The Toronto-Dominion Bank's (TD) CEO Bharat Masrani on Q2 2016 Results - Earnings Call Transcript

| About: Toronto-Dominion Bank (TD)

The Toronto-Dominion Bank (NYSE:TD)

Q2 2016 Results Earnings Conference Call

May 26, 2016 03:00 PM ET

Executives

Gillian Manning - Head, IR

Bharat Masrani - CEO

Riaz Ahmed - CFO

Mark Chauvin - Chief Risk Officer

Teri Currie - Group Head, Canadian Personal Banking

Mike Pedersen - Group Head, U.S. Banking

Bob Dorrance - Group Head, Wholesale Banking

Analysts

Sumit Malhotra - Scotia Capital

Robert Sedran - CIBC

Sohrab Movahedi - BMO Capital Markets

Meny Grauman - Cormark Securities

Darko Mihelic - RBC Capital Markets

Mario Mendonca - TD Securities

Gabriel Dechaine - Canaccord Genuity

Peter Routledge - National Bank Financial

Operator

Good afternoon and welcome to TD Bank Group’s Second Quarter 2016 Investor Presentation. Please be advised that this call is being recorded.

At this time, I would like to turn the meeting over to Ms. Gillian Manning, Head of Investor Relations. Please go ahead.

Gillian Manning

Thank you. Good afternoon and welcome to TD Bank Group’s second quarter 2016 investor presentation. My name is Gillian Manning, and I am the Head of Investor Relations at the Bank. We’ll begin today’s presentation with remarks from Bharat Masrani, the Bank’s CEO. After which, Riaz Ahmed, the Bank’s CFO, will present our second quarter operating results. Mark Chauvin, Chief Risk Officer, will then offer comments on credit quality. After which, we will invite questions from prequalified analysts and investors on the phone. Also present today to answer your questions are Teri Currie, Group Head, Canadian Personal Banking; Mike Pedersen, Group Head, U.S. 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 that 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 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. Bharat will be referring to adjusted results in his remarks. Additional information on items of note, the Bank’s reported results, and factors and assumptions related to forward-looking information is available in our Q2 2016 Report to Shareholders.

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

Bharat Masrani

Thank you, Gillian, and thank you, everyone for joining us today. TD delivered good results again this quarter. Net income rose to $2.3 billion, an increase of 5% from a year ago; and earnings per share were a $1.20, also up 5%. Our Retail businesses benefited from good organic growth, positive operating leverage, and continued foreign exchange benefits from our North American strategy.

Our Wholesale Bank also performed well. While provisions for credit losses rose in both the retail and wholesale portfolios, this was largely a reflection of continued weakness in the oil & gas sector. Overall credit quality remains strong.

Overall, I am pleased with our performance for the first half of the year. Earnings are up 6% and earnings per share are up 5% for the year-to-date. Our CET1 ratio at the end of the second quarter stood at 10.1%, up 20 basis points from the prior quarter. And our leverage and liquidity coverage ratios remain in line with expectations, reflecting the strength of our balance sheet. Our reported results this quarter include a $116 million after tax charge related to our Direct Investing business in Europe; Riaz will address this in his remarks.

Turning to our businesses, Canadian Retail, net income was $1.5 billion this quarter, up 2% from a year ago, as we earned through a higher tax rate. Personal and commercial banking earnings were supported by higher loan and deposit volumes, increased revenue, and good expense management, offset by higher provisions and further margin compressions. Of note, in the quarter, we had record mortgage retention rates or renewals and we grew business banking volumes at double-digit rates. Our wealth business delivered more than $10 billion in net asset growth for a second consecutive quarter, despite challenging market conditions. And TD was ranked number one for pension fund assets under management by Benefits Canada for the fifth year in a row. Our insurance business continues to perform well. While earnings were relatively flat in the quarter, net income before taxes continues to grow, reflecting significant improvements in revenue and claims performance.

We continue to assess the effects of the fires in Fort McMurray, which occurred after quarter-end. Given that our businesses benefit from loss mitigating and sharing arrangements through insurance or reinsurance, we do not expect the impact to be material.

Our U.S. Retail segment generated earnings of US$459 million in the quarter, up 6% from last year. I am particularly pleased with our revenue performance, up 6% this quarter. Loan and deposit volumes increased at double-digit rates. We are acquiring new households faster than our competitors, and we’re doing it by leveraging all our distribution channels with digital credit card sales particularly strong this quarter. While provisions for credit losses rose from a year ago, reflecting portfolio growth and allowance build, they declined quarter-over-quarter as did impaired loans. Core credit metrics remained strong. We also continue to see the benefits of a stronger U.S. dollar in our consolidated earnings with Canadian dollar earnings up 13% year-over-year and 15% including the contribution from TD Ameritrade.

