of the market and certainly not going down market, but at the same time, we're still building out the capabilities to feel comfortable with the risk profile of near-prime lending at some point. But we're not there yet.

Sumit Malhotra - Scotiabank Global Banking and Markets, Research Division

So the aggregate consumer growth sequentially, it's something like 1.5%. Given the, let's call it the upticking in competition, is that a reasonable run rate for consumer? Or do you think that, that might be a little bit low just looking at it on a 1 quarter basis?

Michael B. Pedersen

It's hard to predict what's going to happen here given the speed with which things are moving around. But it would be a little low if for no other reason that we did have some mortgage sales during the quarter which don't show up in that number.

Operator

Your next question comes from Meny Grauman with Cormark Securities.

Meny Grauman - Cormark Securities Inc., Research Division

Earlier this week, Jamie Dimon mused about how technology specifically is changing the size of branch networks, specific for his company but in the U.S. in general. And appreciating that your position in the U.S. is still one of growth, but I thought I'd ask Canada's Jamie Dimon what he thought about that issue in Canada, specifically in terms of how technology specifically is affecting the size and look of the branch network over the coming few years.

W. Edmund Clark

So, Tim, do you want to start and then go to Mike?

Timothy D. Hockey

Certainly. I don't think he was referring to me as Canada's Jamie Dimon, but I'll kick it back to you at the end. I think there was somebody else on the table. So in terms of branch format in Canada, then clearly, just as we do in the U.S., we're constantly experimenting with branch format size. There is no question that the average square footage of a branch will be declining over time, and they will also changed in the nature of the transactions that happen. They'll move much more to sales transactions versus service transactions. And we've seen obviously a remarkable increase in online, mobile and alternate forms of distribution growth. I would say that to date we still continue to see the vast majority of sales happening in the branches. So it'll be a question of managing that shift, but we're seeing great success in the alternate formats we're seeing so far.

Michael B. Pedersen

Yes. I would just say that, first of all, it's clear that there are some important general trends. And in the U.S., we have now seen the total number of branches flatten out and begin to decline. But every bank circumstances are different, and we have our own views about the roles of stores, and Tim just spoke to that. And we're also in a unique situation given that we have a fairly fresh store network, if you will, and we also have 3,200 households per store versus the industry average of 1,400. That puts us in a very, very different position than our competitors in terms of our store penetration. In most markets, it's our belief that we should still grow our store network, and we're continuing to do that. Consistent with what Tim said, the stores we're opening are smaller and cheaper and more oriented towards sales and advice. And as we're opening them, we're investing very fast as well in all the digital channels, in online and mobile, in capability for both retail and small business clients. We're very focused on all the industry developments around that, but our view is stores are going to continue to be a very important tool to acquire customers and to sell products. So we are going to, I think, have more stores in the future than we have today.

Rudy J. Sankovic

Thanks, Meny. We've got time for one last question.

Operator

Your last question comes from Darko Mihelic with RBC Capital Markets.

Darko Mihelic - RBC Capital Markets, LLC, Research Division

My question is for Colleen. I'm looking at Slide 14 of the presentation, the items of note, and I just wanted to ask a few questions with respect to some of these items. The first question is, next quarter, will we see the -- or in any quarter, for that matter, the subsidy that you pay to CIBC, will that be highlighted as an item of note? And secondly, I guess, how long are we going to see the integration charges from MBNA Canada? And then I guess, third, why was the Ameritrade sale -- or gain on sale not considered an item of note for this quarter? And for that matter, it's probably not going to be next quarter, but I was just curious as to what the thought process was around that.

Colleen M. Johnston

So why don't we just go in reverse order? So I think on the Ameritrade gain, we see that as a normal part of our earnings. So obviously, with the items of note, we're taking out items that we don't see as being sort of indicative of underlying earnings. And this -- that one, we would see as being part of our underlying earnings, that we will, from time to time, have small -- sell small parts of that equity, in this case, to provide a bit more headroom for them. So we've consistently treated that as core earnings. On the MBNA integration, that item of note will continue for the balance of the year. And that probably does appear to be a rather long item of note with a rather long life, but I would tell you that part of the reason for that and how we've rationalized that is that when we came along to do the Aeroplan, to acquire that program and go through all of that effort and integration, that did have an impact on the rate of our efforts around MBNA. So we felt that was appropriate, to continue to recognize that as an item of note just to manage all of the operational risks around that. And then the other question I think you had was around the CIBC, the Aeroplan. So obviously, that's a large item this quarter. And the largest item in that is the commercial subsidy that we paid to CIBC. You -- we would not expect to see that ongoing, the net impact of account transfers to be included in the item of note, simply some of the ongoing setup and integration costs, which will be definitely a lot smaller as we go forward.

Rudy J. Sankovic

And Ed, over to you for final remarks.

W. Edmund Clark

Well, as I think we said at the beginning, this is a great way to start off the year. We're quite pleased where we are, and we expect to have a good year this year. Thank you very much.

Rudy J. Sankovic

Great. Thanks, Ed. And with that, we will conclude the meeting and thank everybody for joining us today. So have a good day. Thank you.

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