The Toronto-Dominion Bank
Q2 2015 Earnings Call Transcript

Published: 29 May 2015

[Operator:]

Good afternoon, Ladies and Gentlemen. Welcome to the TD Bank Group's Second Quarter 2015 investor presentation. Please be advised that this call is being recorded. I would now like to turn the call over to Mr. Rudy Sankovic, Head of Investor Relations for the Bank. Please go ahead.

[Rudy Sankovic:]

Thank you, Operator and good afternoon, everyone. We will begin today's presentation with remarks from Bharat Masrani, the Bank's CEO, after which Colleen Johnston, the Bank's CFO will present our Second Quarter operating results. Mark Chauvin, our Chief Risk Officer, will then offer comments on credit quality after which we will entertain questions from pre-qualified analysts and investors on the phone. Also present today to answer your questions are Tim Hockey, Group Head Canadian Banking, Auto Finance and Wealth Management, Mike Pedersen, Group Head U.S. Banking, Bob Dorrance, Group Head Wholesale Banking and Riaz Ahmed, Group Head Insurance, Credit Cards and Enterprise Strategy and Riaz is also responsible for the Capital and Treasury activities at the Bank. Please turn to Slide 2. At this time, I would like to caution our listeners that this presentation contains forward-looking statements. There are risks that actual results could differ materially from what is discussed and that certain material factors or assumptions were applied in making these forward-looking statements. Any forward-looking statements contained in this presentation represent the views of Management and are presented for the purpose of assisting the Bank's shareholders and analysts at 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 we view 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 the forward-looking information are all available in our Q2 2015 report to shareholders. With that, let me turn the presentation over to Bharat.

[Bharat Masrani:]

Good afternoon and thank you for joining us today. As Rudy mentioned, Colleen will be up shortly to discuss our Second Quarter results in detail, but let me start by sharing my thoughts on this quarter and our progress so far this year. Overall, I'm pleased with our performance. For Q2, we generated adjusted EPS of $1.14, up 5% from last year, a good result. All of our businesses performed well and we continue to benefit from favorable FX and solid credit performance. On the capital front, our common equity Tier 1 capital position increased to a strong 9.9% and both our liquidity and leverage ratios are comfortably above our targets. Our Canadian retail segment delivered earnings growth of 6%. Good volume growth, stable margins and strong fundamentals in wealth and insurance helped drive results. A solid lending market fueled demand for new originations in business banking, Real Estate secured lending and auto finance. Wealth Management posted record, long-term Mutual Fund sales, up an industry-leading 60% year-over-year. And, in our Canadian branches, customers can now apply for an account at one of our stores south of the border at TD Bank, America's most convenient Bank. TD is also the only Bank in Canada that now offers customers the ability to conveniently pay their U.S. bills online or on their Smartphone. Two examples of our cross-border banking convenience. Our U.S. retail segment performed in line with our expectations. Earnings growth was 2%, despite a drop in security gains versus last year. While our first-half performance was slightly ahead of our targets, our expectations for the full year continued to call for modest earnings growth. Our fundamentals remain strong as we outgrew the competition in loans, checking accounts and household growth. We had excellent credit performance and good expense Management. You would have seen our recent announcement about our program agreement with Nordstrom, to purchase their existing U.S. Visa and private-label credit card portfolio and to become their exclusive credit card issuer in the U.S. We're proud to have been selected in this competitive process for our customer-centric approach and proven capabilities by an organization who shares our common values on customer experience. Nordstrom is one of the most respected retail brands in the world and this announced transaction will build on the success of our growing North American credit card portfolio. Our wholesale segment delivered an impressive quarter, up 19% from last year driven by higher fee base and trading revenue. ROE was strong at 18%. TD Securities' focus on serving our U.S. commercial and corporate client base is noteworthy. It helps TD bring more to the table, deepens existing relationships and builds on our franchise-driven model. This is what we mean when we say think like a client, act like One TD. When I talked about expenses last quarter, I reviewed our various areas of focus with caution that it will take some time before we see a meaningful impact to our expense base. We do expect to see an improvement in our efficiency in the medium term. While it's still early and we have more work to do, I was pleased with our Q2 expense performance. Excluding FX and variable compensation, our expense growth was 2.2%. Having said that, our operating environment remains challenging. Prolonged lower rates, a slowing Canadian economy, mixed recovery signals from the U.S., continued expectations for low oil prices and regulatory and legislative pressures in both the U.S. and Canada will continue to result in slower revenue growth. Additionally, our industry is changing in fundamental ways and at breakneck speed, as new technologies lower the barriers to entry and innovative competitors emerge. I have said many times before, TD is an adaptable organization. In light of these external pressures, we have continued to find ways to be a fitter and faster organization, easier for our customers to do business with while continuing to create room for investment in the future. As you saw today, we reported an after-tax restructuring charge of $228 million. Today's charge reflects progress on many fronts along our productivity agenda and the related annual expense savings represent roughly 2% of our total expense base which will be fully phased in by 2017 giving us more assurance that our rate of expense growth will be controlled in the future, given a slower growth environment. The restructuring is part of our ongoing focus on adapting to the current environment while building for the future. Given the significant growth we have experienced in the last decade, including integrating our acquisitions, we're now focused on optimizing the performance of our enterprise. The charge spans Real Estate optimization, including branch and store mergers, call center and corporate premises, process redesign to improve agility, efficiency and effectiveness and a continuous review of how we deploy our people to deliver against the evolving multi-channel customer expectations. This phase focused mainly on the United States and some functions in Canada and we expect to complete most of this work by the end of this year. Some of the cost savings will be reinvested in advancing our digital and mobile capabilities, including modernizing our technology infrastructure and adding additional resources and expertise to improve our agility and speed to market. This will enhance the customer experience and help us compete with players who are not encumbered with legacy systems. Technology is increasingly influencing customers' expectations and preferences to change. Speed and innovation matter and we will continue to make significant investments in digital technologies. As we do so, our focus remains on offering legendary experiences across all channels with the safety and soundness that protects the interests of our customers. We strive to be the high-touch Bank in a high-tech world. What's more, we anticipate these investments would help improve our efficiency in the medium term. When I talked to you about our outlook for 2015 earnings growth six months ago, I cited higher credit losses and increasing effective tax rates, as items that would impact performance going forward. Both of these factors have been more benign than we expected. Additionally, the U.S. dollar has been stronger than last year which has meant higher than expected earnings. Expenses are being tightly managed and I'm pleased with the discipline I'm seeing across the Bank in big ways and in small ways. However, in the last six months, we have seen more pressure on revenue than expected and given the lower rate environment in the U.S. and declines in Canadian interest rates, my view on 2015 has not fundamentally changed since the start of the year. Despite these near-term challenges our ability to grow our volumes at a healthy rate, the strength of our credit portfolios and our progress on the expense front are all positive signs of momentum in 2015. More importantly, we continue to parlay our cost core strengths, our customer-centric model, the diversity of our business mix, our organic growth capabilities into new growth opportunities. These include a growing Wealth Management Business on both sides of the border, increased opportunities for our wholesale franchise and the continued growth of our U.S. platform. In closing, I remain optimistic about our growth prospects today and the moves we're making to improve our franchise. While change is never easy, I'm continually impressed by the commitment and professionalism of all of our people. It is because of them that TD continues to be a great franchise with an exciting future. Thank you very much and now I'll pass it over to Colleen.