Net income in our Wholesale Bank was $219 million this quarter, down 11% from a year ago as good top-line performance was offset by higher credit provisions related to the oil and gas portfolio. All of our wholesale businesses had an active quarter with underwriting and advisory revenues particularly strong. Domestic origination market improved and TD Securities won several significant mandates in the quarter, co-leading TransCanada Pipelines $4.2 billion bought deal and advising Shaw for its acquisition of Wind Mobile and disposition of Shaw Media. U.S. business also continues to perform well with origination activity strong during the quarter.

Let me take a moment to comment on provisions for credit losses. Mark will address this in more detail, but at a high level, credit metrics remained strong across our portfolios. We have seen continued weakness in oil and gas impacted areas, but trends in impaired loans and provisions are in line with expectations. Nonetheless, we made a further addition to our collective allowance this quarter to reflect credit deterioration in oil and gas exposures as well as volume growth in the rest of our portfolios. Overall, we’ve been saying for some time that we expected credit to be a headwind to earnings this year, given the benign PCL rates we reported in 2015. That is now materializing. However, we remain comfortable that we are adequately reserved, and losses will be manageable.

Looking more broadly, environment remains uncertain. Global economic growth is trending up, but the pace of the recovery remains slow and uneven. The low growth, lower rate environment continues to affect recoveries in most developed economies, but conditions are stronger in our footprint. While recent economic data in the U.S. have been mixed, domestic demand appears to be firming and the investments we have made in our business are paying off.

We are well-positioned to continue to take share. In Canada, the economy is adjusting to a lower commodity price environment, albeit from last quarter’s lows, and we’ll feel the impact of the Fort McMurray wildfires but fiscal stimulus will provide some offset; and the lower cost of raw materials is driving growth in other parts of the country where our market share is higher.

Against this backdrop, we remain steadfast in our approach. We will continue to generate organic growth and compete where we see opportunities that are within our risk asset base. We will stay focused on managing base expenses as we have done very effectively so far this year. And we will continue to invest in delivering a better customer experience across all our channels.

Last quarter, I highlighted some milestones on this journey. Let me update on our most recent accomplishments. TD Bank, America’s Most Convenient Bank scored another big win in 2016 J.D. Power survey, taking the number one spot for retail banking in Florida. This builds in our success in J.D. Power’s last small business banking survey where we were ranked number one in the Northeast region.

In Canada, TD MySpend, the real time money management app we launched this month, already has more than 180,000 customers and double that many accounts. And we expanded customer service through Facebook Messenger to the U.S. after debuting it with great success in Canada, last December. We also announced that we will be introducing Apple Pay for our Canadian customers, a service we already offer in the U.S. We’re excited to build on our leadership position in the digital space by adding Apple Pay to a strong suite of mobile payment options that include our TD app, Samsung Pay in the U.S., and our participation in UGO Wallet in Canada.

To wrap up, I’m pleased with our results in the first half of the year. We continue to execute on our strategy of building for the future, operating with excellence, and adapting to an ever changing environment. As ever, a greatest trend is our people. We were reminded of that this month as we witnessed there with some remarkable response to the devastation of Fort McMurray. To the people of Fort McMurray, as you return home to begin the long hard work of rebuilding your homes and communities, TD will be there to support you, now and in the future. And to our colleagues, some of whom I met in Edmonton earlier this month, when I visited the region, I know how tirelessly you’ve been working to support the recovery effort. Those of you with the TD mobile responsibly provided onsite emergency assistances, evacuated bank insurance customers, those that the TD Helps advice center were supporting customers with urgent financial needs, those of you at TD Insurance who gave immediate support to our evacuated insurance customers by arranging living allowances and finding temporary accommodation and who are now preparing to help customers rebuild, replace or repair their homes and automobiles when Fort McMurray reopens, and the thousands of colleagues who have made matching donations through TD to the Canadian Red Cross, thank you. The compassion and dedication are inspiring. I know we can accomplish great things together.

With that, I’ll pass it over to Riaz.

Riaz Ahmed

Thanks, Bharat, and good afternoon, everyone. Please turn to slide five. This quarter, the Bank earned adjusted EPS of $1.20, up 5% year-over-year. Canadian Retail earnings grew 2%; U.S. Retail adjusted earnings grew 15% in Canadian dollars, and 7% in U.S. dollars; and Wholesale earnings declined 11%, reflecting higher credit provisions in the oil and gas portfolio.

Adjusted total revenue increased 7% year-over-year, or 4% excluding FX and acquisitions, led by loan, deposit, and wealth asset growth. Growth was partially offset by margin pressure. PCLs increased year-over-year but declined quarter-over-quarter. Adjusted expense growth was 7% year-over-year, or 1% excluding FX and acquisitions.

Please turn to slide six. The Canadian Retail segment earned net income of $1.5 billion, up 2% year-over-year. The increase reflected loan, deposit, and wealth asset growth, and lower insurance claims partially offset by lower margins, higher PCL and a higher effective tax rate. Total loan growth was 6% year-over-year with personal lending volumes up 5% and business lending volumes up 11%. Deposits increased by 6%, reflecting growth in core checking and savings accounts, which were up 8%. Business deposits grew 4%, and wealth assets grew by 3%.

