The Toronto-Dominion Bank's (TD) Management Presents at NBF 20th Annual Financial Services Conference 2022 (Transcript)

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The Toronto-Dominion Bank (NYSE:TD) NBF 20th Annual Financial Services Conference 2022 March 22, 2022 9:10 PM ET

Company Participants

Michael Rhodes - Group Head, Canadian Personal Banking

Unidentified Analyst

Okay. Thanks, again, for joining us. I am here with Michael Rhodes, who is just named Group Head of TD's Personal Banking Business. Thanks for joining us, Michael.

Michael Rhodes

Thank you.

Question-and-Answer Session

Q - Unidentified Analyst

I have a bunch of questions here, but one I'd like to start off with since you're relatively new to the role, last fall, right? Can you give us a bit of an overview of your background at the bank, and what your first impressions are on the personal banking business or from your current seat anyway?

Michael Rhodes

All right. Well, thanks. So, two questions there, let me take the first one. I actually am new in my role. I actually started January 1, so I'm 10 weeks in. So, all of you have the experience of 10 weeks of wisdom here. But, in any case, I've been in financial services about 30 years. If you think about my financial service career, it's been around consumer, credit card payments, small business, and then some commercial and a bit of wealth. I've worked in the United States, United Kingdome, Ireland, Spain, and of course, now, Canada. I’ve been with TD since 2011, a lot of interesting roles over the time. I've had the opportunity to work in technology and business units and operational functions. I was the CMO of the world's largest independent credit card bank for a while, that was sold to Bank of America.

I was then the CEO of one of Bank of America's bank subsidiaries in the U.K. And then I joined TD in 2011. I ran the credit card business. My joke is when I joined the credit card business, we were the sixth largest credit card issuer in Canada. And I told everyone there -- my claim to fame maybe is I told everyone we're going to be number one in five years, and we actually got there in three years. And so that was a good run, and may be one of the reasons I'm sitting here with you today.

So - but in any case, I went from there, and then ran America's most convenient bank retail bank, and then came back to Toronto to run all the shared services, so technology, digital, data. We did a Layer 6 deal and some of the operational functions, call centers for all collections, things like that.

And then, at one point in my career, we were just mentioning, I took a diversion at one point and actually I left Bank of America in 2008, and I don't recommend anyone doing this by the way, decided I want to do something different. I raised some capital and bought a small specialty finance company, I raised $300 million of equity capital, and raised a specialty finance company in the UK, which then was turned around and sold. The shareholders were very happy with that return, let me say that. And so that's a bit about me. I'm thrilled to be in the consumer bank, now the Personal Bank, as I have a lot of personal banking experience, and I'm quite energized by the role I'm in right now.

Early impressions, honestly, we have so much strength to lean upon. If I think about us, let's start with the brand. Our brand is just fabulous in the Canadian marketplace, number one for awareness and consideration, and that's obviously very, very powerful and helpful. We have the best branched network in the country, and I say that with great confidence. We're 90% urban. We are number one. If you go through the markets in Canada have 500,000 people or more, we're number one in 84% of those markets in terms of branch share. And so we're where the people are, which is terrific.

On the digital side, we have more digital presence, whether it be web traffic or usage of our mobile and online platforms than anyone else in the marketplace. Our deposit business is a real source of strength. It's the largest deposit business in the country, and we're growing share. We grew about 60 points of share last time I looked. And at the same time that we've been able to increase our wealth business through our mutual fund referrals. And so we're both growing the personal bank's deposit business and creating a referral engine to the wealth business through the mutual funds, which is terrific to see.

And the other thing I'd say is, look, I really -- the energy and the enthusiasm of the colleagues who I work with is just off the charts, and that really matters in banking. I know when JP was giving the introduction earlier, he talked about the value of in-person and being in-person. And for us that value is so terrific because I'm just really proud of the staff that I'm working with. And so, that's a bit about my background.

Unidentified Analyst

And the impressions. So, the Q1 call, there was one question asked about market share. And your -- in some markets, you're lagging a bit, and your response was -- the tone was a little weak and do better. I'm curious about what areas do you see that needs some work and how are you planning on addressing those areas?

