Toronto-Dominion Bank (TD) CEO Bharat Masrani on Q1 2017 Results - Earnings Call Transcript

| About: Toronto-Dominion Bank (TD)

Toronto-Dominion Bank (NYSE:TD)

Q1 2017 Earnings Conference Call

March 02, 2017, 15:00 ET

Executives

Gillian Manning - Head of IR

Bharat Masrani - CEO

Riaz Ahmed - CFO

Mark Chauvin - Chief Risk Officer

Mike Pedersen - Group Head, U.S. Banking

Teri Currie - Group Head, Canadian Personal Banking

Analysts

Ebrahim Poonawala - Bank of America Merrill Lynch

Meny Grauman - Cormark Securities

Nick Stogdill - Credit Suisse

Gabriel Dechaine - National Bank Financial

Sumit Malhotra - Scotia Capital

Robert Sedran - CIBC World Markets

Darko Mihelic - RBC Capital Markets

Sohrab Movahedi - BMO Capital Markets

Mario Mendonca - TD Securities

Operator

Welcome to TD Bank Group Q1 2017 Conference Call. Please be advised that this call is being recorded. I would now 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 first quarter 2017 investor presentation. My name is Gillian Manning and I'm the head of Investor Relations at the Bank. We will begin today's presentation with remarks from Bharat Masrani, the Bank's CEO, after which Riaz Ahmed, 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 invite questions from pre-qualified 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 2. 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 are all available in our Q1 2017 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. Q1 was a great quarter for TD. Earnings rose 14% from a year ago, to CAD2.6 billion and EPS increased 13%, to $1.33. Our retail and wholesale businesses performed well, reflecting strong volume growth, good client activity and an improving macro environment. Our Basel III Common Equity Tier 1 ratio ended the quarter at 10.9%, up 44 basis points from the prior quarter; and our leverage and liquidity coverage ratios remain strong.

Reflecting these strong fundamentals, we declared a $0.05 dividend increase, bringing our dividend to $0.60 per share, a 9% increase. And we announced our intention to repurchase up to 15 million shares for cancellation, subject to regulatory approval, primarily to offset dilution from our dividend reinvestment program and issuance related to stock options.

Overall, I'm very pleased with our results this quarter. We delivered double-digit earnings growth and strengthened our capital base, while continuing to invest in our businesses and in meeting our customers' needs.

Turning to our segments. Canadian Retail earned CAD1.6 billion in Q1, up 4% from a year ago. Revenue rose 3%, driven by good volume, asset and free growth. We also benefited from higher margins, reflecting business mix, repricing and Treasury actions we took last fall, though we continue to expect moderate downward pressure on margins in the months ahead.

In Personal Banking, we continue to grow our core deposit base which is critical to our retail strategy. On the Lending side, we had good origination activity in our proprietary real estate secured lending channels and loan growth was strongest in higher margin products, such as HELOC and unsecured loans. In Commercial Banking, we had robust growth in loans and deposits.

Our Wealth business performed very well this quarter, with strong asset growth and trading activity driving a 15% increase in earnings. Insurance earnings were down slightly, as improved claims results were offset by investments in improving the customer experience and upgrading our platform.

As we indicated in our Q4 call, expense growth in Canadian Retail was elevated this quarter, reflecting strategic investments we're making to digitize the customer experience, enhance our products and extend our service and convenience model across our distribution channels. Those investments are already yielding impressive results.

Let me share a few examples. Last quarter, I mentioned the redesign of our WebBroker platform in Direct Investing. The results have been outstanding. We're delivering solutions 20% to 30% more cost effectively, while releasing improvements faster and more often. We're leveraging scalable and reusable technology solutions, like the cloud and APIs.

We further personalized our card offering, making it possible for customers to keep their TD Visa card number when they change card types at TD, the first Canadian bank to offer this service for Visa customers. And we released enhancements to TD MySpend, our money management app that empowers users, who now number 850,000, with more tools to manage their financial well-being.

We're excited about these innovations which are driving strong engagement and enabling us to provide customers with better, more meaningful advice. With the majority of our Canadian customers interacting with us digitally, we will continue to prioritize these initiatives.

Turning to the U.S. Our U.S. Retail bank generated earnings of $518 million this quarter, up 10% from a year ago. Revenue growth accelerated to 9%, driven by strong loan and deposit volumes, higher fee income and continued strength in household acquisition.

As is typical in the first quarter, we had a seasonal uptick in credit provisions, but underlying credit performance remained strong. We also delivered very good operating leverage again this quarter, even after continued investments in technology, enhanced digital offerings and revenue growth initiatives.

Those enhancements continue to power strong growth in U.S. digital sales. For example, 15% of checking account sales are now done digitally, up from 9% a year ago and digital credit card sales are now over 20%. We expect to build on those gains with the innovations we continue to make.

We've extended our new digital platform to a tablet experience, creating a single universal app that allows customers to review products and complete the account opening process digitally. And we introduced TD ASAP which allows customers to authenticate directly to an advisor in a contact center from their digital device. These tools are making banking faster, simpler and more secure for our customers; and we're seeing the benefits in improved customer experience scores, reduced call center wait times and increased productivity.