Margin declined 3 basis points quarter-over-quarter, reflecting certain adjustments made in the prior quarter, the low interest rate environment, and competitive pricing. We expect margins to remain under modest downward pressure, reflecting the interest rate environment, product mix and competitive factors. Credit losses increased 15% quarter-over-quarter, reflecting higher provisions this quarter and a sale of charged of accounts in the prior quarter. Expenses increased 1% year-over-year.

I would like to take a moment to give you an update on Fort McMurray. We are continuing to assess the impact of the wildfires. We expect we will experience some losses in our banking businesses and higher claims in our insurance businesses in the third quarter. However, as a result of our smaller footprint in Alberta and because of mitigants [ph] including reinsurance in our general insurance business, mortgage insurance in our personal banking, and third party insurance held by our commercial banking customers, we do not expect the impact to be material. I estimate less than $0.05 per share over time.

Please return to slide seven. The U.S. Retail Bank posted earnings of US$459 million, up 6% on an adjusted basis from Q2 2015. Results for the quarter ended, reflected strong revenue growth, partially offset by higher expenses and PCL. Total loan growth of 13% year-over-year, reflecting an 8% increase in personal loans and a 17% increase in business loans. Average deposits increased by 10%.

Margin was stable quarter-over-quarter, reflecting the full quarter benefit of the December, Fed rate increase, offset by lower loan margins and balance sheet mix. Overall, absent interest rate changes, we expect margins to be relatively stable in 2016. PCL decreased 23% quarter-over-quarter, primarily due to typical seasonal reductions in credit card balances. Adjusted expenses increased 4% year-over-year, reflecting investments in the business and timing. Adjusted expenses are up 2.4% year-to-date excluding impact of acquisitions.

Earnings from our ownership stake in TD Ameritrade increased 13% year-over-year, reflecting asset growth and higher trading volumes in that business. Aggregate adjusted U.S. retail earnings were up 7% year-over-year in U.S. dollars and 15% in Canadian dollars.

Please turn to slide eight. Net income for Wholesale was $219 million, down 11% year-over-year, primarily due to higher credit provisions this quarter. Revenue decreased 2% year-over-year, reflecting lower fixed income trading and equity underwriting fee, partially offset by higher advisory and corporate lending fees. Credit losses were $50 million, a $38 million increase quarter-over-quarter, primarily reflecting specific provisions in the oil and gas sector. Non-interest expenses were down 1%, reflecting lower operating expenses and variable compensation, partially offset by some foreign exchange translation adjustment.

Please turn to slide nine. The Corporate segment posted an adjusted loss of $120 million this quarter compared to a loss of $139 million in the same period last year. Net corporate expenses increased slightly year-over-year, reflecting ongoing investments in enterprise and regulatory projects. Other items increased $38 million year-over-year, reflecting contributions from positive tax items recognizing the current quarter and higher revenue from treasury and balance sheet management activities, partially offset by offset by higher provisions for incurred but not identified credit losses.

On a reported basis, the Corporate segment loss includes a $116 million after tax charge, reflecting impairment of goodwill, non-financial assets, and other charges related to our direct investing business in Europe. This business has had recurring losses indicating that the goodwill and intangible assets do not have continuing value. We are considering opportunities to prevent further losses in this business.

Please turn to slide 10. Our common equity Tier 1 ratio was 10.1% at the end of second quarter, a 20 basis points increase, due primarily to organic capital growth and unrealized gains on our AFS securities, partially offset by risk-weighted asset growth in other items in the quarter. Our leverage and liquidity ratios are consistent with last quarter. Overall, we remain well-positioned for the evolving regulatory and capital environment.

I’ll now turn the call over to Mark.

Mark Chauvin

Thank you, Riaz, and good afternoon, everyone.

Please turn to slide 11. Credit quality remained strong as evidenced by a 3 basis-point quarterly reduction in the Bank’s overall loss rate to 42 basis points despite further increases in collective allowances. Canadian Retail gross impaired loan formations have remained stable over the past five quarters at 19 basis points.

In Wholesale, further deterioration in the oil and gas producer portfolio occurred during the quarter, despite a recent strengthening in oil prices. This trend was expected as leverage borrowers exhaust available sources of liquidity. The four new impaired formations in the oil and gas sector totaling $142 million were expected, representing previously designated high-risk accounts. The $384 million decrease in U.S. Retail formations for the quarter was concentrated in the personal consumer segment. The legacy interest-only HELOC product accounted for U.S. $201 million of the decrease, resulting from completion of the remediation effort began over a year ago for major portion of the portfolio. A $126 million of the decrease was attributable to strengthening in the Canadian dollar.