Michael Rhodes

I do remember that question, it was the first question of the earnings call, and that was my first earnings call, so I appreciate – or answer that in here, thank you. The question was specifically around our RESL business, our real estate business. And if you look, on the one hand you say, well, jeez, your growth on a year-over-year basis was 9%, and just about market you'll say that's really, really strong. But, honestly, in the Canadian market right now, that that's certainly the laggard. And so, I just described all of the strengths we have. And then I say but we're not leading in growth in mortgage and home equity, those two don't seem to fit together.

And so I said, look, we can and should be doing better. And that's why I did call out. And to describe the strengths of the bank, really, if you kind of double-click specifically on the RESL business, beyond the fact that we have all these strengths I talked about earlier, look, we have a multichannel approach where we have several different ways, we can acquire customers and we have probably the most distribution of probably anyone in the marketplace. And we're seeing some momentum in a number of places. We've made some adjustments to our product suite in our brokerage channel, which has worked well, our mobile mortgage specialists, who aren't really tethered to a branch, but their productivity has increased at double-digit pace since pre-COVID.

And so, we're seeing momentum, but we still need to be doing better. And we do have a lot of things that we're doing to ensure that we're going to get there. When I was giving my background in terms of who I am, the one thing I didn't mention, I actually started out -- my wife is an engineer. I was a mechanical engineer, material science, and I actually practiced as an engineer for a while.

So, I do have a bit of an engineering mindset. And if I look at our RESL business, one of the things I've done is I've asked for a complete end-to-end review of the process, everything from when we originate, if we take an application whether it be in a branch or through a mortgage specialist, through underwriting, through funding, through servicing, and almost an industrial engineering mindset.

And, look, the good news is we're actually seeing opportunities there. We're seeing opportunities on the account management side. We're seeing opportunities through auto-adjudication. We're seeing opportunities in creating better connectivity between the underwriters and the folks who are taking the applications, our advisors who are taking the applications. And we're seeing opportunities in terms of tooling that we bring to bear, but if the data, the analytics, the workflow management, things like that. And so, when I was on the call, what I said was we can be doing better. But I also said I believe we have momentum, and I actually really do believe that.

Unidentified Analyst

Well, one of the -- and one of the changes, I believe, you made recently on the distribution side, the FlexLine product is being in --

Michael Rhodes

Launched in the broker channel.

Unidentified Analyst

Broker channel. So, what -- why wasn't it there before, I guess, would be my first question.

Michael Rhodes

So, it's -- when you work inside a large bank, when you look at the prioritization of kind of what you're offering where, there's always a bit of a pecking order, and we have a certain amount of money that we're going to fund, and you have to -- things are above the line and below the line. And the brokerage channel has become more and more important, particularly with COVID, and where people are going into a branch less. And to be fair, one of the reasons we had been lagging in RESL was because people were coming into the branch less and we were more branch-dependent probably than most. And so, we saw the brokerage channel was actually accelerating, and it is the -- like this is the time that we need to roll the product out.

Unidentified Analyst

And is that FlexLine -- I'm a little bit confused sometimes, the combined mortgage and HELOC products.

Michael Rhodes

Yes.

Unidentified Analyst

Like the regulator is kind of shining a light on that. And it's a big product for every bank at this point.

Michael Rhodes

Yes.

Unidentified Analyst

And TD was an innovator in it, so it's a big part of - for you. Is that -- what are your thoughts on potential regulatory oversight of that particular type of product?

Michael Rhodes

Yes, and certainly some regulators, you've probably seen some press regulators have commented on the product. Look, at the end of the day, whenever you're lending money, you want to make sure that we're doing it in a prudent way that's good for the customer. We're pretty confident. We understand what the regulator's intentions are with the product. And we believe that our path forward, it is going to be a good path.

If I actually look at the combined loan product and HELOC in general, it's actually interesting. When you look at some of our numbers, when you look at our financials, it's hard to see how we compare to the marketplace, because we actually have more granularity than most in terms of how we report out.

If you look at CBA data, which you probably don't have access to, but I do, we're fourth in the marketplace. So, we actually see this as an opportunity, because in most places, we're first or second and in terms of our product share, and here we're fourth.

Unidentified Analyst

Fourth in what like in volume…

Michael Rhodes

Volume, just in volume, just balance sheet metric. And so, our aspiration is go from fourth to a higher position in the league tables, and we very much believe we can do this in a way that's actually compliant with regulatory expectations.