Q1 was a strong quarter for our Wholesale Bank. Net income was CAD267 million, up 66% from the prior year. Robust capital markets and good activity across our businesses drove stronger trading revenue and higher debt and equity underwriting fees, more than offsetting revenue-driven increases in variable compensation and costs associated with our acquisition of U.S.-based securities dealer Albert Fried & Company.

We also continued to advance our strategic priorities. TD Securities ranked number one in Canadian equity underwriting in 2016, raising nearly CAD10 billion on behalf of our clients and leading some of the year's largest transactions. And our sovereign, supranational and agency business is off to its best start ever in 2017, leading 14 U.S. dollar benchmark deals this quarter and raising nearly $30 billion in total.

One quarter into FY17, we have much to be pleased about. Our Wealth and Wholesale businesses are profiting from strong client flows and favorable financial market conditions. Our U.S. Bank's robust fundamentals are being amplified by accelerating U.S. economic growth and the prospect of higher rates. And our Canadian Retail franchise continues to deliver solid results and is well positioned to benefit from a firming outlook for the Canadian economy.

This quarter, you saw us deploy strong earnings growth and savings generated from our productivity program into additional investments and you can expect that to continue. It's an exciting time to be in banking. Rapidly changing technologies are opening up new frontiers and we're well situated to seize the resulting opportunities.

We will continue to make investments to advance our digital transformation, deliver a more connected customer experience and simplify the way we work. Our spending is purposeful, pragmatic and aligned with our strategy to build a better bank, a bank of the future.

To wrap up, I'm extremely pleased with our first quarter results. They speak to the strength of our diversified business mix, the adaptability of our service and convenience model in a digital world and the enduring power of our customer-centric approach. I would like to thank our 80,000-plus employees for their hard work and dedication for enriching the lives of our customers and communities while delivering for our shareholders.

We have accomplished a great deal together and I'm confident that we can build on this momentum in the year ahead. With that, I'll turn it over to Riaz.

Riaz Ahmed

Thank you, Bharat. Good afternoon. Please turn to slide 4. This quarter, the Bank reported earnings of CAD2.5 billion and EPS of CAD1.32. Adjusted earnings are CAD2.6 billion, up 14% and adjusted EPS was CAD1.33, up 13% year over year. Adjusted revenue, excluding acquisitions and FX, increased 7%; and adjusted expenses on a similar basis also increased 7%. Higher expenses this quarter reflected seasonality and investments in our business and infrastructure. As I said last quarter, these investments will continue and we expect the rate of expense growth to be higher on a year-over-year basis in the first half of the fiscal year, particularly in our Retail businesses, with expense growth abating in the second half of the year.

Credit losses increased 16% quarter over quarter, but declined year over year. Segment reported earnings were CAD1.6 billion for Canadian Retail, CAD800 million for U.S. Retail and CAD267 million for Wholesale. The Corporate segment reported a loss of CAD100 million or CAD75 million on an adjusted basis.

Please turn to slide 5. Canadian Retail segment net income was CAD1.6 billion, up 4% year over year, reflecting revenue growth in Personal and Commercial Banking and Wealth and lower insurance claims, partially offset by higher non-interest expenses and PCL. Total loan growth was 4% year over year, with increases in personal lending and business lending volumes.

Deposits increased by 12%, reflecting growth in core checking and savings accounts and business deposits. And wealth assets grew 11%. Insurance claims decreased 12% year over year, reflecting a reduction in the fair value of investments supporting claims liabilities and lower current-year claims.

Margin was 2.82%, up 4 basis points quarter over quarter, reflecting favorable business mix, Treasury actions and product repricing. We nevertheless continue to expect moderate pressure on margins, reflecting the low interest rate environment and competitive pricing. PCLs were relatively stable, increasing 2% quarter over quarter. Year-over-year PCL increased 18%, reflecting the benefit in the prior year of the sale of charged off accounts and higher provisions in the auto lending portfolio in the current quarter.

Expenses increased 7% year over year, reflecting higher investments in strategic initiatives, including digitizing the customer experience and enhancing our product suite, increased investments in front-line employees and business growth, partially offset by productivity savings. Please turn to slide 6. U.S. retail net income was $601 million, up 9% year over year or CAD800 million, up 7% year over year. The U.S. Retail Bank earned $518 million, up 10% year over year. Strong revenue growth reflecting higher loan and deposit volumes and fee income growth was partially offset by higher expenses and PCL. Total loan growth of 7% year over year, reflecting growth in both personal loans and business loans and deposits increased by 11%.

Margin was 3.03%, down 10 basis points quarter over quarter. The decrease was largely due to the accounting impact on NII from our hedging activities which, as you know, is largely offset in other income. Fundamentally, margin was up 1 basis point this quarter, reflecting good deposit margin expansion, partially offset by lower accretion on legacy loans. While many factors affect margins, we expect continued improvement in 2017, with potential further upside if U.S. rates continue to increase.

PCL increased 32% quarter over quarter, primarily reflecting seasonal increases in the auto lending and credit card portfolios and prior quarter benefits related to the release of special reserves held for the South Carolina flood. PCL increased 21% year over year, primarily due to higher provisions relating to mix in auto lending and growth in seasoning and credit cards.

