The Toronto-Dominion Bank
Q3 2015 Earnings Call Transcript

Published: 28 Aug 2015

[Operator:]

Good afternoon, Ladies and Gentlemen. Welcome to the TD Bank Group's Third 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. 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 third quarter operating results. Mark Chauvin, 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. The call will last one hour and end at 4 pm. Also present today to answer your questions are Tim Hockey, Group Head Canadian Banking and Wealth Management, Mike Pedersen, Group Head U.S. Banking, Bob Dorrance, Group Head Wholesale Banking and Riaz Ahmed, Group Head Insurance, Credit Cards and Enterprise Strategy. Riaz 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 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 the forward-looking information are all available in our Q3 2015 report to shareholders. With that, let me turn the presentation over to Bharat.

[Bharat Masrani:]

Thank you for joining us today. As Rudy mentioned, Colleen will be up shortly to discuss our results in detail, but let me start by sharing my thoughts. This was a strong quarter for TD. All our businesses performed well. The bank generated EPS of $1.20, an increase of 4% versus an already elevated quarter in 2014. These results were driven by solid revenue growth, good credit performance, positive operating leverage and favorable foreign exchange. Our Canadian retail segment delivered very good adjusted earnings growth of 8%. We continued to take market share across a number of key categories, and posted a strong quarter for new originations in our real estate secured lending business. Wealth management achieved double digit earnings growth driven by strong fee based revenues and asset growth. These results reflect the benefits of ongoing investments in this business including the addition of new advisors. Insurance also had a very strong quarter, as favorable claims performance contributed to good earnings growth. Before I leave Canadian retail, I’m thrilled to highlight a significant accomplishment this quarter. We pride ourselves in providing legendary service across Canada and the U.S. For the 10th year in a row, J.D. Power has recognized TD as the leader in customer satisfaction among Canadian Banks. For as long as this award has existed TD has won it, and I want to recognize the tremendous efforts of our branch, phone, digital and AT&T including various groups that support this businesses. I also want to thank our customers for their tremendous loyalty and for awarding the industry leader in this important category. Turning back to the quarter, U.S. retail results were up slightly from Q3 of last year and have increased 5% year-to-date. The business has good momentum, loan growth is strong, we are acquiring customers significantly faster than our competitors and we are making progress on deepening relationships. Our focus on growing the U.S. Wealth business is also going well as assets under management have doubled since we acquired Epic in 2013. Margins have declined this quarter, but we are increasing our net interest income and making good strides on improving our efficiency ratio. Wholesale banking delivered a strong quarter with earnings of $239 million. These results reflect higher trading revenues and investment banking fees and growth in the corporate lending portfolio. We made good progress building out our U.S. franchise adding high quality corporate institutional and government clients and leveraging the deep relationships we have with customers at TD Bank, America’s most convenient bank. This focus has seen strong growth in our U.S. dollar franchise in the last three to four years. A TD Securities loan book south of the border has been growing at 15% annually since 2013 mainly in high quality investment grade loans. Our government business ranks third globally in terms of raising U.S. dollar funding for its clients and we continue to add franchise building producers across all of our business lines. On the capital front, our common equity tier 1 ratio of 10.1% remains strong and both our liquidity and leverage ratios are comfortably above our targets. As we look ahead to Q4, we expect that credit losses will remain relatively stable with Q3, and FX will be a positive driver given the stronger U.S. dollar. On the other hand, we expect to see higher expenses and normalization of insurance earnings. Overall, 2015 is shaping up to be good year for TD ahead of our expectations. Now let me talk a little about the current operating environment and what it means for us. In recent months, we have seen further weakening in economic conditions in emerging markets and downward pressure on commodity prices including oil. The Canadian economy likely contracted in the first half of the year and the Bank of Canada reduced interest rates twice. We are living in uncertain times with increased volatility and financial market turmoil having broader and longer implications. TD is not immune to these macroeconomic forces, but we’ve had lower risk profile and our resilient business model I’m confident we are well positioned to weather the storm. We get paid to take the right risk and manage those risks and this is exactly what we are doing. Our exposure to oil is relatively small, our underwriting standards remain strong and to date the oil and gas portfolio is performing within expectations and we don’t expect material losses. We continue to see originations of high quality personnel and commercial loans across our network including Western Canada. We are standing by our customers and clients as they adapt to a new reality. While the U.S. economy also faces uncertainty, the economic outlook is more promising. The U.S. has begun to show signs of recovery and we will benefit from any future rate increases. The housing market, it keeps improving, consumer spending is on the rise in part due to falling energy prices and labor markets are performing well. With this positive outlook, I like the way we are positioned in the U.S. with a young high quality franchise that’s growing and taking share. I am proud of our performance. TD continues to grow our volumes at a healthier rate and are focus on service and convenience is driving market share increases across our key markets. Our business model has proven to be resilient and we are weathering these conditions well, however, we understand that we can’t rely on revenue growth alone in this environment and we continue to look for ways to make TD the better bank. Last quarter, we announced the restructuring charge that reflected the first phase of a bank wide focus that will help make us more effective and reduce our rate of expense