[Colleen Johnston:]

Well thanks, Bharat and good afternoon, everyone. Please turn to Slide 4. This quarter we delivered adjusted EPS of $1.14, up 5% year-over-year. The quarter reflected good growth from retail and wholesale versus last year, up 9% and 19%, respectively. The corporate segment posted a loss of CAD139 million. We continued to benefit from a strong U.S. dollar. Adjusted total revenue increased 6% year-over-year or 2% excluding FX, led by strong loan deposit and wealth asset growth and higher insurance, fee-based and trading-related revenue. Growth this quarter was partially offset by margin compression, reduced security gains and lower corporate segment revenue. Adjusted expense growth was 8% year-over-year or 4% excluding FX. Expense growth was driven by higher variable compensation and increased project and initiative spend, increases in base expenses were partly offset by productivity savings. Excluding variable compensation, expenses were up 2.2%, a good result. Overall a strong result for the Bank this quarter. Please turn to Slide 5. This slide presents our reported and adjusted earnings this quarter with the difference due to four items of note, two of which you have seen before. With respect to the other two, the after-tax litigation charge was due to an adverse judgment and the evaluation of other developments and exposures in the U.S.. We also took a restructuring charge this quarter of CAD228 million after-tax to reflect various productivity initiatives. I'll comment more on this item in a later slide. Please turn to Slide 6. Canadian retail delivered a good quarter with Adjusted Net Income of CAD1.4 billion, up 6% year-over-year. The increase was driven by continued good loan deposit and wealth asset growth and higher insurance earnings, but was partially offset by expense growth. Loan and deposit growth was good this quarter. Total loan growth was 5% year-over-year with Real Estate secured lending volume up 4%, strong business lending growth of 9% and 17% higher auto lending volumes. Deposits increased by 5% due to strong growth in core checking and savings accounts which were up 9%. Business deposits were up 6%. Margin increased 1 basis point sequentially primarily due to the impact of a credit mark release in the acquired credit portfolios partially offset by the lower rate environment. We expect margins to remain under modest pressure in the second half of the year as a result of product mix, seasonal factors and competitive pricing. Credit performance was flat year-over-year. Higher personal PCL, up CAD24 million, mainly on higher auto PCL and prior-year recoveries was mostly offset by lower business banking PCL which decreased CAD23 million from a single commercial provision in the prior year. Adjusted expenses were up 4% year-over-year primarily due to higher employee-related costs including higher revenue-based, variable compensation in the wealth business and business growth, partially offset by productivity savings. Canadian retail produced 50 basis points of operating leverage when insurance claims are netted from revenue. Overall, a good result for Canadian retail. Please turn to Slide 7. U.S. retail, excluding TD Ameritrade, had earnings of U.S.D433 million, up 2% year-over-year. Results for the quarter reflected strong fundamentals, including very strong loan and deposit growth, solid credit quality and good expense control, partially offset by margin compression. Revenue decreased 2% year-over-year relating to target and lower security gains. Excluding these items, revenue growth reflected strong volume and fee growth partially offset by margin compression. Average loan growth showed continued strength and was up 10% year-over-year with a 4% increase in personal loans and a 17% increase in business loans. Average deposits increased by 5%. Margin declined nine basis points quarter-over-quarter driven primarily by product mix due to lower credit card balances and lower loan margins. We expect margins to experience modest pressure for the second half of the year mainly due to competitive pricing and product mix primarily driven by auto and business lending. PCL decreased 33% year-over-year driven primarily by target. Excluding target, PCL was flat. Expenses were up 1% year-over-year primarily due to higher expenses to support growth and higher regulatory costs partially offset by ongoing productivity initiatives. Expense Management has been a key business focus this year. While earnings for the first six months are up 8% in U.S. dollars, we expect earnings growth to be modest for the full year reflecting a challenging revenue environment. Earnings from our ownership stake in TD Ameritrade in U.S. dollars were down 1% year-over-year in line with TD Ameritrade