Expenses increased 5% year over year, reflecting higher spend for technology modernization, volume growth and additional front-line employees, partially offset by productivity savings. Earnings from our ownership stake in TD Ameritrade increased 1% year over year.

Please turn to slide 7. Net income for Wholesale was CAD267 million, up 66% year over year, reflecting higher revenue and a net recovery of credit losses, partially offset by higher non-interest expenses. Revenue increased 29%, reflecting higher origination activity in debt and equity capital markets and higher trading-related revenue.

PCL decreased, reflecting the recovery of specific provisions in the oil and gas sector. Non-interest expenses increased year over year, reflecting higher variable compensation in line with revenue and higher operating expenses and costs associated with the acquisition of Albert Fried & Company.

Please turn to slide 8. The Corporate segment posted an adjusted loss of CAD75 million in the quarter, compared to a loss of CAD178 million in the same period last year. Net corporate expenses increased year over year, due to the timing of ongoing investments in enterprise and regulatory projects. The contribution from other items increased CAD133 million year over year, reflecting higher revenue from Treasury and balance sheet management activities, as well as provisions for incurred but not identified credit losses and negative tax and other items recognized in the prior year.

Please turn to slide 9. Our Common Equity Tier 1 ratio was 10.9% at the end of first quarter, reflecting strong organic capital generation. The increase in RWA this quarter reflects business volume growth offset by certain capital management activities to reduce capital-intensive investments.

Our leverage and liquidity ratios are consistent with last quarter's levels. We announced our intention to launch a normal course issuer bid for up to 15 million common shares, subject to regulatory approval. This is primarily to offset the share issuance for the dividend reinvestment plan and stock option exercises. I will now turn the call over to Mark.

Mark Chauvin

Thank you, Riaz and good afternoon, everyone. Please turn to slide 10. Credit quality remains strong, as we begin the year with stable trends across the Bank's credit portfolios. Gross impaired loan formations were stable at CAD1.3 billion or 21 basis points quarter over quarter and reduced CAD436 million or 9 basis points, from the previous year. U.S. Retail formations are up CAD71 million, due to seasonal trends in the credit card and indirect auto portfolios and the negative impact of foreign exchange. There were no new formations in the Wholesale portfolio.

Please turn to slide 11. Gross impaired loans ended the quarter at CAD3.4 billion, down CAD110 million or 1 basis point quarter over quarter, as resolutions outpaced formations in the Wholesale and U.S. Commercial portfolios. Gross impaired loans decreased CAD400 million or 8 basis points, year over year, driven primarily by resolutions in the U.S. HELOC portfolio and the impact of foreign exchange.

Moving on to slide 12. As indicated in previous quarters, U.S. strategic card PCLs are reported on a net basis for segment reporting, including only the Bank's contractual portion of credit losses. For the purpose of the credit slides, we continue to report gross losses to better reflect portfolio credit quality.

Provisions for credit losses during the quarter are within expectations at CAD635 million, up CAD81 million or 5 basis points, quarter over quarter to 42 basis points, 3 basis points lower than the previous year's quarterly loss rate. The primary factors impacting PCL in the quarter are seasonal trends in the U.S. credit card and indirect auto portfolios, driven by holiday spending and the negative impact of foreign exchange, offset by CAD25 million in recoveries in the wholesale oil and gas sector.

To conclude, the key takeaways this quarter are credit quality remains strong and we continue to be well positioned for growth across all credit portfolios. With that, Operator, we're now ready to begin the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions]. And we'll take our first question from Ebrahim Poonawala with Bank of America-Merrill Lynch.

Ebrahim Poonawala

First question, Riaz, if you could help us with a better understanding of the NIM dynamics in the U.S. going forward around you mentioned that you expect the NIM to continue to improve even without any interest rate increases and then do even better. Is there any way, if you could help quantify around what we should expect on the NIM coming off the December rate hike and if we get another hike in March, what that could mean for the 2Q, this NIM strategy going forward.

Riaz Ahmed

Ebrahim, as I'd mentioned to you on the Q4 call, I'm not really giving specific guidance around interest rates and its impact on our NIM, as you can see that there tend to be a fair number of moving parts. But what I can tell you is this, we experienced very good deposit margin expansion in this quarter which, as I mentioned earlier, was offset a little bit by the lower accretion on legacy loans.

So the fundamental margin was net up 1 basis point. We experienced this accounting noise from hedging that I've talked about before which a decrease in NII is offset in other income which brought the headline number down. But this quarter, we've also made a decision to move those Treasury and balance sheet management activities to Corporate segment which actually hurt the U.S. Retail's earnings this quarter. But nevertheless, what we've done is taken a fair bit of that volatility out into the Corporate. So you should see a more stable and rising NIM, U.S. segment NIM number moving forward.

And given that the Fed rate increase occurred really in the middle of the first quarter, that, from a deposit margin perspective, should continue to bode well into the second quarter, where we would have the effect of the full year. And you should also see continued improvement, due to what I mentioned before, the yield curve enhancements.