growth. We are well into the second and final phase and expect to complete most of the work by the end of the year. As I look forward, our focus on permanently improving our processes will play an important role in enhancing our agility and positioning us for success, but the TD story remains one of growth. I am equally focused on investing in opportunities that will position us for continued out performance in our core businesses. Our leadership team remains resolved to increase efficiency and effectiveness. I am confident that when we are done TD will be an easier place to work and a better bank for our customers to do business with. I’m excited about our prospects and I’m proud of how we are becoming fitter and faster the TD way. To wrap up, it was a strong quarter for TD. I am pleased with what we have achieved and I have full confidence that we are taking the right steps to preserve our track record of delivering good results and to invest and adapt for our customers, employees and shareholders. With that, I’ll turn 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 $1.20, up 4% year-over-year. The quarter reflected strong growth from retail and wholesale versus last year, up 10% and 11%, respectively. The corporate segment posted a loss of CAD161 million. We continued to benefit from the favorable currency impact of a stronger U.S. dollar. Adjusted total revenue increased 10% year-over-year net of claims or 5.3% excluding FX, led by strong loan deposit and wealth asset growth in addition to higher insurance, fee-based and trading revenue. Growth this quarter was partially offset by margin compression. Adjusted expense growth was 9% year-over-year or 3.6% excluding FX. Expense growth was driven by increased investment in technology, modernization and new capabilities and regulatory infrastructure partly offset by productivity gains. We were pleased to post strong operating leverage reflecting good revenue growth, positive claims experience and prudent expense management. We remain focused on delivering sustained productivity improvement. 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 three items of note, which you have seen before. The litigation item reflects the recovery related to certain litigation matters recognized as an item of note in prior quarters. Please turn to Slide 6. Canadian retail delivered a strong quarter with adjusted net income of CAD1.6 billion, up 8% year-over-year. The increase was driven by continued good loan and deposit growth very strong insurance earnings, and wealth asset growth partly offset by higher expenses. Loan and deposit growth was good this quarter. Total loan growth was 5% year-over-year with real estate secured lending volume up 4%, business lending growth up 9% and auto lending up 17%. Deposits increased by 6% due to strong growth in core checking and savings accounts which were up 9%. Business deposits grew 7%. Margin declined 1 basis point sequentially primarily due to the impact of a credit mark release in the acquired credit card portfolio last quarter and the lower rate environment partially offset by seasonal factors. For Q4, we expect margins to remain under pressure due to mix, seasonal factors and competitive pricing. PCLs increased 4% year-over-year, personal PCLs decreased CAD11 million due mainly to lower credit card personal lending and auto provisions. Business banking PCLs increased CAD20 million year-over-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 positive operating leverage when insurance claims are netted from revenue. Overall, a strong result from Canadian retail. Please turn to Slide 7. U.S. retail, excluding TD Ameritrade, posted adjusted earnings of U.S.450 million, up slightly from Q3 of 2014. Results for the quarter reflected strong volume growth and disciplined expense management, largely offset by margin compression and normalizing credit losses. Revenue increased 1% year-over-year as industry leading volume growth and broad based fee growth were partially offset by lower loan margins. Loan and deposit growth remained very strong in the third quarter. Total loan growth was a strong 11% year-over-year with a 4% increase in personal loans and a 17% increase in business loans. Average deposits increased by 6%. Margin declined 12 basis points quarter-over-quarter, roughly half of the decline was attributable to our U.S. Partner card programs and hedging related items which were offset in other income. The balance of roughly 6 basis points was due to lower loan margins in commercial and auto loans and the impact of the low rate environment on deposit margins. We expect margins to remain under pressure due to continued competitive pricing and the low rate environment. PCL increased 36% year-over-year mainly due to higher provisions for commercial loans as a result of an allowance built partially offset by a decrease in personal banking PCL. Expenses declined 1% year-over-year due to ongoing productivity savings partially offset by higher expenses to support growth and higher regulatory costs. Our adjusted efficiency ratio has improved by 110 basis points year-over-year. Earnings from our ownership stake in TD Ameritrade in U.S. dollars increased 7% year-over-year due primarily to increased asset growth and transaction revenue partially offset by higher operating expenses. Overall, good fundamentals from the U.S. bank which has driven 5% earnings growth in U.S. dollars on a year-to-date basis. Please turn to slide eight. Net income for wholesale was CAD239 million, up 11% year-over-year, a very strong result. Revenue increased 13% year-over-year, due mainly to higher fixed income and equity trading, M&A fees and corporate lending partially offset by lower equity underwriting fees compared to a strong Q3 of 2014. Non-interest expenses were up 10% driven primarily by higher initiative spend, the impact of foreign exchange translation and higher variable compensation. ROE this quarter was 17%. Please turn to slide nine. The corporate segment posted an adjusted loss of CAD161 million in the quarter compared to a loss of CAD53 million in the same period last year. The higher loss was the result of lower favorable tax items in the current quarter and ongoing investment in enterprise and regulatory projects and initiatives. Please turn to slide 10. Our Basel III common equity Tier 1 ratio was 10.1% in the third quarter versus 9.9% in Q2. The increase reflects solid organic capital generation partly offset by increased RWA mainly due to volume growth. Both our leverage and liquidity ratios are consistent with last quarter. Overall, we continue to remain well positioned for the evolving regulatory and capital environment. With that, I'll turn it over to Mark.