earnings. All-in, a good performance in the U.S.. Please turn to Slide 8. Net income for wholesale was CAD246 million, up 19% year-over-year, a strong result reflecting broad-based contributions from all businesses. Revenue increased 16% year-over-year due mainly to higher trading, debt and equity underwriting fees and strong corporate lending growth. Non-interest expenses were up 10% primarily driven by higher variable compensation and foreign exchange translation. ROE this quarter was 18%. Please turn to Slide 9. The corporate segment posted an adjusted loss of CAD139 million in the quarter compared to a loss of CAD30 million in the same period last year. The higher loss was a result of a prior-year gain on sale of TD Ameritrade shares, lower favorable tax items and prior-year releases for incurred but not yet identified credit losses. Please turn to Slide 10. Our Basel III common equity Tier 1 ratio was 9.9% in the Second Quarter versus 9.5% in Q1 of 2015. The increase reflects solid organic capital generation and RWA reductions primarily in wholesale. This quarter, we've disclosed our liquidity coverage ratio for the first time. We're comfortably above the 100% minimum target that OSFI has provided. I've included a slide in the appendix to provide further insight into LCR. Overall, we continue to remain well positioned for the evolving regulatory and capital environment. Please turn to Slide 11. With respect to the restructuring charge announced today, the CAD228 million after-tax amount reflects a detailed and thoughtful productivity review which has been taking place over the last several months. Approximately 50% of the charge was related to our U.S. operation. This review focused on three key areas. First, a focus on process redesign with a view to simplifying and streamlining processes across the Bank. Second, Real Estate optimization including branch and store consolidation in Canada and the U.S. and the cancellation of a limited number of de novo store locations in the U.S. which didn't make as much sense given changing consumer behaviors. We do, however remain committed to opening new branches and stores in key growth Markets as we move forward. Third, an organizational review primarily targeted at streamlining our executive and corporate Management structures mainly in non-client facing areas. This was something that Bharat provided an update on last quarter. Ultimately our goal is both customer- and employee-oriented. As a result of think process we will improve our service levels, make it easier for our customers and clients to do business with TD and for our employees to get business done all while improving both efficiency and effectiveness. The expected annual savings from the restructuring is roughly 2% of our expense base. Fully realized in 2017, but with most savings in 2016. In the last couple of years, our rate of expense growth has been pressured by many factors including technology transformation, regulatory investments, investments in digital capabilities, including mobile and business-as-usual growth. The run rate savings from these restructuring charges will allow us to lower our rate of expense growth while still investing in future capabilities. Before I hand it over to Mark, I want to briefly mention the federal budget proposals related to synthetic equities. It's early to precisely size the impact given the consultation period and potential mitigation. However, what I can tell you is that the pre-mitigation impact of the proposal, assuming November 1 implementation, is 1% to 2% of EPS. And, with that, I'll turn it over to Mark.

[Mark Chauvin:]

Thank you, Colleen and good afternoon, everyone. Please turn to Slide 12. Credit performance remained strong across all portfolios throughout the Second Quarter. Gross impaired loans and new formations remained at cyclically low levels and are in line with results over the past four quarters. Provision for credit losses is up slightly, returning to a more normalized level when taking into account the Canadian debt sale which occurred in the First Quarter. With respect to our oil and gas exposure, outstanding exposure remains stable at CAD3.8 billion representing less than 1% of total loans and acceptances. Our oil and gas book is performing within our expectations and we're not seeing a significant deterioration in consumer credit quality in the impacted provinces. As it is still early days, however, we continue to maintain a cautious approach across retail and non-retail exposures impacted by low oil prices. We continue to see high quality originations across the portfolio and moving forward, I anticipate credit quality to remain strong through the remainder of the year. With that, Operator we're ready to begin questions.