Unidentified Analyst

Got it. The credit card business, so that's one where TD is a big market share of course, but if I look at pre-COVID balances to today, that's one where your recovery has been slower than some of the peers. And I'm wondering, is that because you had a heavy travel card emphasis? Or is it the legacy, non-legacy it's called the MBNA product because that's a more borrowing-based product. And that's just not what people are using anymore or doesn't want to.

Michael Rhodes

So, I say yes, and yes.

Unidentified Analyst

Okay.

Michael Rhodes

So it's interesting. There’s – so you do subscribe two different segments, one of which is the high-end travel cards, which the Aeroplan is our anchor product. And that's just it's a fabulous product. And actually, with Aeroplan, the progress just re-launched actually during COVID. And the re-launch product, it's the best travel product in the marketplace, part on. Unfortunately, people haven't been traveling as much, and we actually see with our spend data in the credit card business that we're still on up to pre-COVID spend levels on travel, we aren't everything else.

In fact, if you look at our balances, this year balances have shrunk. But actually, our spend on our credit card business, if you compare Q1 2022 to Q1 2020, which was a pre-COVID period, our spend is up 13%. Now our balances are down $3.5 billion or so, $3 billion or roughly $3 billion or so. And on a year-over-year basis, our spend is up 23%.

And so, we're actually seeing good spend patterns, but not actually translate into balances. So, a few things as you unpack this. Clearly, the travel programs - without that high spend levels, the travel programs haven't achieved that level of spend yet. But we actually see momentum, there. Obviously we're confident actually even in February, we're seeing momentum there. And so, we feel good about that. And then on the balance consolidation side, when COVID hit lots of stimulus programs, customers flush with cash, the need for balance consolidation, loans has gone down, and that's impacted the MBNA business.

If I think about the recovery from here, I actually think the travel rewards category is going to probably recover faster in the balance consolidation category, just because there is so much liquidity in the system. Now, that liquidity in the system is not all bad for us. In fact, that translates into very strong deposit balances, and you can again see our deposit balances are quite healthy. And I spend a lot of time in credit card, I can probably go on this for forever.

Unidentified Analyst

Well, I do have a follow-up and it's on the revolver rates being so low. I mean, I anticipated my simplistic view of the world that government programs, we got wound down September last year, few months go by and people will start having to carry balances again, or maybe my timing expectations are off. But not just now, but it sounds, I've talked to a few other bankers and it's there, they seem to be pushing back expectations for when revolver rates will actually go back to pre-COVID levels, why is that? And what's your outlook?

Michael Rhodes

So I think our outlook would actually be pretty similar, that's taking a while for evolve rates to get back to pre-COVID levels, I will say they're firming up and not going down anymore. They're actually probably edging up a bit. But look, I know the stimulus programs have stopped and some other factors that kind of came into play. The truth matters, which is good, the consumers still have a lot of liquidity even despite the fact that the stimulus programs have ebbed, I do remind folks though every once in a while that they're putting these natural hedges in the credit card business. The evolve rate goes down. Actually, your loss rate goes down also. And I know the focus these days is pre-tax pre-provision. We got on NIAT basis. It's actually, it performs well. All that said is, look, we want to see the balances come back and are confident they will, as I said, the travel is going to recover a little faster than the balance consolidation.

Unidentified Analyst

So the other today versus pre-COVID comparison, I look at is margins and your margins are still further off from pre-COVID. How much of that is because of this cards issue we're talking about because those are the highest spread products and how much of that is due to other factors. And what might those be?

Michael Rhodes

So, good, obviously everyone tracks our margin and you can see what it does on a quarterly basis. And when I came to the job, it was the first thing that I did show me the margin trends and what's going on. But at the end of the day, look, we are more interest rate sensitive than most. And so when rates are going down, you feel that in terms of margin compression. And my hope is when rates go up, you see the opposite effect. And certainly right now, it seems like we're in a rising rate environment. But it's a combination of mix.