[Mark Chauvin:]

Thank you, Colleen. Good afternoon, everyone. Please turn to slide 11. While we've seen an in the provision for credit loss of CAD47 million or 12% quarter-over-quarter and CAD114 million or 35% year-over-year, the increase is attributed to the normalization of loss rates in the U.S. portfolio through a combination of increases in commercial and retail allowances to support volume growth, seasonal trends in consumer credit volumes and lower recovery levels as workout activity continues to reduce. The Bank's loss rate was flat at 33 basis points for the quarter with gross impaired loans stable at 57 basis points, up 1 basis point over the previous quarter and 2 basis points year-over-year. The oil and gas portfolio continues to perform within expectations and we have yet to see a meaningful deterioration in consumer credit quality in the impacted regions. Oil and gas outstanding exposure remains stable representing less than 1% of total loans and acceptances. While we continue to maintain a cautious approach across retail and non-retail exposures impacted by low oil prices, I do not current believe that low oil prices will result in a material increase in credit losses. In summary, credit quality remains strong across the bank as we head into the fourth quarter. With that, operator we are ready to begin the question and answer session.

[Operator:]

Thank you. [Operator Instructions] And the first question is from John Aiken from Barclays Capital. Please go ahead.

[John Aiken:]

Good afternoon. Bharat in his opening comments talked about TD being a growth bank and I immediately then flipped to the indirect auto growth that you had on both sides of the border. I found that very interesting based on commentary one of your competitors had that they were actually tapping the brake in terms of that loan growth. So Tim, can you let us know what your philosophy is in terms of this portfolio and importantly what you're seeing in terms of some of the longer term lending practices that are going on in the marketplace?

[Timothy Hockey:]

Sure, John, we are actually quite comfortable with this portfolio. We had great growth through the years. The dynamic of course is that the auto sales continue to be strong. Just so we have made some investments in that particular business and we introduced a new system this past spring and so we're seeing some other results of that. The overall trends, if you worried about at this point of the cycle, we continue to see the call it average credit score in that business essentially flat through the years. We're actually a little bit below industry average when it comes to loan to value on the prime book. We're basically on market in the non-prime book, but we're still very comfortable with this particular business, we think it's an important growth area for us.