[Operator:]

[Operator Instructions]. The first question is from Steve Theriault from Bank of America Merrill Lynch. Please go ahead.

[Steve Theriault:]

So Bharat, you're nestled up against 10% core Tier 1. Are you thinking about or what point do you think about rein stating the buyback that you were a little bit active within 2013 and 2014?

[Bharat Masrani:]

Steve, I think I mentioned or talked about this before I give you the answer as to how we think about capital generally, what's capital deployment thinking and the first thing we obviously look at it is how much capital do we need to support our strategies related to organic growth and growth generally and that's always been our top priority. We've also used capital when it is appropriate to make sure that we have all the capabilities that we require to adapt and compete in various markets in which we operate. I think Epoch is a good example of that. We've also been very active in using up our capital to optimize our U.S. balance sheet. We've talked about assets as something that we're really interested, as long as they are asset classes that fit our risk appetite and give us returns that are in keeping with what we consider to be reasonable, then we will certainly be using our capital to deploy to make sure that we take advantage of such opportunities and then we also talked about whenever we do see any opportunities for tuck in acquisitions or frankly being opportunistic events that might take place on both sides of the border, we would certainly be aggressive in pursuing those if they made sense for us and once we go through all of that thinking and if we still find that we have more capital than obviously we would seriously think about how do we maybe look at buybacks or anything similar so that's our capital thinking. I think the level you're seeing now is good. It's healthy. There is still a lot of uncertainty out there on what exactly are the requirements, what kind of rules might get finalized and we have good organic growth opportunities as well so I think it's premature for me to comment on exactly what we would do but I just wanted to give you some context on exactly how we think about capital and how we deploy it.

[Steve Theriault:]

You mentioned in your comments, Bharat regulatory pressure in Canada. Is there anything specific you'd mentioned to on the horizon you'd expect to take that materially or incrementally lower?

[Bharat Masrani:]

What I meant there was just building out the different forms of infrastructure, making the right investments, when obviously, we're watching for and prepared for any eventuality that might result in various Basel deliberations or what might apply nationally but in addition to that there is a significant infrastructure build just to meet the new expectations that are out there and those are not insignificant, so we like all major banks, I'm guessing, are quickly building up those capabilities and that requires some dollars as well, so that was what I meant by talking about expectations.

[Steve Theriault:]

Okay, if I could sneak a quick one in for Mike. Thanks for that, Bharat. Just really quickly in the context of the restructuring I'm looking at your store count or branch count, its floated right around 1300 plus or minus maybe 10 for some time. With the implementation of some streamlining and overlapping branches, would you expect that to drop materially below the 1300 count?

[Mike Pedersen:]

Yes, so as I've said before, it will go up and down as we go through the quarters. As part of this charge, we've decided to close another 24 stores. That brings the total of stores that we merged into others for the year at about 45 and we'll probably open about 21 this year and we'll probably open roughly the same next year, so you know we're just taking a very careful look at customer transaction patterns and where we're acquiring customers and in some cases we have mature stores that can be merged into others with really negligible customer impact and would rather deploy some of that capital to open stores in growing areas in order to acquire more customers at a faster rate gain share and so on.

[Operator:]

Thank you. The next question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.

[Sohrab Movahedi:]

A couple of quick ones. Mike, you will go through the CCAR process in the U.S. this year. Are you anticipating any incremental costs above and beyond what you would have spent already in preparation for that?

[Bharat Masrani:]

So again, looking back over the last few years in the U.S. in our expense base is the gradual build of capabilities and infrastructure required to meet the broad array of regulatory change that we've seen in the U.S. and that includes spend to prepare for the DFAST exercise and the CCAR exercise next year. We're trying our hardest to derive productivity gains that moderate the impact of those initiatives and so far we've succeeded and we're going to continue to stay very focused on that. I think in terms of expenses we've had a very strong start to the year. We're down 1% year-over-year so far. I do think expenses will be a little bit higher in the second half of the year, in part for the reason that we're talking about the regulatory build but more related to the fact that more of our store openings are taking place in the second half than did in the first year. There's some timing related to Marketing and so on so as much as possible I don't think you'll discern any impact of regulatory build.

[Sohrab Movahedi:]

And very quickly for Mark or for Bharat for that matter. TD has historically not been shy in the past of using sectoral look provisions when there's a variety of unknowns on the horizon. With what's happening in Alberta with the slowdown in Canada with the fears of the oil and gas, is [indiscernible] something that you're thinking about just to allay any investor concerns specifically on the loan book?