Turning to the next slide. Gross impaired loans decreased by 2 basis points or $232 million to $3.57 billion. Canadian retail and commercial portfolio performance continues to trend their cyclical low level, unchanged at 29 basis points quarter-over-quarter.

In the U.S., our performance continues to be good across all the portfolios. The $353 million decrease noted during the quarter is due to a $297 million strengthening of the Canadian dollar and US$58 million decrease in legacy interest only HELOC gross impaired loans. The decrease in legacy interest only HELOC impaired loans resulted from the decline in new impaired formations, mentioned earlier, and the return of customers to performing status. Further reductions are expected this year.

Please turn to slide 13. As announced last quarter, U.S. strategic card PCLs are now reported in the U.S. Retail segment on a net basis, including only the Bank’s contractual portion of credit losses. For the purpose of these credit slides, however, we continue to report the gross amount for U.S. Retail PCL to better reflect portfolio of credit quality. Provisions for credit losses were $592 million, down $56 million, or 3 basis points, quarter-over-quarter to 42 basis points. Canadian Retail credit loss rates increased 5 basis points during the quarter to 30 basis points, roughly in line with last year’s performance of 29 basis points. U.S. Retail PCL was down a $123 million or 27 basis points during the quarter, primarily due to seasonal reduction in U.S. card volumes and strengthening of the Canadian dollar. Collective allowances for incurred but not identified losses recorded in the Corporate segment increased $60 million during the quarter due continued credit deterioration in consumer, commercial, and wholesale exposure impacted by low oil and gas prices.

Please turn to slide 14. Turning to oil and gas now. There has been little change in the composition of our oil and gas related exposure over the quarter. Drawn loans to the oil and gas producer and servicer segment increased $200 million to $4.4 billion, continuing to represent less than 1% of total gross loans and acceptances. Excluding real estate secured lending, consumer lending and small business banking exposures to Alberta, Saskatchewan, and Newfoundland and Labrador represents 2% of the Bank’s gross loans and acceptances. As expected, credit deterioration and loan impairment in oil impacted portfolios and regions are continuing.

The recent increase in oil prices, while encouraging, is not likely to have an immediate positive impact. In the corporate and commercial segments, we are now seeing the impact of sustained low oil and gas prices, which is reflected for new impairments and related provisions in the segment this quarter. The signs of deterioration in the consumer lending portfolios in impacted provinces seen last quarter are continuing, but to-date increases in credit losses have been largely offset by stronger than expected performance across the rest of the country.

Well, we are regulatory performing detailed assessments of our oil and gas exposure as the challenges facing this sector play out. To-date, the pace of negative credit migration, new impairments, and credit provisions remain within our expectations. We continue to be adequately reserved for the problems that lie ahead, barring a significant decrease in oil and gas prices.

With respect to Fort McMurray wildfires, our immediate concern is for our customers and employees, and we’re focused on providing whatever support we can in these difficult times. Our credit exposure to the region is modest, and future losses are not expected to be significant.

To conclude, the key takeaways this quarter are, first, credit quality remains strong in the Canadian and U.S. portfolios; and secondly, low oil and gas prices continue to represent a credit concern. Having said this, I remain comfortable that total losses attributed to low oil and gas prices are unlikely to exceed my previous guidance of 5% to 10% over 2015 actual levels, which equals roughly $100 million to $200 million per year for a period of two years.

With that, operator, we are ready to begin the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Sumit Malhotra from Scotia Capital. Please go ahead.

Sumit Malhotra

My question is for Mike Pedersen and has to do with loan growth, loan growth in the U.S. You’ve obviously had a very strong trend here over a period of time but it did seem like sequentially across your consumer portfolios, the pace of loan growth had slowed, particularly noticeably. And I know there has been movements in interest rates. I wouldn’t have thought that was enough to put a real cramp or crimp in loan demand. Could you give me some color on what was happening in the quarter and whether there’s been any change to the outlook as far as the consumer side of the equation is concerned?

Mike Pedersen

Yes, the issue there is that we had very large payoffs at the end of Q1 and in particular one very large loan. So, as you look at the averages quarter-over-quarter, that was in Q1, not in Q2. We’re not seeing any difference in outlook other than that fact. And I expect to continue to see a good growth in business lending.

Sumit Malhotra

And just one more for you segment, and I’ll leave it there. It has to do with timing and pace of expense investment. So, on the back of the restructuring charges you took last year, I assume that the pace of the expense growth would be slower, and we certainly saw that the last couple of quarters, a bit of an increase I think around 4% in terms of expenses year-over-year in Q2. As you think about the investment spend that you communicated to us, is the level of expense growth you saw this quarter, more in line with what we should think about or whether specific projects or timing that maybe impact to this pace of expense increase?