[Mike Pedersen:]

John, this is Mike. Maybe I'll comment from a U.S. perspective. This is obviously a category where we continue to see good growth and our new dealer strategy is paying off. We're focused mostly on super prime and prime, little bit of near prime and we've reduced our expense space and both our credit and profitability metrics are improving. And as was the case with Tim's comments on Canada, all of the key risk metrics, the stuff we're writing is better than our portfolio, so it were improving our risk posture in this business as things stand and comfortable with it.

[John Aiken:]

That's great. From a competitive standpoint, though you guys being forced to chase the terms that are being pushed out?

[Mike Pedersen:]

Nor that the case in U.S. in fact, as I alluded to including on term the originating terms are lower than the portfolio terms and they are well within normal risk parameters. We're not chasing the stretchy stuff.

[John Aiken:]

Great. Thanks guys.

[Operator:]

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

[Meny Grauman:]

Hi, good afternoon. First question, wanted to follow-up on commentary you made. You talked about – you haven't seen any meaningful deterioration in consumer credit quality in affected regions, in oil producing regions. And I'm wondering why you think that is? There are some reasons that you think that this is that that's causing this?

[Mark Chauvin:]

It's Mark. I'll answer that. I think we still feel it's probably early and its probably still to come. You can certainly see in those markets that unemployment is going up. We're just not seeing it translated to our delinquencies yet, but I still think in the next quarter or two that we will see it come in to the levels that we kind of expected when we kind of went down this road. To put it maybe in the context, we feel that at s $35 oil price, it gradually recovers into the $40s and into maybe $50 over four-year period that you might look for an increase on the direct and indirect which will cover the consumer area of about 5% to 10% per year. So, we think that that's probably likely to come. We just haven't seen yet but we're watching closely.

[Meny Grauman:]

Thanks for that. Then I wanted to switch gears and I think this one for Tim. I just want to ask about the Canadian mortgage market and there are definitely headlines over the past few months about fraud. And I'm wondering from your perspective, how big a problem do you think fraud is in Canada and do you think that there's more fraud going on now in the system than say five years ago?

[Mark Chauvin:]

Yes. It's Mark again. I'll take that from a maybe a risk perspective. We follow in our underwriting standard, verification of income and the down payment is very important and central to the process. So, we will do that through several means and we will do it until we satisfied that we have it right. So it could be tax returns, that could be -- if they're a customer of the bank it would through automatic deposits to their accounts, but would be verification from employers that we would even reach out and call to them, call the employer if necessary. But in addition to that we do have fraud analytics that looks to assess the reasonableness of a declared income to make sure it makes sense. And my comfort that is working effectively is that we do have a Quality Assurance program that follows up behind. And we even do that for mortgages that we buy from other institute like from other second tier areas. When we buy them we do go and look at it and it's effective in detecting those fraud situations and picking them. And so I'm quite comfortable that we're effectively managing it. We have the proper risk navigation in place. I don't think necessary that it's gone up over time though to tell you the truth.

[Timothy Hockey:]

Meny, if I can just add. I think if you look back to your point five years ago the heighten level of scrutiny on this market both by all of us as lenders as well as regulators, as well as tightened the Ministry of Finance basically in terms of tightening. My sense is if anything it would have gone down little bit and there's certainly higher degree of scrutiny on that type of activity.

[Meny Grauman:]

Thanks.

[Operator:]

Thank you. The next question is from Steve Theriault from Bank of America Merrill Lynch. Please go ahead.

[Steve Theriault:]

Thanks very much. If I could start with a couple maybe quick questions for Mark, Mark. So I'm referring to slides 21, 22 in the deck, and maybe it's obvious, but I'll ask anyway. When I look at TD versus Canadian Peers versus U.S. Peers, you have those three tables there. On gross impaired, TD screens quite favorably, on credit provision quite favorably as well. But I look at the formations and may topical given all the questions around credit these day, I notice TD's formation in terms of basis points is higher than Canadian Peers, which maybe isn't too surprising, but higher than U.S. Peers as well. I'm wondering maybe hopefully my questions has been long winded enough to give you a chance to take a look at those and if you can provides some insight as to why that is maybe helpful?