[Mark Chauvin:]

It's Mark and I'll address that question. I think in the current environment, that would be addressed through our normal provisioning process and they would capture changes in risk and the portfolio and we're tracking Alberta very closely. It's very heightened alert but what we're seeing is very little if any change in the core credit metrics that would say that any, in fact that has not driven any increase in the reserves for those areas on the consumer credit side. Now maybe it's a little early and it's not over yet but I would say anything that is required will be captured naturally in our reserve process.

[Operator:]

The next question is from Sumit Malhotra from Scotia Capital. Please go ahead.

[Sumit Malhotra:]

To go back to the restructuring charge or maybe more importantly on what it means for expenses going forward, in the not too recent past the Bank had been targeting a level of expense growth, core expense growth ex of foreign exchange or acquisitions of 3% year-over-year but you had backed away from that for a couple of reasons. As you undertake this restructuring and talk about streamlining the cost the rate of growth going forward, is it that 3% level that you're looking to get back to and if so what's the time frame we should be expecting that?

[Colleen Johnston:]

It's Colleen. I think I've talked about our general rate of expense growth in recent years in the 3-4% range and as we look forward, what we're really trying to do is to continue to invest in the future and we've called out some of the important investments in technology transformation investment in digital and mobile, other investments and regulatory infrastructure but that isn't brand new. We've been doing that over a number of years and in fact our base costs are growing so obviously doing this more comprehensive restructuring process is going to allow us to have higher productivity gains and hopefully bring our rate of expense growth down below that range that I've cited for you. I don't want to name a specific number but that would be our goal, again is to continue to make the right investments in the future while lowering our rate of expense growth.

[Sumit Malhotra:]

Maybe try it a different way. I know when we talk about operating leverage its normally been focused on the Canadian banking segment but from the top of the house perspective, that one's been a more challenging endeavor for TD and you would think some of the issues such as acquisitions or FX are going to cut both ways on revenue and expenses, so not to tie you down too much here, but how does the Bank think about operating leverage from an all Bank perspective and is that a more realistic goal given some of these investments that you'll be undertaking?

[Colleen Johnston:]

I think if you look at the first half performance of the year and the fact that obviously we're posting negative operating leverage for the first six months I would call out a number of items that we've earned through broadly but a number that affected the revenue line. You look at the TD Ameritrade gains which happened in Q1 and Q2 of last year, substantially lower security gains, same quarter last year, we had a tax related item but which affected revenues and taxes, so those items we don't have similar types of items in the latter half of 2014 so I think what you'll start to see is an improvement in the trend around operating leverage. I don't want to make any firm commitments for the immediate year but certainly our goal is to make sure that we can improve our efficiency over time and reduce that productivity ratio in the medium term and that is our goal and I think the restructuring charge the work that we're doing in fact that's continuing is going to help us do that, given the slower revenue growth environment.

[Operator:]

Thank you. And the next question is from Gabriel Dechaine from Canaccord Genuity. Please go ahead.

[Gabriel Dechaine:]

Just a quick one on the U.S. margin and the follow-up, one of the factors in your report that explains the decline sequentially was from higher margin loans maturing. I just want to get a sense if that's a one off type situation or if there's a cohort of loans that is slowly repricing through the system and that could be a persistent issue?

[Mike Pedersen:]

Yes, Gabrielle, it's Mike, so I guess just context I'd say on margin our outlook hasn't changed a lot from the last couple of quarters. We said in Q4 and last quarter that while it would bump around a bit quarter by quarter, it would likely be roughly at the Q4 2014 level for the full year this year so in Q1 the margin went up by six basis points and it was then down nine this quarter and this quarters decrease was really due to three things and roughly similar measure. The first was loan margin compression. The second was strong deposit growth and the third was slower target volumes, so haven't changed our outlook much. As I sit here at the half year mark if there's one thing that looks a little different and this is to your point it is that our loan mix is a bit different than we expect it with stronger than expected growth in sort of the bigger ticket commercial loan bracket and also in auto finance. This is all good business for us and obviously adds net interest income but these are relatively lower margin loans so the mix change may represent a bit of downward pressure in the next couple of quarters but not a lot.

[Gabriel Dechaine:]

And then the restructuring, I'll ask about PCLs actually. Something that in the U.S. actually as well this quarter we saw big reduction year-over-year and I think that's mostly target. I don't want to dwell too much on this quarters, that specific item but it seems like say recurring benefit that TD has been having from credit I estimate one of the biggest beneficiaries of lower credit costs or lower PCL almost over the past several years and these items just keep popping up in a good way for you. I'm just, what does this say about how you've managed the Bank and is the well running dry at some point? Do we have any visibility on more of these types of recoveries taking place?

[Mark Chauvin:]

It's Mark. What we saw in the last quarter was a reduction really. All of the asset classes with the exception of target are kind of running at their normalized level I would refer to it as and with target you had a seasonal reduction volume that did result in that reduction but I would expect it to come back to a more normalized level next quarter and in terms of your more general question I think we're at the point where we're seeing kind of at the low end of the cycle of credit losses and I personally would not expect to see material significant downside going forward, on a positive downside.