Mike Pedersen

Good question. So, if you look at the 4%, about 1% of that was the effect of M&A, so the strategic card alliance from last year and the extra day as result of the leap year, so if we take those out, it’s more like 3%. In addition to that, we had a few issues in the quarter. We moved a call center from Texas to South Carolina, which is obviously not something that’s going to recur, and then there was a bit of timing between Q1 and Q2. I kind of look at it for the first half, our expense growth was 2.4% ex the M&A. And my hope would be that as we look into the second half, it won’t be too different from that; it’ll bump around a little bit quarter by quarter.

Operator

[Operator Instructions] Our next question comes from Robert Sedran from CIBC. Please go ahead.

Robert Sedran

I am not sure if it’s for Riaz or Mike again, but the margin this quarter with the benefit, the full benefit of the Fed move was flat, and the guidance going forward is -- irrespective of what the Fed does, I think it’s going to be flat -- or sorry, even if the Fed doesn’t move, it’s going to be flat. What gives you the confidence that some of the trends that hold back the margin this quarter other than the Fed benefit, are not going to recur in coming quarters?

Mike Pedersen

Again, great question. And, we obviously had the full effect of the rate increase in Q2; so, we’re looking forward from Q2. And so, this is all absent rate increases, to be clear. So simply, what’s going on is that on the one hand, we expect deposit margins to be stable from Q2, again in the absence of rate changes. On the other hand, we are seeing some continued loan margin compression, but it’s less this quarter than it was last quarter, and it was less last quarter than it was the previous quarter. So, the slowing is slowing down, if you will, or the compression is slowing down. And we think the loan margin compression will be offset by essentially mix. And that’s both, the mix of loan origination but also the fact that we expect deposits to grow slower than loans. So effectively, deposit margin is stable and some offsetting stuff in loan margins leading to our expectation that margins will be relatively stable for the remainder of the year.

Robert Sedran

Do you have any insight, Mike, into why the loan compression or loan margin compression is slowing?

Mike Pedersen

Well, I think it’s been going on for a long time. And there is at least two things going on, one is that the farther we get into this trend the less the effect of higher margin stuff rolling off and new stuff coming on at lower margins. But the other thing is that I think the competitive intensity we’re seeing around pricing is slowing a bit, relative to where it was, say a year ago.

Operator

Our next question comes from Sohrab Movahedi from BMO Capital Markets. Please go ahead.

Sohrab Movahedi

Staying with the topic of NIM, maybe for Teri, in Canada the NIM got this declining trajectory. Do you expect that to continue into 2017?

Teri Currie

So, we would continue to project modest downward pressure to margins, again impacted by the interest rate environment, product mix and competitive factors. We did have in this quarter, on a quarter-over-quarter basis, the issue of the recognition of the commissions paid to auto dealers that we talked about last quarter, and year-over-year acquisition related items, the credit mark release from the acquired credit card portfolio last year. So net-net, we still project modest downward pressure and still NII positive.

Sohrab Movahedi

So, modest more or less, in line with the last few quarters, except for this aberration of the last specific quarter?

Teri Currie

Absolutely.

Sohrab Movahedi

And if I can just sneak one in for Mark? Mark, the allowances, whether it’s specific -- is relative to your credit RWA, seems to be around 95 to -- call it plus or minus 95 basis points. If I think or if I look at it over the last 5 to 10 years, that’s probably more like 115 basis points, and it’s probably peaked out in the 140 basis points, coming out of the crisis. When you think about your collectives and the additions that you make and what have you, is that a good way of thinking about where you may actually peak out at? Do you expect to be below trend line on this ratio or do you expect it to revert back up to let’s say the 115-120 basis points average over the last 5 to 10 years?

Mark Chauvin

You’re talking about a trend line for the portfolio. And really where we’re experiencing difficulties in is very small part of the portfolio, being the oil and gas sector. So, I don’t -- and if we look at the credit cycle now through the general portfolio, there is a very strong part -- a good credit loss rates across all the portfolios. And based on our view of the economy over the next year in both of our key markets, we don’t see that changing between now and into the New Year. But on the oil and gas sector, I guess I do see that amount increase. I don’t think of it in terms of RWA. I think where we are now is appropriate I can see further increases over the balance of the year as the issues play out. But, I really can’t give you a number relative to what RWA would be.

Operator

And our next question comes from Meny Grauman from Cormark Securities. Please go ahead.

Meny Grauman

Just wanted to ask about expenses. We’re seeing some competitors come out around with a fresh round of restructuring charges. I am wondering what you see as the potential for further restructuring charges that were helping through the year?

Bharat Masrani

Meny, this is Bharat. As you know, last year, we did go through a restructuring in the Bank, and that was necessary, and we’re happy that that is now complete. And we have been able to improve our productivity and at the same time make the investments that are absolutely necessary in our Bank. So that portion is now for the most part behind us. So, I am happy that we are able to now get the benefits of that. And in my comments, I said we’re going to be quite fixated in our base expenses, but at the same time make sure that we have enough capacity to make the necessary investments. So, that’s how I would see it. You’re asking me do you see future restructuring charges, I mean never is a long time but generally we are pretty happy with where we are and what we’ve been through last year.