[Mark Chauvin:]

Yes. I mean, the increase in gross impaired loan formations really focused in the U.S. primarily, relatively constant in Canada period over period. And in U.S. what we're working through is in the HELOC portfolio we have two legacy effectively interest only products. One is an evergreen so individual in the HELOC portfolio can stay on interest only payments for an extended period of time when the product was originally sold. And then what we refer to is a 5510 product when means it's got a five-year interest only period followed by another five-year then amortization over ten. And these are legacy products that over the years with the tightening of the underwriting standards these are products that we don't offer any longer. So, as we go through the portfolio we're renewing these customers and so it's an interest only or we're looking to qualify them under the current standards. And the standards are higher and they're more rigid appropriately so. And so if a customer does not qualify then we're required to designate them impaired. It is a regulatory requirement that called TDRs and they go into the impaired although they are still making their payments. So if you look at the formations for the quarter 90% of those were customers that were making payment as just as they couldn't qualify under the current standards. And if you look at the overall impaired for HELOC it's about 60% that are currently making their payment themselves. So we've been experience [ph]. We're about a year or so into this process. We feel that we reserve appropriately for those based upon our experience going forward. As U.S economy continue to strengthen we think that these will get better and probably the risk of loss is not – we don't really see it as the high expected loss portfolio, but it will have an impact on impaired formations and gross impaired loan for period of time I'd say for the next three or four years.

[Steve Theriault:]

Okay. That makes sense. It's probably just a much bigger part of your mix than it would be for some of those U.S. comps on the table?

[Mark Chauvin:]

Yes. True. I guess I don't study the others as well.

[Steve Theriault:]

And then a quick for Colleen in Q2 when you announced the restructuring charge, you hinted at a Q4 charge but the work was still being done and may still very well be ongoing, but wondering if you can give us a sense for whether in terms of order of magnitude it will be in similar range or not when we roll around to Q4 in December?

[Colleen Johnston:]

Ho, Steve, the work is still ongoing and I don't have a solid number at this point in the process, but I think we're probably looking at an order of magnitude that's somewhat similar to Q2 charge. Although I would expect at the moment it will be smaller than what you saw in Q2, but more to come in the fourth quarter.

[Steve Theriault:]

Okay. That's helpful. Thanks so much.

[Operator:]

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

[Robert Sedran:]

Hi, good afternoon. I just wanted to come back Colleen to your comments around the U.S. margin, and I make sure I understood them. I guess half that was related to loan and deposit spreads, was any of that mix or is all that just competition?

[Colleen Johnston:]

So, I'll start out and then maybe hand it over Mike to embellish a little bit, so if you look about half the margin decline and we have in the past we've called out the U.S. card partner programs and that can have an effect on the margin and in particular there were some accretion last quarter which didn't recur. And then also we had and I'm sorry to cite accounting movements but I must do so. We did have shift between NII and other income related to our fair value hedges. So that -- you can see that sequentially that are other income in the in-source currency increased quite a bit. So I'd say, I call about half of the margin decline was related to those two items. And then I'll turn it over to Mike to talk about the relative growth rates in our various portfolios and how that's affected the margin.

[Mike Pedersen:]

Yes. So I think the answer to the question is that it was partly mix. So, the margin did decline a bit more than we expected this quarter, but mostly because we grew faster than we expected and that was especially in larger commercial loans and in super prime auto lending. So, in this environment with origination margins lower than portfolio margins if you're outgrowing the market in lending you are subject to more margin pressure, but it’s still good NII business. And so because we had larger than expected growth in larger commercial loans and in super prime we saw a little bit, so you called that mix, but I would just say that these represent good NII business with good credit quality but lower margins, but you'd want us to do this business and you can see it in our NII, we grew our lending in our revenues increased by CAD60 million quarter-over-quarter. So our focus is on growing our revenues and profits more than just managing to the NIM target and in the last couple of years we've grown our net interest income faster than our both our big bank and regional bank competitors.

[Robert Sedran:]

And so if I can tie that back to Colleen comments about the pressure to be ongoing, presumably are less than what was shown this quarter?

[Mike Pedersen:]

I think we're hesitant to put precision around this, but on balance I would expect that it's most likely that we'll see some continued downward pressure and that's especially if we continue to see good loan growth or better than market loan growth. I would just add that rate increases would obviously mitigate this.

[Robert Sedran:]

Thank you.

[Operator:]

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

[Mario Mendonca:]

Good afternoon. Mark, first could you just explain what you meant by the 5% to 10% increase when you're describing the expected increase in credit losses, do you mean 5% to 10%?