And while card balances are much lower balances in aggregate than say, RESL, on the balance sheet, they're much after yield is that mix. That mix really does matter a lot. And their loan margins also and your loan margins look on a relative basis, and also balance sheet management strategies kind of come into play. So, those combination factors have caused some of a relative decline and our margin what we might see for others. That being said, coming into a rising rate environment, I think the things that have been, you've seen this look a little adverse, which should hopefully start looking a lot more positive.

Unidentified Analyst

Right. And that’s my - leads into my next question is rising rate environment, how much pricing power do you have on the deposit side of the balance sheets such that maybe you can overshoot some of the rate sensitivity metrics you've given us?

Michael Rhodes

So, I think about a rising rate environment, I'll give you a number, which is actually disclosed number, so it's fine is in the first quarter, we actually disclosed the impact of that.

Unidentified Analyst

You can give us the other.

Michael Rhodes

Okay, that's fine.

Unidentified Analyst

We're amongst friends.

Michael Rhodes

Yes, I know I'm sure we are. It is my first one of these things, no, it is going to be the last, but if you actually look in our disclosures, you see that just a 25 basis point increase in the short end for the enterprise is worth about $394 million. About half of that is in Canada, is that gives you kind of a sense of the leverage on the Ops for how we see margin going forward. And now I tell you, I was going on just talking about what was the question again?

Unidentified Analyst

I guess pricing power on deposits, what' the…

Michael Rhodes

Yes, and then, why is that pricing power so attractive? About three quarters of our deposits in Canadian bank don't attract rate if you will. And so, they basically zero yield of 25% due and so that 25% we are going to be very thoughtful in terms of, in the marketplace, what's the customer expectation? What's the competitive dynamic? What's the yield curve look like? I think we've got 75:25 mix.

Unidentified Analyst

In this 75, if you don't pass anything through that?

Michael Rhodes

With the 75, you actually need to kind of watch that and monitor very, very closely because you don't pass anything off. But mix shifts that can happen between 75 and 25.

Unidentified Analyst

But I imagine given the level of excess deposits that are across the system, the competitive intensity just isn't that high or is it more of a behavioral issue?

Michael Rhodes

I hate to forecast competitive intensity in the future. So, I just know like we've gone through prior rising rates cycles like and this is different, without a doubt what we're going through right now. But if you were to look at our prior rising rates cycles, at least you could probably use that as a proxy to think about this how look like.

Unidentified Analyst

Okay, expense management investment spending. So, we're in the phase now, where banks are gearing up for more initiative spending. I'll start with what are your areas of focus right now? What's the priority for these investments?

Michael Rhodes

So, high five or six areas of focus, actually, today was I know yesterday was my first visit for the markets when I took this role, I anticipated basically going from West Coast to East Coast and visiting every market which had failed miserably due to the kind of resurgence of COVID. So, I was actually in one of our branches here in Montreal just yesterday. And great team, great staff, fabulous attitude. And I asked our divisional leaders that if you could have one thing, what would it be? Should more advisors, and so one of the things we are investing absolutely in this year is more advisors. And so, you're going to see that as the year unfolds, and that's been a common story, you've probably heard from us for a while. But beyond advisors, how else do we stimulate demand, it's going to be marketing, being an ex-cards guy for a while, that's mostly a direct response business. And so, I've been a believer in the value and the power of marketing to stimulate demand, and you're going to see us investing more in marketing.

You're going to see us invested in our operations modernization. We heard earlier by kind of tech and ops coming together and the digitization of the world, yes. There's a digitization going on, it's going to affect our operating areas. And so, we're investing a lot beyond mortgage in that. We're also investing in a new operating model between tech and business. And this is actually my prior role. I ran technology and bunch of other things now, I'm in this current role but one of the conundrums you have inside a large complex organization is when you're try to deliver technology is we're generally very siloed in terms of how we operate. And so, how do you actually deliver technology across multiple silos and do it effectively? It requires a change in your operating model. And this is something that some banks in Asia have done, some banks in Europe have done and we're doing now ourselves, which is you're going to hear us talk about platforms and journeys or platforms or enterprise capabilities, journeys or the way a customer engages with a bank. And we're putting these platform journeys together, just cross functional parts and empowering teams to drive change. And the whole idea is here, we want to increase the metabolic rate of driving technology change for the benefit of our business.