[Gabriel Dechaine:]

You keep saying that but we keep seeing loan losses going down.

[Mark Chauvin:]

Ask me next quarter.

[Bharat Masrani:]

We have a great Chief Risk Officer.

[Operator:]

Thank you. The next question is from Meny Grauman from Cormark Securities. Please go ahead.

[Meny Grauman:]

My question is on the back of the Nordstrom deal but really the Nordstrom target deals together and it's really about I guess bigger pictures, do you have a concern that you're moving into a more monoline relationship in the U.S.? You're solving a short-term problem but do you have a debate internally about the issues longer term? It seems like in both deals cross-selling is limited and provides limited opportunity there and so the question is how big can you go with these deals, target was 6 billion, Nordstrom 2 billion. Is there a certain point where you say enough and how do you think about where that line may be?

[Bharat Masrani:]

I think if you step back to about four years ago and say what were we trying to do with the card business, we were clearly a laggard in the card business and both in Canada and the U.S., we sought out to increase our scale and our performance which in Canada we achieved having a tremendous amount of organic growth of outcomes through our branch sales and then added the MBNA portfolio and Aeroplan portfolio to that. Now in the U.S., we started by having a three pronged approach. We thought we would take some strategic partners. As I said before I don't view the strategic partner business as one that we're doing more from a market share purpose but more from a strategic and tactical point of view and then we also went to increase our Bank card as well as our retail cart capabilities, so if you look at target, we added a tremendous amount of balances, we developed a very good partnership with a brand name that we're happy with and you look at the we added some capabilities, some terrific talent and we earned a very good amount of credibility in the marketplace and we're able to, we have been able to repeat that with Nordstrom where we're very proud to have a Nordstrom and TD as brands stand side by side as partners. Both of us are very committed to the customer experience. We're a customer centric organizations both of us and we like the transaction. We like the returns that we're going to get on this. I think we expect the portfolio to grow over time and we expect that we'll continue to deepen our partnerships in various areas but it not just related to the relationship between the retail partners and TD. You have to realize we also get scale with the processes and networks and so it gives us a very good perch from which we can look at the development in the payment space a little more broadly so there's a lot of benefits to this transactions and we're delighted to partner with Nordstrom.

[Meny Grauman:]

And going back to the second part of my long question, is there a dollar value that you have in mind or how do you think about that in terms of how big that business in particular can be?

[Bharat Masrani:]

Well in terms of the dollar value from our risk management perspective, we would look at asset concentration limits and how we think about that internally in relation to the aggregate size of our balance sheet and the capital we have deployed in the business but as I said earlier we aren't looking at these deals from a market share perspective so I don't anticipate that bump up against any of those kinds of considerations for this part of the business.

[Meny Grauman:]

And if I could just sneak one more in. You talked about relating to the brand closing changing in consumer behavior and I wonder if you could explain that in a little more detail. Are you just talking about the use of internet mobile or is there something more going on that you're seeing?

[Mike Pedersen:]

It's Mike. Colleen has pointed to Tim and I so you'll hear from the two of us. So the obvious thing happening with the advent of new ways of banking mobile and online and so on we're seeing transactions in our stores drop by 6-7% a year and that gives us an opportunity both to change and enhance the customer experience and to become more efficient and more productive so the things you're seeing us doing whether it's the heavy investment in digital or the optimization of our store network or the introduction of new smaller stores that are focused on advice and sales as opposed to transactions is all a function of that. This is also why in the context of the restructuring charge we've revisited a few of the planned openings that we had and had decided not to proceed with 16 of them. These were decisions you Mick on a long time horizon and when we made the decisions to open these stores, it was quite a different environment in terms of customer behavior so as we looked at our new store pipeline we've decided not to move forward with these and again invest in a different part of our distribution systems.

[Bharat Masrani:]

And from a Canadian perspective, the only addition I would make is that not much of what Mike said is also actually applicable to Canada in terms of transaction migrations, branch formats, but the transaction decline in our branches in Canada is about half that rate of the United States and that's generally true of Canada versus the United States industry.

[Operator:]

Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead.

[Mario Mendonca:]

Colleen can we revisit your answer to Sumit's answer? Without providing hard guidance your answer was still helpful but I want to go one step further. It looks like the restructuring activities will be done by the end of 15. What would be helpful to understand is does the slower expense growth play out in 16 or are you really highlighting 17 as the time frame?

[Colleen Johnston:]

Mario, I would be expecting that the slower growth starts in 16 because the majority of the savings we talked about 2% of the expense base, really about 90% of that number is coming into 2016 and then with real realization into 17 and as we've suggested in our remarks, that our work is also continuing in particular on the organizational review. To date we've done the U.S. in some parts of Canada so we're continuing to work on all areas of productivity.

[Mario Mendonca:]

There is more work to do there obviously. If there were additional restructuring charges in subsequent quarters it would be fair to say those restructuring charges would be significantly smaller than the 337 we saw this quarter?