Ebrahim Poonawala

And if I may, just another question for Bharat, I guess. There's been a fair bit of discussion around U.S. M&A through this earnings season. Just wanted to get an updated view both in terms of on the Bank's front, I know you've talked some interest in your Northeast, within your Northeast retail footprint and on the non-Bank side, cards or what would interest you?

Bharat Masrani

Ebrahim, our view on that is unchanged. It has not changed. We continue to be interested in high quality card portfolios in the U.S., as we have said before. It's a business that we like. Our experience has shown that this business performs very well. It gives us decent returns and frankly, helps us to build up our scale in the U.S. So if we were to see more opportunities in that area that make sense from a risk appetite perspective and obviously financial perspective, we would look at those seriously, particularly given the structure of our balance sheet in the U.S., with deposits outpacing loans by quite a margin.

With respect to the Bank acquisitions, we had said and we continue to believe that if there are particular opportunities that would help us accelerate our organic growth plans within the U.S., particularly in the Southeast, where we think that we may not have as much of scale as we would like, given the demographics, the dynamics of that market, we would look at those very seriously. But all of these would have to make sense, both from a risk perspective and financially, as well.

Ebrahim Poonawala

And Bharat, would you care to quantify what size of deal should we think about when we think about M&A, both cards or bank fund?

Bharat Masrani

A lot would depend on, A, what is available and B, our ability to integrate it, make sure we do it well. If you're going to do a large-ish transaction, then we have to make sure that the culture is going to be aligned what our values are to make sense, because we do have a fantastic business proposition in the U.S., as we do in Canada. Our value proposition is compelling and we would not want to do anything that would disturb that.

With respect to size, tough to say, Ebrahim. Obviously, if there's a very large transaction that appears to be very compelling, then we would have to think hard about timing, what would suit us, both from a financial risk and integration and conversion perspective, but as well as market timing and whether such a deal would make sense for the Bank. So hard to predict precisely, because none has come around. But should one present itself, we would look at it seriously. But those would be the factors that would come into play.

Operator

We'll go next to Steve Therall [ph] with Eight Capital.

Steve Therall

I wanted to ask a question on indirect auto. You mentioned this quarter a change in mix in the indirect auto. Am I right, is that flagging a move a little bit down market, more into near prime? You've been reluctant to do so in the past. So if that's right, wondering what the thinking is there.

Mike Pedersen

So it's Mike, Steve. So to be clear, we're have not been originating any sub prime and we continue not to originate any sub prime.

Bharat Masrani

We're talking U.S. here, just to clarify.

Mike Pedersen

We're talking the U.S. here, yes. We're obviously continuing evaluating what our origination mix should be. And as you suggest, in recent quarters we have tweaked that a bit. We're doing a bit less super prime and more prime and near prime. But we're not talking about dramatic switches in the mix. It's a few percentage points. I'd say it's all planned and it's evolving exactly as we expected. We knew we were going to see higher PCLs as we adjusted the mix and we're seeing them in the quantums that we expect to see. It's obviously more accretive business for us overall. So I'd say very comfortable with what we're originating and no concerns on the credit quality part in the auto finance portfolio in the U.S.

Steve Therall

When you say a change of a few points, what would the near prime be at in terms of mix? Would it be 10% or less than that, more than that?

Mike Pedersen

So the origination which is what we're doing, so a year ago, it would have been about 10.5%. Now it's just over 15%. But it changes quarter by quarter.

Steve Therall

And maybe if I can dove tail that into a question for Mark. I think a bit surprised by the rise in PCLs in the U.S. So when we consider everything together, so the seasonality in cards, but then what looks like a pretty consistent ramping in auto loans, maybe in part on the back of more near prime, how representative of a run rate out the remainder of the year would you say that $190 million, I think it was, PCL number for the U.S., Mark?

Mark Chauvin

So maybe in looking at the quarter-over quarter change in the U.S. PCL, first, I'd clarify that it was really right on our projections. So there was no surprise to that at all. And really what was driving that quarter-over quarter change, we refer to it as seasonality. But to explain that a little bit more, it's really driven by the fact you experience during our first quarter, given our large participation in strategic cards with the retailers, you see an increase in spending through the holiday season that increases balances. Also during this period and it's consistent year in and year out that you see a slight increase in delinquency in the card portfolio, as well as the indirect auto portfolio.

And that is what really, those two things create an increase in PCL through reserving which we forecast, but every year comes back in the second and third quarter. So that was probably about 60% of it, the change. Another 30% would have been change in FX. So it pretty much accounted for all of it in the year. And I would expect the loss rates in those two categories to revert to what we experienced in the third and fourth quarter, as we go forward in the year. The issue of the mix in cards was a bit of a factor year-over-year, because it takes longer, but not as much quarter-over quarter.

Mike Pedersen

Steve, it's Mike again. If I could just add to your point. Last year, we saw Q1 PCLs were the high water mark for the year. We'd expect the same this year, based on what we're seeing right now.

Steve Therall

And then just a follow-up. The PCL on the auto, will that grow, would you say that's going to grow in line with the loan book or will it grow a little faster with the change in mix?

Mike Pedersen

I think primarily with volume, but a little bit with mix.

Operator

We'll go next to Meny Grauman with Cormark Securities.