Meny Grauman

And if I could just ask quick question on trading, just if you could comment on the composition; it looked a little different than what some of your competitors have been reporting, especially in terms of fixed income and some of the drivers in that business; it didn’t look like you saw as much of a lift as some of the other competitors, although admittedly maybe it’s hard to compare too closely.

Bharat Masrani

Yes. I mean, I think it is hard to compare too closely. It can reflect obviously different mix of businesses that we’re all involved in, both on a product as well as the geography. It’s a short period of time, and we’re just seeing it as well to one quarter has a lots of volatility in the numbers. So, I think we had a strong quarter in trading, basically started that after the middle of February. So, it was a shorter quarter. Having said that, I think it looks pretty stable relative to previous trends, and sort of all I can say on the -- I can speak to our quarter but I really can’t speak to other things, pro forma on a relative basis.

Meny Grauman

So, just in terms of the fixed income business, there’s nothing you’d highlight as being sort of unusual in that business for the quarter?

Bharat Masrani

No, there was a reasonable amount of volatility in credit within the first half. And some of the credit parts of fixed income were negatively impacted in the first quarter and then positively impacted in the second quarter by the movement in credit markets. If you look at fixed income as a pure government business, there’s different drivers to that. That had a better first quarter in our case and not quite a strong second quarter.

Operator

And our next question comes from Darko Mihelic from RBC Capital Markets. Please go ahead.

Darko Mihelic

The question is for Riaz, I mean just trying to square something in the numbers, maybe you can help me with this. On page five of the presentation, you show revenues up 7% and expenses up 7%, but when you exclude FX and acquisitions, it’s 4% and 1%. When I do some back of the envelope math using some of the other disclosures on the FX impact, it looks like the acquisitions, namely Nordstrom, I’m presuming had expense growth that was far greater than revenue growth. Am I right in that first?

Riaz Ahmed

No, I don’t think, Darko, that that math would work that way, because to the extent that our strategic cards portfolio is net positive and performing consistently, you wouldn’t see that. I think it’s just in a mix of Canadian dollars versus U.S. dollar revenue versus Canadian dollar and U.S. dollar expenses that you would find the differences.

Darko Mihelic

And just to be crystal clear on that, is the Nordstrom expenses, they are all reported in the U.S. Retail or is some of that in Corporate?

Riaz Ahmed

No, what would happen is that the retailers share of the net cash flow gets reported in Corporate and then it gets -- what’s in the U.S. Retail segment is only our share. So that also gives you a little bit of a variability.

Darko Mihelic

I may have to come back to you offline on that one; I don’t want to get too caught up in the nitty-gritty. The question then for Mark Chauvin with respect to the collective allowance. Mark, is there an appropriate way to think of the allowance? When we’re looking at the allowance and trying to judge the appropriateness of it or the coverage of it, we were suggested that one way to look at it would be to take the collective allowance as a multiple of the specific -- or the specific ACLs you have. Do you think that’s a good measure; is that something that we should get comfort from as we look at it that -- if we look at it that way?

Mark Chauvin

That is somewhat of an effective [ph] way of looking at it. In theory, you tend to look at having coverage of 1.5 to 2 times, thinking that would be an appropriate range.

Darko Mihelic

Your seems to be bigger than that but yours is above three?

Mark Chauvin

Well, I mean it’s through the cycle. We are at a fairly strong part of the credit cycle for the majority of the portfolio. So, you’re seeing lower PCL than what you would see at different parts, right? And it tries to be a true to cycle number. So that’s probably one of the problems with that numbers, when you get through these periods, it looks like it’s too large. But, you have to look at more what normal parts [ph] of the cycle would be and kind of basing on that process. Does that make sense?

Darko Mihelic

I’m not sure because you’ve been adding to it, even though you’ve got…

Mark Chauvin

Well, but when you’re adding to -- we’ve been adding to it, driven largely by a sector being oil and gas. So, these are two things that drive change in collective. It would be volume increases, and we’ve seen a bit of that, but the other is, migration in the portfolio or deterioration in credit quality. And the increases that you’ve seen in the last three quarters are really largely driven off of credit deterioration in the oil and gas sector specific in non-retail and then in consumer credit in the impacted provinces.

Darko Mihelic

So, just to wrap up then, when you think about your forward-looking sort of concept of stressed losses, are you encompassing within that some level of collective allowance or are you specifically referring to…

Mark Chauvin

Well, I’m encompassing in that that the collective allowance will transition into specifics at some point.

Darko Mihelic

Okay, fair enough. Thank you.

Operator

And our next question comes from Mario Mendonca from TD Securities. Please go ahead.

Mario Mendonca

Good afternoon, two quick questions; first, probably for Mark. Could you help understand or break out the oil & gas exposure between oil and gas? And specifically, like I don’t know how it’s best to break it out; I don’t know if you can look at your total loans and say this is amount that’s supported by gas reserves versus oil reserves or whether you could say this is the exposure to gas only means, but is there some way to help clear this up to me?