[Colleen Johnston:]

I think it's hard to estimate at this time, Mario, because the work is ongoing.

[Mario Mendonca:]

Let me flip over to something different, margins. Rather than looking at it on a segmented basis sometimes it's helpful to look at it on a consolidated basis and depending on how you calculate it the margin sequentially was down and I estimate as much as ten basis points which is a fairly significant number for TD. I know it's not domestic retail. We know what's going on in the U.S. that was helpful but it would appear to me there was more going on perhaps in Treasury or on the corporate segment. Did anything play out in Treasury or corporate that would cause the margin to be down that much sequentially?

[Colleen Johnston:]

Let me just check your number. I thought we were down three base us points quarter-over-quarter on the margin.

[Mario Mendonca:]

The way I would do it is take out the trading numbers and try to clean it up for trading. But if that's not a number you can speak to now I'll take it offline.

[Colleen Johnston:]

That's not the way we look at it. We were down three basis points and math Matt icily that makes sense when you think about the U.S. being down nine and Canada being up slightly, so there was a small impact in wholesale but mathematically it was exactly what we expected the total bank to look like.

[Mario Mendonca:]

Okay I'll revisit.

[Colleen Johnston:]

I'd be happy to sit down and go through your math and the way you think about it.

[Mario Mendonca:]

Sure and maybe one final thing then. That was helpful to provide us the outlook on 1-2% from the impact on dividend rental agreements but what would be helpful is to understand how it plays out on the Income Statement. Would it just show up as lower revenue or higher tax rate like a higher reported tax rate? Is that how you think about it?

[Colleen Johnston:]

Yes I'd probably prefer not to get into the details right now. It's a little bit premature and there are different impacts on whether it be on the funding side, whether on the TB side and tax side, so I think it's a bit premature to comment until we know exactly how the rules get bedded down.

[Operator:]

Thank you. The next question is from Peter Routledge from National Bank Financial. Please go ahead.

[Peter Routledge:]

Just a follow-up to the prior question. You mentioned it's 1% to 2% pre-mitigation. Can you give us some color on what mitigation is? Is that new products or is it offsetting trades?

[Bob Dorrance:]

It's Bob, Peter. I think mitigation just means working with the affected counterparties. I think it's somewhat premature and hard to say what that might be given we're still in the consulting phase. We still need to work with the various clients that are impacted or potentially impacted and it will be somewhat a function of what they decide their strategies want to be.

[Peter Routledge:]

Since I have you, Bob, a couple questions. I noticed the RWB reductions for TD overall and it looks like some or most of them are in your segment. Was there an earnings impact, did you sell assets and what would have been the earnings impact of that?

[Bob Dorrance:]

No, there was not an earnings impact, Peter. It was broadly a function of benefit from the movement and exchange rates and how they affected exposures and our derivative portfolios, combined with some improvement in some of the parameters that we've been focused on working with risk a little while and then also the business has been actively trying to manage the optimization of the capital such that we're earning the returns we need to return.

[Peter Routledge:]

It brings up the broader issue, a very strong quarter and I wonder and I know this business is volatile but I wonder to what extent can we look at this quarter's performance as representative of sustainable returns from your growth initiatives, put in place over the past year versus unusual or unsustainable gains that we shouldn't count on.

[Bob Dorrance:]

Yes, I think that gets into the area of unforecastability. What I like to look at is are we actually improving the earnings power that we have in the business such that were Markets to continue to be as constructive as they are, would we earn the same amount and I think we've been focused on is improving our earnings power and as I've talked about in recent times, the amount added in the U.S. dollar space so we continue to grow both our clients on the government institutional and corporate side in U.S. dollars and we grow our products capability in people in U.S. dollars and that's helping significantly I think in the potential for the business.

[Operator:]

Thank you. The next question is from Robert Sedran from CIBC World Markets. Please go ahead.

[Robert Sedran:]

Would like to ask about the insurance business. As pleasant as the weather is these days it wasn't for much of the quarter so I wouldn't have expected to see that positive claims experience as a driver of the result, so can you give us a sense of what was happening during the quarter and whether this might signal something beyond an unusual quarter and that this business is back into perhaps providing a better growth trajectory than it provided in the last little while?

[Bharat Masrani:]

So as you know over the last couple of years, we've been spending a lot of time in getting the fundamentals right for the business, so a lot of the activity we've undertaken to return the business to search for profitable growth areas and to secondly improve our claims Management process. We've shed some international activity that wasn't adding value and we're continuing to increase investments in the business in the infrastructures and in terms of talent, so the outcome of that is that our revenue claims and expense lines have somewhat been bumpy but the bottom line is definitely getting better and we have happier customers. That being said the second quarter was actually good from a weather perspective. If you look at the weather out in Alberta February through April its been very warm, so our current year accident claims are down and then we didn't have any really much of catastrophic losses to cover in the quarter, so the outcome of all of that has been that we had a very good bottom line performance but I'm not quite ready to declare that is a run rate.