Meny Grauman

I just wanted to understand a little bit more the dynamics in terms of your outlook for further margin pressure in Canada going forward, especially in the context of what helped the margin this quarter. You mentioned favorable business mix, Treasury actions and product repricing. So just in that context, why you expect margin pressure to continue going forward.

Teri Currie

Meny, it's Teri. I'll take the question. So as you identified, the positive factors for Q1 were business mix. So really, deposit growth was very high, so that really helped us. Product mix, we had record checking volumes, so that made a difference. We had some Treasury actions, as you indicated and repricing activity. So those things helped us in the first quarter, year-over-year, in particular.

When we look ahead, we have all the same dynamics that we had talked about last year. And so we expect modest downward pressure, because we'll still be facing the fact that on the deposit book, the tractors will roll over at lower pricing and on the lending book, the new business we're putting on is at lower margin than the average portfolio margin. Having said that, you will have seen we're starting to originate more of our home equity line of credit, our FlexLine product and higher margin product in the lending book., so that will help over time. But again, the same factors of lower interest rates, competitive pricing are going to play a role in cost of funds as we go through the year.

Operator

We'll go next to Sohrab Movahedi with BMO Capital Markets.

Sohrab Movahedi

We'd like to stay with Teri, if I can. Teri, within Canadian Banking, I think this was the first quarter in a while that your year-over-year revenue growth was over 5% and you've had pretty good accelerating revenue growth there. Can you just talk a little bit more on the revenue dynamics across, not just on margins?

Teri Currie

For sure. So thanks for noticing that. I would say, obviously for Canadian Retail, Wealth performed particularly well, with strong growth there. Business lending and personal lending performed well and unsecured personal lending has been a strategic growth focus for us. Great core deposit growth, business lending at double digits, personal deposit growth, again record checking volumes in Q1. So a lot of things working in our favor. And then again, we've got the embedded growth in the franchise that's helping us. So I'd say we had good organic growth across many of our businesses, including cards.

Sohrab Movahedi

And so within that Canadian personal and commercial banking piece, your non-interest income was up pretty smartly. Is that repeatable, do you think?

Teri Currie

Certainly the biggest factor was our broad-based organic growth. And so I would say the caveat I would probably put on it is we had such good deposit growth, I would expect that to moderate somewhat. Otherwise, I'd say yes.

Operator

We'll go next to Nick Stogdill with Credit Suisse.

Nick Stogdill

Just sticking with Teri on Canadian P&C. Last quarter, you did telegraph that expenses would be elevated in the first half of 2017. Can you break apart how much was for the front line growth versus technology spend and other buckets in terms of the 7% growth year-over-year? And is that a good pace to assume for the second quarter, as well? And then lastly, just on the back half of the year, should we expect expenses to decline on an absolute basis versus H1 or flat or how should we think about that? Thank you.

Teri Currie

For sure. So a bunch of things in that question. So yes, we had guided to the expense growth that you saw in this quarter. And as Riaz mentioned, there were some one-time favorable items in Q1 of last year. If we look at the expenses in this quarter, first off, the year-over-year expense growth will abate through the year. I think either Riaz or Bharat mentioned that earlier. And we're still expecting positive operating leverage for the full year. So there will be some bumpiness in quarters.

When we look at the investments, as we mentioned, call it 33% of that is around digitizing our branch customer experience. So this is really ensuring that we've got the right network, ensuring that we've got Wi-Fi and iPads in our locations such that our front line colleagues can help our customers take up our industry leading digital properties and continue to help our customers save time and money and have their self-service transactions which almost 80% of them happen today, happening via direct channels, if you will. We have invested in front line advisors, as you mentioned, call that another good portion of the investment. And that would be both Wealth Management and in cad P&C mobile mortgage sales force.

And then the other impact is rationalizing and enhancing our product lineups. That's another portion of the expenses. And in that case, an example would be for unsecured lending, we've gone from 50 products down to 8 in the last quarter. So we're making it easier for our colleagues and more efficient for them to get the right products in our customers' hands. So I'd say overall, we're making investments to grow the business where we've done that in the past. You've seen the examples of that. FlexLine business card would be other examples of where we've made those investments and they've paid off in future growth. So I think that covers us.

Operator

We'll go next to Gabriel Dechaine with National Bank Financial.

Gabriel Dechaine

Just a quick numbers question on the U.S. margin and then still on this expense topic here. The margin, you mentioned it's accretable yield that would have benefited Q4. Can you quantify that, just so I can get a better sense of what the actual margin did in the U.S.?

Mike Pedersen

Yes. It's Mike, Gabriel. Around 4 basis points.

Gabriel Dechaine

Okay. So net of that --

Riaz Ahmed

Negative, not a benefit.

Mike Pedersen

That was a negative.

Gabriel Dechaine

Right. It was negative in the sense that you had it last quarter, you didn't have it this quarter. So excluding that, you would have been up 5-ish kind of thing. And the accounting thing.

Riaz Ahmed

The math works. Yes, Gabriel. The math works the way you said it.