And so, you're going to see that you're going to see investments in mobile. And I call mobile specifically because mobile is a growing channel. All their channels might be reasonably flat. Mobile is growing without a doubt. And those investments will be in capabilities. We just launched a new reward center with Starbucks. It's just great to earn and burn with Starbucks. You can actually pay for your coffee in line with through the TD app now and all sorts of interesting things you can do with that program. But beyond the capabilities, probably the most important vessels we're going to make are the ones you don't see. And those are the infrastructure investments. And so, actually moving our mobile application in Canada the cloud, by doing so we actually are going to end up bringing we're going to bring better tools for engineers, so they can write and deploy code quicker, so it's speed increase the metabolic rate. And we're also we adopted a modular architecture to our services with a mobile.

And so, again, historically, if you want to make change to your mobile app, you have maybe five or different groups you want to do something, you had to coordinate all that into one giant release. And now by creating modular architecture, we can actually run our change programs in parallel and get more work done. And so, you're going to see that type of investment and so my guess is this year not going to say, sit back and say, "Oh, geez, look at the great investments," they've made it infrastructure because you won't see it. What you will see is once we make those investments, and then we're talking this year, you're going to see an increase in metabolic rate with the rate of change so we can actually be there for our customers in a really fast way and understand their needs and drive the solutions to support them.

Unidentified Analyst

So, earlier, I heard you talk about the branch network.

Michael Rhodes

Yes.

Unidentified Analyst

You have 90% or been the best in Canada and then a lot of emphasis on digitization and this is the question everybody asked, and I myself included, I think it's kind of feel the pulse type things. The -- with all this digitization and increasing proportion of transactions online. What is the future of the branch look like? Is it just well, it'll go down slowly and we make them smaller or something like that or is it something else?

Michael Rhodes

So it's a good question. Let me start out with telling you a little story, if I can.

Unidentified Analyst

Sure.

Michael Rhodes

So as you knew, what you do and you're new in the role, one of the first things you do is you call customers and you talk to yourselves, you don't rely on your marketing research was greater your direct reports. So, I actually got on the phone and called a bunch of our customers and how are we doing? And I will tell you, and we called them is we do these surveys with customers and I called customers who thought we were fabulous. I usually call some customers who think we made a mistake and how we service them in one way or the other. And everyone regardless why talk to the ex-referred back and says and said, "Boy, I just love dealing with Jane in the branch or Harry." Directly, we're referring to actually individuals in the branch.

And one thing is you heard from JP, when he was introducing as he says, it's great to be in person because personal connectivity matters, when it comes to complex financial products being in person actually does matter. And meanwhile simple transactions will be going and then we'll be going and going digital simple sales, simple service transaction of when mobile be going digital, some data may go in virtual reality. And you're seeing the branch there's a shift. There's a shift that's happening away from service towards what I call the more complex sales and for they're having a physical presence, we believe matters because you're going to do those sales. You're either going to do them work from home, you're going to do in a call center environment, or you're going to do them in the community. We believe that being the community matters, and being 90% urban. We have the right locations -- we're the people in order to make that happen. But always going to be monitoring to kind of see and them make tweaks to the plot to the portfolios as time goes on. But I think that's our approach.

Unidentified Analyst

I guess the end of the branch is an exaggeration, right? The quick one on the expense initiatives, in the world that we're in how quickly can you pivot away from them if it's a batten down the hatches -- [technical difficulty]…

Michael Rhodes

Yes, so I mean, if you look at the quick thing you can pivot away from is honestly marketing and so when you have some excess dollars, you probably want to spend it a bit more marketing to drive volume. And when there's not you can kind of pull it down more quickly. I will tell you when it comes to some of the kind of technology change where things are going on. Like our intention is to be actually quite persistent with that finding. Because we don't think that the need to modernize our operation is going to go away. And so, one things that I'm really challenging my team to do is we need to figure out how to not cut back on the investments we're making, but how we lean out the things that we're doing, so we can afford to pay for them. And so, I'm very much focused on leaning our operations to create the call for the furnace to drive the growth.

Unidentified Analyst

Well, with that, I'd like to thank you for coming to Montreal. I really --

Michael Rhodes

Well, thank you.

Unidentified Analyst

-- appreciate your presence here, and good luck for the rest of the day.

Michael Rhodes

Thank you.

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