[Robert Sedran:]

Is there anything incremental you can add about Ontario-Ottawa specifically?

[Bharat Masrani:]

I think the Ontario-Ottawa we've made tremendous progress in making sure that some of the issues that were dogging us in terms of underwriting and pricing are fixed to the extent that we can control those. I think the Ontario budget which is now tabled as Bill 91 continues to show the Ontario governments commitment to control cost, some of which I think will be reinvested in the rate reductions that the government promised to deliver on which so far seems like they are about half way through, so I think that work the government is doing is very productive for driving lower insurance premiums for the customer and to put the industry on a more sustainable framework, on more sustainable footings, so I think what we're seeing is a lot of positive outcomes and of course a lot of the devil will be in the details when the regulations get released so we're going to be anxiously watching that.

[Colleen Johnston:]

Rob, it's Colleen. Maybe I can just make one point to amplify something is just that when I think when you look at the insurance business, you really want to look at revenue net of claims because those numbers do move around between those two lines for various reasons, so but I think the underlying reason for the good claims performance are the reasons that was cited.

[Operator:]

Thank you. The next question is from Darko Mihelic from RBC Capital Markets. Please go ahead.

[Darko Mihelic:]

First just a housekeeping question, Colleen and Page 11 of your supplemental line number 14. Can you just remind me what bounces that number around and why is it up so high in Q2 versus Q1 and which business segment benefited from that?

[Colleen Johnston:]

So that's, there's nothing unusual going on in that line. That truly is the non-trading FX and that, those amounts just relate to amounts that are held in various parts of our operations including our branches, so certainly some of that would go into the retail Bank.

[Darko Mihelic:]

And then just getting back to the restructuring discussion. One of the things that you highlight is that the restructuring charges to help slow expenses, the rate of growth because of an increase in necessary investments and higher base costs, can you talk about higher base costs? Can you give us an idea what's driving costs at the base level up? Is it just inflation and what level of growth are we seeing there and do you expect that to elevate from recent growth in cost space?

[Colleen Johnston:]

So when you look at the kinds of things that affect our base, so inflation, merit increases were still giving annual merit increases to our team, cost of doing business across our various businesses, volumes are rising obviously we want to become more efficient and lower our unit costs as well but the reality is that the business of the Bank is growing and as I say those kinds of costs like merit in recent years, pension has certainly with lower rates has been something that has driven up our base costs as well, so again, we need to find ways to make sure that we can offset those increases and afford the investments that I've elaborated on previously.

[Darko Mihelic:]

But is it fair to say that the rate of growth in base cost is somewhat less now than it was say a year or two ago?

[Colleen Johnston:]

I wouldn't necessarily say that, no. Same ballpark.

[Darko Mihelic:]

Same ballpark so that really hasn't changed, okay?

[Colleen Johnston:]

No.

[Operator:]

Thank you. The next question is from Sumit Malhotra from Scotia Capital. Please go ahead.

[Sumit Malhotra:]

Just wanted to check in on a point that Bharat made earlier on the call in that one of the headwinds of the bank expected coming into 2015 was higher tax rates. Now we've certainly heard about the recently the equity derivatives, synthetic equity derivatives, creditor insurance changes. When I look at TD's TB tax rate on an all bank basis in the 21% or 22% range, why hasn't that headwind that you envision played out and I don't know how specific you can get but do you see that headwind being revisited as a potential threat to your earnings growth going forward?

[Colleen Johnston:]

If I step back, Sumit and look at my adjusted effective tax rate in 2014 it was 17.5%, this year my projections would suggest that that effective tax rate will be up maybe a point to a point and a half which again is slightly lower than I'd expected. We had some positive tax items last year and again some of those have recurred but I do expect the direction of the effective tax rate to continue to rise as we head into 2016.

[Sumit Malhotra:]

And that number that you mentioned that's non-TB, right?

[Colleen Johnston:]

Correct.

[Sumit Malhotra:]

Okay, because it doesn't look like on a TB basis or maybe this isn't the best place to do it but it doesn't look like its actually moved that much and I was just curious as to why that's been the case given even Bharat’s comments earlier.

[Colleen Johnston:]

There are various factors that will affect the rate. I tend to look at the adjusted effective tax rate. You're right. The level of tax exempt income will affect that number. In fact it did in this particular quarter which is why our rate looks a bit elevated but the fundamental direction of the effective tax rate is upward.

[Operator:]

Thank you. At this time I would like to turn the call back to Mr. Bharat Masrani. Please continue.

[Bharat Masrani:]

Thanks very much. So just in conclusion, very good quarter and I want to take this opportunity to thank nearly 85,000 TD folks around the world who continue to deliver for our shareholders. With that, I will conclude the call. Thank you very much, everybody.

[Operator:]

Ladies and Gentlemen this concludes the conference call for today. We thank you for your participation. You may now disconnect your lines and have a great day.