Gabriel Dechaine

One plus four, I got it. Okay. Then on the IT -- sorry, the elevated expenses in Canadian P&C, the digitization. Now just from a conceptual standpoint here, if I go through your non-interest expenses in the supplement and I go through the major categories, it looks like it's, where expenses went up across the Bank were in salaries and benefits and all the other major line items were either flat, up a little or down. But it looks mostly salary related. So as you talk about expenses, growth abating or expenses coming down, as some of that initiative spending gets pulled back, how should I see these lines evolving over the course of the year?

Teri Currie

So it's Teri. And then Riaz can kick in, as well. So for our Canadian Retail businesses, again, a big part of the number was front line advisors and customer support to ensure that as we grew our business, we could continue to grow our capabilities to meet our customers' needs. And the other thing that you would have seen would be increased costs along with investing in our businesses. That obviously requires more people to deliver those investments in those projects.

Riaz Ahmed

And I'd also just add to that, Gabriel, that when you're undertaking these projects to digitize and along those lines, they require a lot of people and developers, et cetera. So you would expect to, you're correct to basically connect the dots between the examples that we're giving you about that investments that we're making to salaries and benefits, because it is people-driven research, development and projects work.

Gabriel Dechaine

But those aren't necessarily permanent, are they?

Teri Currie

No.

Gabriel Dechaine

Right. And is there -- and it was alluded to earlier that you had good revenue growth in Canadian Banking this quarter. There's been some acceleration there. Has it been -- maybe we underestimate that from where we sit or where I sit anyway, but as you're pushing through these transformations and cultural changes, really when you're digitizing, I guess that's going to have an effect on the culture, there's a lag between or maybe a negative impact on your revenues short term, like we saw last year, maybe 2015, as well and you're starting to turn the corner on that as the new, as the plan advances, I guess. Is there some validity to that?

Teri Currie

For sure I would reinforce the midterm guidance that we've given on Canadian Retail around mid-single digits. That's still what we would be projecting. But I would I say, I think when we think about how we're delivering our strategy, it's definitely a multi channel strategy. And while our customers are taking up our new capabilities, it's equally true that most of our customers deal with us across multiple channels. And when they do that, they actually have more business with us and they're more satisfied.

And so we're continuing to really work through how do we optimize the branch network to be there for our customers in high growth markets, consolidate and create new formats where it makes sense and concurrently invest in the digital properties. And I think we're keeping that balance fairly intact, fairly right. And as we look you ahead, we think we can do that with moderate expense growth and good business growth.

Operator

We'll go next to Sumit Malhotra with Scotia Capital.

Sumit Malhotra

First, just a couple of clarification questions for Riaz. On the U.S. NIM, the commentary about, I think it's balance sheet management activities, are you referring to just the way the accounting impacts your credit card partnerships and how that flows through or is this relating more to the securities portfolio and some action you may have taken in that regard in the U.S.?

Riaz Ahmed

You're right that it is the accounting effects, but I wouldn't isolate it to one or other part of the balance sheet. Because as you know, we take our asset/liability approach on an integrated basis. But it relates to the fact that we use derivatives to adjust the duration profile of our interest rate risk and those derivatives are marked to market for accounting purposes and then you use hedge accounting to tag those hedges against assets that would move in a similar way and sometimes you can get basis differences. So that over the term of the hedge, the effect is zero, but in the meantime you get this little volatility in NII that gets offset in other income.

So it's a very kind of a technical accounting requirement. But what I'd say to you is that the takeway is that the hedging program works. It is largely revenue neutral over its duration. And that's why we essentially took it out back to the Corporate segment, to give you a more fundamental view of what's going to happen to the underlying margin, so that we're not struggling with this quarter after quarter after quarter and putting you through mitts over it.

Sumit Malhotra

It sounds like between this and the credit card accounting, you're going to make more references to a so-called core movement in U.S. NIM, like you did this time around, going forward.

Riaz Ahmed

I think essentially, you'll see that coming together in any event, given that we're moving the effects of these Treasury and balance sheet items to Corporate segment starting this quarter.

Sumit Malhotra

Okay. And another clarification. But you know what? In the interest of time, I'll ask my actual question and I'll requeue, if there's time. Back to Teri. And when we look at the 7% expense growth, I'm looking just at the P&C Bank, not Wealth or Insurance, the one you show in your appendix. So 2016, your expense growth in this big segment was limited to 1% year-over-year. And this year, with some of that project spending you had talked about, it's up at 7% to start the year.

Now, I may be looking at this too simplistically, but the 2016 flat expense number comes on the back of the larger restructuring charges the Bank enacted in 2015. My question would be, why wasn't some of that project spend anticipated over the course of the year and maybe spread out a little bit more? And maybe put a different way, did last year's number benefit, was it more front loaded in that $600 million run rate savings estimate you've guided to as a result of the restructuring charges?

Teri Currie

I'll give you three pieces to that. I'd say for sure, as we came into 2016, expenses were lower as a result of the productivity exercise that we had done in 2015. In particular, we would have been holding some vacancies and so working our way through that in 2016. For sure, we had lower expenses at the beginning of 2016 and you're seeing the impact of that now year-over-year in our first quarter expenses, the number that you talked about. So those are two factors.