Mark Chauvin

Yes. So, the way that we look at it is your oil and gas producer will have a blend generally, but we look at what’s predominantly driving that, whether it’s oil or gas. I would say, it’s very -- we would have very few that would be driven predominantly by gas. It’s normally a blend that’s weighted heavier to oil. And I would say the overwhelming majority of our portfolio would be borrowers that are heavier weighted to oil than to gas.

Mario Mendonca

Looking forward, would it be correct to suggest that losses to the extent there are a lot more losses in oil and gas would be weighted toward gas and that’s one of the reasons why you’re not looking for any material increases in TD’s exposures or TD’s losses?

Mark Chauvin

Well, the analysis that we complete, it’s really an account by account analysis that stresses, both the oil content and the gas content. And that’s what has been used to arrive at the kind of my guidance of 5% to 10% or $100 million to $200 million per year for two years. So, that gas factor is already incorporated in that. But, I would say, if you’re asking, what’s driving it more than anything given that the majority of our borrowers are weighted towards oil, I would say it’s more oil.

Mario Mendonca

Quickly over in domestic retail, the earnings growth has not been strong this year, certainly not this quarter, and I am focusing specifically on retail banking. There are some pretty good explanations for why, not the least of which is the higher taxes associated with mortgage insurance. The question is, once we look beyond this year and the obvious headwinds, does this strike you as a kind of business that can go back to growing at 5% or 4%, like inflation plus type growth or is that type of growth environment behind us now that the Canadian consumers over-leverage; what’s your thinking there?

Teri Currie

So, we remain committed to the medium-term guidance that we gave you in our Investor Day. And I’d say for Personal Banking in particular, we have a number of opportunities that we outlined in Investor Day where we are under share with our primary customer base that we are working hard to leverage, so unsecured lending where we’re growing disproportionately within our risk appetite, business credit card, which we outlined again at the Investor Day and mutual fund would be some examples of that. So, we feel quite confidence that the business over the medium term would still be able to meet the kind of goals that we talked about before.

Mario Mendonca

Those goals, just to fresh memory, were 5% plus?

Teri Currie

Yes.

Mario Mendonca

And your referred to personal specific; is commercial would be similar as well?

Teri Currie

Commercial would be similar.

Operator

And our next question comes from Gabriel Dechaine from Canaccord Genuity. Please go ahead.

Gabriel Dechaine

Good afternoon. Just a follow-up on Darko’s line of questioning; actually you qualified the increases in the collectives as tied primarily to the oil and gas sector. Why -- we had another bank that took sectoral reserves for the oil and gas exposure. If this is so heavily dependent on the trends in that sector, why is it not a sectoral or what’s the difference in perspective I guess?

Mark Chauvin

Well, I guess my view is the collective allowance methodology appropriately captures the risk in the portfolio. And with it, you don’t need a sectoral, would be I guess the short answer.

Bharat Masrani

That’s the way we look at it; it’s our methodology…

Gabriel Dechaine

Are we splitting hairs here or is it really that different?

Riaz Ahmed

Look Gabriel, under IFRS incurred but not identified, it’s a very defined concept that everybody uses. And then that’s the framework that is used in the way we apply Generally Accepted Accounting Principles. If you want to interpret them as sectorals, well, sectorals are not really an accounting definition; different people can look at it different ways. So, I think it just depends on how you want to characterize what’s a sectoral but IB&I [ph] is a clearly understood framework.

Gabriel Dechaine

Okay. Turning I guess to more of a growth outlook, during the crisis TD stepped on the gas in commercial lending, specifically commercial real estate, which was effective, that was falling out of favor and that helped you go from number five market share to number two or three, depending on whose slides you are looking at, in the commercial lending in Canada. Are you doing anything different or similar story in the oil and gas sector? Maybe that’s for Bob.

Bob Dorrance

Yes, we have added to -- specifically to our U.S. business. We acquired some loan assets of a bank who was exiting their North American business, was primarily an investment grade loan book, but it gave us diversification into larger E&P, into midstream as well as into refinancing. We subsequently thereafter hired a group of people who had relationships with those companies. So, it’s been a meaningful addition to the U.S. energy business. So, we see a good opportunity to grow that to add, both corporate relationships as well as to introduce products over time. We’ll do it with -- in a measured way and within our risk appetite. We weren’t particularly interested in adding to the non-investment grade part of that, because we didn’t really have -- or we don’t really have as many products that we might offer to those types of clients. But, we’re building out of debt capital markets capabilities or derivatives capabilities or hedging capabilities in that market.

So, we’re looking at the U.S. as a meaningful -- U.S. dollar businesses as meaningful business opportunities for where we can grow not just in the corporate space, but also in the government and agency space, as well as in the investment buy side real money space as well. All those are very good opportunities for us. So, I think they’re coming as a function of what’s happening in the markets broadly.