[Mark Chauvin:]

Okay. We run many stress test and looking at the impact of low prices, but if you look at the one that I think that's probably most appropriate that's a $35 gradually increasing as I indicated earlier, and when you look at that the incremental increase due to low oil prices in the direct, so that would be the oil and gas sector, the services sector and the indirect would be largely consumer credit in those regions that are most impacted by low oil prices. We would expect versus current PCL levels an increase in the 5% to 10% per year range.

[Mario Mendonca:]

Annually, so call for the next three years, if that's the way [Indiscernible]

[Mark Chauvin:]

I'm sure, I would go three years, but say per year my thinking is two.

[Mario Mendonca:]

Okay. That's fair. Colleen, the next question I'm going to ask, I've had some varying degrees of success on the calls, but given what Mark's just offered about what seems kind of like a modest increase in PCL. The question I have is in that environment do you think the bank will be capable of growing earnings, even just modestly year-over-year?

[Colleen Johnston:]

We'll start with Mark, Mark is responsible for all of the stress testing and all of the moving parts and comments specifically on oil and then I'll wrap it up, Mario.

[Mario Mendonca:]

Okay.

[Mark Chauvin:]

So, looking at the view, what is the impact of oil prices to the bank effectively, I mentioned the credit, there's pluses and negative, so the most obvious negative is the credit element which I mentioned, but also in that scenario, we would look forward, reductions in interest rates and we've seen two from the Bank of Canada already that are kind of factored into the analysis itself. And then we'd also look for just revenue reductions due to the lower GDP growth. But on the other side looking at the positives, the reality is with low energy prices we would expect higher consumer spending in our largest markets being Central Canada and Northeastern U.S. and we would expect those to have stronger growth. And also in that scenario it's really – you would certainly see a low Canadian dollar which we're seeing today and that would have a positive impact on FX translation on our U.S. earnings. So the net impact of the positives and negatives of our stress testing is kind of a neutral position. So, we feel we're pretty well position to weather this situation given our relatively lower exposure to oil and gas itself plus kind of where our large markets are and couple with U.S operations to arrive at its kind of a neutral impact over that two-year period. So I'll past it over to Colleen.

[Colleen Johnston:]

Yes. Just to conclude, talking about 2016, its still – our planning process is still underway, it’s probably a little early to comment on specifics. But I think if you take Mark's comments and then what I would say is that absent any other shocks we don't necessarily see oil prices impacting our growth trajectory and obviously we are working on productivity improvement which should help us in 2016, so, net-net as they say we would still see some growth.

[Mario Mendonca:]

That's what I was looking for. Thank you.

[Operator:]

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

[Gabriel Dechaine:]

Hi. Good afternoon. Just two prong on the expense question here. The seasonal increase we, I think you guided to it last quarter that we would still see in Q4 this year, I'm just wondering if we're going to see a similar magnitude of quarter-over-quarter spike as we did last year which was on the high side. And then also on the restructuring charge how many understand the benefit for investors, if it’s not a tangible EPS figure that's going to come out of the cost cutting in this program, like will TD be able to deliver sub 3% growth in perpetuity, something along those lines, I think that could be helpful?

[Colleen Johnston:]

Okay, Gabriel let me start with your first question regarding our Q4 expense increase. So I'm going to give you some numbers here and I'm going to express them on an adjusted basis and I'm going to exclude foreign exchange. So over the past couple of years we've had an average quarter-over-quarter growth in the fourth quarter just over 6%. So this year I do still expect an increase, but I'd be surprise if the rate of increase isn't substantially lower, again in percentage terms in the last two years, but I will caution off the top that based on where foreign exchange rates are going, I think the headline number quarter over quarter will look higher because of FX. So, on a Q3 year to-date basis are expense again excluding foreign exchange and M&A increased by 3.6% and if I'm right about Q4, this means that our full year expense growth rate will definitely come down from the Q3 year to-date level. So, we're definitely on the case I can assure.

[Gabriel Dechaine:]

That's very helpful.