Having said that, we did accelerate our expenses through 2016 and then guided to this higher level at the beginning of this year because of those timing differences. So again, I believe moderate expenses for this year and improving year-over-year gross and positive operating leverage are the right sound bites.

Bharat Masrani

And Sumit, this is Bharat. When you have a favorable environment and you have an investment list, then obviously you're going to take advantage of the environment and get those investments done. And we will continue to do that, because it makes sense for the Bank. And I know there's a lot of noise around this, but my point is that and I've said this many times before, we're not going to worry about operating leverage on a quarter by quarter basis. We will make sure and we will try to aspire to a positive operating leverage over the year. And that's what we said we will do and that's what we're doing.

Operator

We'll go next to Robert Sedran with CIBC.

Robert Sedran

Teri, I guess you're the most popular kid on the playground today, so I'm going to stick with that. I'm just curious, when you think about -- I'm probably paraphrasing Bharat from earlier when he talked about making progress on extending the service and convenience model into the digital side. I'm wondering, on the hours open on the branch side, if there's ever been any thought or if you've been doing anything in terms of paring back some of that as the channels become a little bit less emphasized or if you think maybe that's too central to the brand that you can't really affect the hours opened at all or if it wouldn't be a good idea to even try?

Teri Currie

Since I'm popular, maybe I'll give you a little bit of a story around this. So our strategy obviously has been and we've been winning, because we have a deep understanding of our customers and we're delivering the best personal connected experiences. And that's a branch strategy. That's an ATM strategy. It's an online and digital strategy, an online and mobile strategy and it's a phone strategy. And again, we're continuing to pull the levers that we think make sense to have a connected experience for our customers to meet their expectations.

Branches continue to be important for our customers. They're important for problem resolution. They're important for complex advice. And they're important for us as billboards, for attracting new customers and you know we continue to be very good at acquiring new customers. And so while we're continuing to innovate our formats in branches, we've reduced our square footage since 2013 by 160,000 square feet, we do think our hours advantage continues to serve us well. Now in markets, we continue to tweak to ensure that we maintain that advantage, but that we're available for customers at times that make sense. And so there have been cases and will continue to be where we pull those back. But I can definitely tell you that we think our hours advantage is a big part of our service and convenience offering and it's not the most expensive part of creating the availability for our customers and so we would be loathe to do too much about that.

Obviously, concurrently, as you mentioned, we're building out our digital capabilities. And Bharat mentioned industry leading capabilities, like TD MySpend, TD For Me and WebBroker. And so we're going to continue to, I think, deliver a premium retail franchise across all channels for our customers going forward.

Operator

We'll go next to Darko Mihelic with RBC Capital Markets.

Darko Mihelic

Teri, I'll stick with you. One question, I'll try and keep it brief. What's difficult for us on the outside is when we understand or we hear about the elevated expense level, the question is, why does the expense level decline, but more importantly, at the end of this all, why is it that all the banks have been able to take restructuring charges, they're also spending on initiatives, why seemingly that you're spending or it's affecting you more on a relative basis?

And I guess where I'm coming from is when I hear that you're rationalizing products and digitizing the customer experience, it's difficult for us from the outside to understand whether or not what you're doing is actually ahead of your competitors or you're catching up to your competitors. So can you speak to maybe some benchmarking and something that would help us understand better what TD, apart from TD MySpend and WebBroker, but what it is that you've done with the product on the advisor side that is actually industry leading?

Teri Currie

Sure. So I think the biggest issue around expenses, as we've talked about, is the year-over-year comparison and the fact that in Q1 of 2016, we had some favorable items and in the ramped up expenses, if you will, through the year and delivered a good expense result for the full year and now we come into 2017 with a plan to deliver a good expense result over the full year, but some front end year-over-year expense growth that is creating, I think, some of this question. So I do continue to want to emphasize that for the full year, we will have positive operating leverage and moderate expense growth.

Having said that, if you're looking at then how do I understand why you're in this place, I would say in terms of digitizing and automating our offerings to our customers, we're continuing, like all of our competitors, to do more in that regard. And I think that that will continue to provide better customer experiences over time and also better efficiency over time. But there is investment to make that happen and that's what we're working through.

In terms of areas where we lead, certainly WebBroker is a big example of that. That's been cited by the Global and Mail as the best amongst the big five banks. And I'd say the investment in the self-service capabilities for our investors has been second to none. And then again, according to Com Score, we have the best mobile engagement in Canada across our customer base and 50% of our total customer base are active mobile users and almost 80% of service transactions happen self-service. So those are just come examples. I'd be happy to answer more questions, if you have a follow-on.

Darko Mihelic

I do have a lot of follow-ons, but I'm not going to monopolize the call. I'll leave it there. Thank you.

Operator

We'll go next to Sohrab Movahedi with BMO Capital Markets.

Sohrab Movahedi

Mike, just for you on the U.S., a bit of a big picture question. Lots of talk that maybe the U.S. administration's going to be able to get the U.S. GDP growth going to 3.5%, maybe even 4%. In that type of an environment, what sort of leverage do you have in benefiting and growing your earnings, if U.S. GDP growth was in the, let's say, 3.5% to 4%?