Bharat Masrani

Just to add to that. I mean generally with the Bank -- this is Bharat, we’ve said that, we are a growth Company; we have the capital; we support our clients; and we want to grow our share where we’ve identified opportunities. And we will continue to do that. And if the current situation presents those opportunities, and if it’s within our risk appetite, we’ll aggressively pursue those. So that’s not only in oil and gas, but in every market in which we operate.

Gabriel Dechaine

But this one in particular more of a one-offs where you see good risk-adjusted spreads, maybe not as broad-based as push we saw in commercial lending few years back?

Bharat Masrani

I would say, we see good opportunities to pursue clients where we can have good relationships with clients, and from there good business opportunities will results and we’ll build the franchise. I think that will reflect what we’ve already invested in states and many of other parts of our business.

Gabriel Dechaine

And just my last one, sneak in there, I understand you’re going through the AIRB transition in the U.S. this year. Should I expect much out of that? I know in the past for Canadian banks making transition has resulted in a pretty noticeable improvement in capital ratios through RWA deflation. Should we expect a similar outcome, maybe a lighter version of it in the U.S. this year?

Mark Chauvin

So, it’s Mark, I’ll address that question. There is numerous applications that you can go through. I mean there is AMA which is operational risk for the enterprise and there is -- for the U.S., it would be for the retail portfolio and for the non-retail portfolio. We’re looking to implement two of those in the third quarter, which is AMA, operational risks for the enterprise and the retail for the U.S. The net impact combined is pretty flat, it’s not much of an impact on CET1.

Gabriel Dechaine

So, your retail credit risk-weighted assets would go down but…

Mark Chauvin

They will go down offset by an increase in the AMA. But the net impact is flat.

Operator

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

Peter Routledge

Just follow-up on the last one. If you got commercial, would you get some -- if you got commercial U.S. loans on AIRB, would you get some RWA relief?

Mark Chauvin

Peter, it’s Mark. It’s difficult. You don’t know the terms of the approval. You have to work through the process. I don’t think – clearly, I don’t think you’d see an increase. But I really -- it’s difficult to predict whether there would be any meaningful decrease.

Peter Routledge

Okay, thanks. And then, I mean Bharat or Riaz, just a question on capital more broadly. The Canadian banks seem to be settling in around 10% on CET1. And I presume they are able to do that, because the regulators is happy with that level of capital. But I look globally, and I understand TD is not systematically important on a global basis. I see capital ratios at 12%, and I see leverage ratios much higher than your 3.8%. Why will that condition hold? I mean the skeptic in me says, at some point something has to give, and your capital ratios will have to trend up towards global norms. Why is that perception wrong?

Bharat Masrani

Let me give it a shot and then perhaps ask Riaz to add. Peter, capital, it has to have some relationship with the risk and the balance sheet we run in the markets in which we operate. If you look at TD’s mix of businesses, I can talk more about TD, the type of businesses we do, the type of risks that we manage, and the markets in which we operate. And I think when I look at that, I find from TD’s perspective very comfortable with the capital levels that we have. Obviously, there are banks out there, like you said globally that are much higher. But, I think it is important to see their specific business models, the mix they have, the type of risk they are carrying, and the volatility that they are experiencing. And that probably explains some of those differences. Now, is there a chance sometime down the road that capital regimes would change? Yes, I think so. But, I also feel that we are closer to the end rather than the beginning. And there seems to be more certainty around what those capital requirements are. And yes, maybe, there might be movement here or there, but I see that as a minor event and not as a major event. I don’t know Riaz, if you want to add anything to that?

Riaz Ahmed

No, that was spectacular.

Operator

And our last question comes from Sohrab Movahedi from BMO Capital Markets. Please go ahead.

Sohrab Movahedi

I just wanted to clarify, Teri, when you had the Investor Today, you talked about medium-term growth up plus 7%; did you just say 5% or did you say 7% to an earlier question?

Teri Currie

What I just said was I agreed to 5% plus.

Sohrab Movahedi

But, at the Investor Day it was at 7% plus.

Teri Currie

We haven’t changed our prior guidance for wealth and insurance as well, right, as the Canadian retail number.

Sohrab Movahedi

Okay, thank you.

Operator

Thank you. And at this time, I would like to turn the conference call back to Mr. Bharat Masrani for closing remarks.

Bharat Masrani

Thank you, operator. And thanks everyone for joining us. I know it’s been a tough day for you folks with the three banks that announced. And I assume that means a lot of work in one day. So, I really appreciate you’re taking the time and great engagement with the questions that I’ve heard. I would just say, once again, pleased with our numbers. We continue to deliver growth. We are a growth Company. And I’d like to take this opportunity to thank my colleagues around the world, 80,000 strong, who delivered for the shareholders once again. So, thanks for that. And we will see you in the next 90 days. Thank you.

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