[Colleen Johnston:]

So to move on to your second question, really the message isn't different from what we told you last quarter. So, if you look at our expenses this year and I just mentioned the 3.6% growth and I'm talking on a year to-date basis now, so I'll just give you some moving parts. So higher project and initiative spend drove about 2% growth in our total expenses and there are base expenses are up on a year-over-year basis as well, and that always have to come in to the picture. So, we are giving increases to our frontline staff, our business volumes are growing. So that also means that expenses will increase, and then what we're doing, we've been doing for several years and we'll continue to do at a greater rate is then we productivity gains to bring our rate of expense growth down. So this year they say 3.6% and part of that growth by the way is variable cost that's linked to revenues. So that sort of gives you the picture of where we are. So when you think about as we head into next year, we expect that project and initiative spend really increase, but again we're spending at important areas already this year, but you look things like digital and mobile capabilities, although we're keeping our retail distribution cost in total at a very reasonable growth rate. Technology, modernization and transformation is really important and that's to improve our agility and to reduce costs. Regulatory infrastructure is an area of spend in particularly on aspects of Dodd-Frank. So, and also as you look to next year we do – the fact that we are increasing our project spend, means, that we will have higher depreciation cost going forward, because some of our project cost are capitalized. We will continue to have base increases going forward and again this for the same that I mentioned just a minute or so ago. So, then the key is that what do we do in terms of productivity and we got it frankly increase the rate of productivity gains from what I've cited on a year to-date basis and that's where restructuring is going to help us. So the name of the game here is that what we want to do is make sure that we can – that we can slow down our rate of expense growth. You're not going to see a year-over-year decline that just isn't reasonable in this environment, but what we do what to do is reduce our rate of expenses growth, and people ask me what are you doing, that will fall to the bottom, that will fall to the bottom and assuming we obviously what to make sure that we can grow our revenues at a decent rate given the environment. So that how we're thinking about expenses generally.

[Gabriel Dechaine:]

Okay. That's helpful, very helpful. Just a really quick on there. Bharat, you mentioned normalization of insurance earnings, there was big spike this quarter in growth. Was the contribution from which may call the claim -- positive claims development. What was that?

[Riaz Ahmed:]

It's Riaz, Gabriel. I don't think normally disclose that in a quarter-over-quarter basis, but I can say that if you look at the claims number on a year-over-year basis its down quite a bit. So half of that order of magnitude is because of as I had mentioned in Q2, 2015 that we're shedding some low value international activity, and so that's brought our claims cost down fair bit without having any meaningful impact on NIAD and then the other half is in Q2 and Q3 we've had terrific weather, so our claims are down, we're seeing the emergence of some favorable development and then we didn't have any material catastrophes to speak off, so I think that's what causing us to have two very strong quarters.

[Gabriel Dechaine:]

Thank you, Riaz.

[Operator:]

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

[Sumit Malhotra:]

Thanks. Good afternoon. Just to share with Bharat since we're there on insurance. Two years ago at this time we had some conversations after the events in Calgary about whether the P&C Insurance business was a good first for TD Canadian retail operations just given some of the consistent volatility we had seen. It's been a much better year from a claims experience perspective; we have just talked about some of the improvements you've made in the business. And it's also been a period where there has been M&A activity in P&C Insurance domestically. Now that the business is fixed up or running better, have you given some additional thought as to whether it is a fit with what you want the brand to be in Canadian retail?

[Bharat Masrani:]

Sumit, yes, the business continues to be core for us, yes, we did have some issues and as you rightly pointed out we fixed those issues. We have adjusted our model to make sure that we take into consideration events like what happened Calgary, so that is part of how we run the business. And frankly we see some synergy and having that TD brand in that business and we can leverage that. And it is a good returning business as we saw this quarter. So overall we feel pretty comfortable with where we are and we will continue to find ways to make sure that we are growing this business appropriately and in a manner that provides us with good returns. But overall very happy with it and it continues to core.

[Sumit Malhotra:]

All right. That's straightforward enough. And then one quick one hopefully for Mark, since your were giving us some color on how you're thinking about the stress test process. If I look at on a year-over-year basis we've obviously seen a significant decline in oil prices yet unemployment on a Canada as a whole basis, the unemployment rate is actually lower. So when you run your stress scenario how are you envisioning the trend in domestic unemployment? And I ask specifically due to the fact that the bank is a bigger domestic credit card player than it was when we have the last credit cycle in Canada?