Mike Pedersen

I've made the point before that I think given our size, compared to -- which is relatively small in the U.S. in the overall scheme of things -- compared to some of the larger players, I believe that our growth and success is less correlated to GDP growth than some of our competitors. We win through a unique model and the proof is in our household acquisition and our deposit growth and our loan growth and so on. So I think that's very important. We actually believe that we can succeed in a low growth, moderate growth, faster growth environment.

Needless to say, I think the sentiment in the U.S. right now is fairly positive. Whether I'm speaking with consumer customers or commercial customers, they are more positive in terms of their outlook and commercial and corporate customers are talking about investments and capital outlays more than they were. So I think that augers well. But, as this may be the basis of your question, we're not really seeing it in the actual GDP numbers reported yet, but I think they're sometimes a lagging indicator and I think we will see it.

If we get into a faster growth environment, I would expect us to perform better than we're performing now. There's a point at which TD will not do the racier things in a fast growth environment, but we're nowhere close though that environment. I feel very confident about our business looking forward, with the assumptions that the economy's going to operate as it is or slightly better. We just have so many things that, being a relatively young business, that are going well for us. We're outgrowing our peers in all the respects I spoke about. We're deepening relationships with our customers. We're making very good progress on that. We're changing our distribution strategy. Bharat mentioned the digital sales in one year on checking going from 9% to 15%. We've had excellent productivity progress, good expense management. I'm very pleased with the efficiency ratio this quarter, 56.7%.

And then we've got opportunities, as Bharat alluded to, like the Nordstrom's and Scottrade kinds of deals, as well as others that he alluded to and on top of that, potential rate increases. So feel good about the prospects for the business over the next year or two.

Sohrab Movahedi

It almost sounds like you'd rather not have the GDP growth in the U.S.

Mike Pedersen

No, given the choice, I'd take it.

Sohrab Movahedi

Thank you.

Bharat Masrani

Sohrab, on that, if you have 3% and I think you said 4%, that would be quite something if that happens, we're going to have companies borrowing more, loan growth is going to be pretty robust then, there's going to be a lot of transaction activity. So you would think, we're a large checking bank, so you would think the transactions would go up, debit interchange would go up. We have partnership deals with our credit card retailers.

You would see some robust activity there. And if you have that kind of GDP growth, I'm not clairvoyant, but you would expect interest rates to be firmer than where they are today. And with our balance sheet mix, with the heavy emphasis on the deposit gathering, you would think you would benefit.

So that's yes, Mike's point is bang on that our model allows us to perform very well, regardless of from a relative perspective, regardless of where the economy might be, but an overall GDP growth of that level, if it were to happen on the basis that people would normally expect, would be positive, very positive.

Sohrab Movahedi

And presumably, you would hold Mike's feet to or whoever's heading up the U.S. region then, you hold their feet to fire. In other words, you have much higher expectations out of that earnings, expectations of earnings out of that segment under those circumstances, as well.

Bharat Masrani

More than just feet.

Operator

We'll go next to Mario Mendonca with TD Securities.

Mario Mendonca

A couple moments ago, you said something that really caught my attention. You said that the Bank will invest when we have favorable revenue environment, we're not going to worry about quarterly operating leverage. So the question I want to ask is, in any given quarter, what expense flexibility does the Bank have? And what I'm getting at here is, is it CAD100 million, as in in any given quarter, you can either expense or not expense CA100 million or spend or not spend CAD100 million. And if the answer to the question is that's a ridiculous question, that's fine. But that's the direction I want to go.

Bharat Masrani

Well, I'm not going to say it's a ridiculous question, Mario. But I will say that when the environment, when you see some positives in the environment, like we've seen in certain markets, when we know what our own pipelines are and that's not just by quarter and we do get a sense for where the next little while might be and sometime we get it right, sometimes we get it wrong. But hopefully, most times we do get it right. And that would encourage us to make the investments perhaps faster than what we might have done had that not been the case.

So that's what I mean. I don't want you to take the impression that we can throttle up or down within two minutes because Mike thinks something's going to happen in the U.S., so let's get the expenses up. But generally, we do try and take advantage of an environment. Because in today's day and age, the investment opportunities are huge and some of them make a lot of sense for TD and we want to make sure that we take advantage of our franchise and industry leading positions. We just want to make sure not only do we maintain it, but we take share because of that advantage.

Mario Mendonca

So expenses will always be based on their merits, but the timing of those expenses could be somewhat variable.

Bharat Masrani

It's not inaccurate. Not going to suggest that your whole expense base is of that characteristic, but certainly some categories do fall into that description.

Operator

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

Bharat Masrani

Thank you, Operator. I'm very, very happy with what we have delivered today. You look at the numbers out of U.S. Retail, very strong results, as well as from Wholesale. And we've started to see momentum out of our Canadian Retail business, where we have some of the largest market shares in the industry. So very happy with how the quarter's turned out and the momentum we're building.

So thank you for your support. I know our shareholders are listening to this call. We appreciate your support and I look forward to meeting many of you in the quarter. And if we do not get a chance to get together, I look forward to talking to you in 90 days from now or so. Thank you very much.

Operator

That does conclude today's conference. We thank you for your participation.

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