[Mark Chauvin:]

Well, when we did our low oil price scenario, I mean, we did look at it on a regional basis and our scenario played out that there would be increased on unemployment in those impacted regions in the range of from then existing levels of 40% to 50%. And if you look at the increase in credit losses that I mentioned 5% to 10% that is like two-thirds or largely driven in the unsecured sector which would be cards, I would include indirect auto in that as well. So that's really the major driver of the increase in credit losses versus the direct exposure to the actual oil and gas producers. Our experience in the oil and gas producers has played out very similar to how we projected last January in terms of we have seen negative migration in the portfolio, but we’ve seen – we’ve had no surprises in terms of accounts. The accounts that went down and once we thought would go down. We’ve had four go into impaired status but two of those were paid out relatively quickly and we’ve only got two left in the account at above CAD30 million and actually we’ve seen about CAD400 million or 10% of portfolio payout and it was the higher risk accounts that were refinanced or taken out by acquirers. So yes, the unemployment certainly factored into it and this credit card is a driver but we think it’s well within the range of being – its within what we would have expect or call it our risk appetite.

[Sumit Malhotra:]

And so I just sort of have it right, I may have missed it earlier. When you say 5% to 10% are you talking on a dollar basis on the domestic provisions, 5% to 10% left?

[Bharat Masrani:]

Correct.

[Sumit Malhotra:]

Thanks for your time.

[Operator:]

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

[Sohrab Movahedi:]

Just a quickie for Mike. Are you happy with the performance of the U.S. retail segment in source currency?

[Mike Pedersen:]

Sorry, I didn’t catch the last bit of your question.

[Sohrab Movahedi:]

Just in source currency so avoid negating the effects in fact are you happy with the performance of the segment?

[Mike Pedersen:]

I am happy with our performance in the circumstances that were operating and it’s as difficult in terms of the lower rates and the fitful economic expansion and traction as well as the competition. As I look at the major elements of our performance, we are doing very well versus our end market competitors. We are doing well on earnings. We are doing well on revenues; we are doing well on expenses to have 200 basis points positive operating leverage this quarter is a nice thing to have in this kind of environment. Our expenses are down for the full year, year-to-date by 1% compared to last year. So I’m happy in the sense that we are outperforming our end market competitors in a very difficult environment. I’m obviously hopeful that we get some assist in terms of the economy and rates but in the absence of that I think we have enough levers at our disposal in terms of deepening relationships with customers and improving our distribution strategy and the productivity agenda that we can continue to generate earnings going forward no matter what the – within reason no matter what the circumstances are and year-to-date our earnings are up 5% I would have taken that at the beginning of the year if you said it was possible.

[Sohrab Movahedi:]

Okay, so just – but just to push on that earlier a bit. I mean it looks like the credit environment has turned way for your portfolio in the U.S. You’ve got some incremental loan losses absent recoveries that’s just going to be there and you were able to offset that with the lower expenses this quarter like year-over-year. If credit continues to you know not deteriorate but at these types of levels trend higher and revenue environment stays such that the best you can do is grow lower margin but higher volume business, how much leverage do you think you have on your expense line to continue to get the bottom line in an around these types of level?

[Mike Pedersen:]

Well I guess I’d say that we understand that in this environment for the reasons that you’ve articulated that we need to be very focused on productivity and expense management agenda and as I alluded to before we are and we have been and we continue to be in terms of its difficult, it’s a little early to look at next year, but I think we will continue to see that expense management will help us moderate that rate of expense growth and our focus is to try to continue to deliver positive operating leverage even as we’re investing for future growth and things like our card business and our wealth business and our technology and digital platforms and so on.

[Sohrab Movahedi:]

Okay, thank you very much.

[Operator:]

Thank you. And the next question is from Stefan [Indiscernible] from Citigroup. Please go ahead.

[Unidentified Analyst:]

Yes hi guys, good afternoon and also good evening from London. Two questions, the first one on the U.S. assets, you obviously have been quite interested in buying portfolios, small books etcetera. Could you just give us a little bit about the criteria that you have and the minimum hurdle returns, size etcetera and also maybe a little bit about the type of credits asset that is card etcetera and is there anything on the horizon right now that could be of interest to you. And the second question is now that your assets are higher than RBC or I guess some of your other competitors I really should say, have you had any discussions with obviously or with any other regulators in terms of the potential inclusion on the GCC list. You are a significant bank in the U.S. and you are a significant bank in Canada which are obviously two quite important banking systems on a global scale, does that potentially make you a GCC down the road?

[Mike Pedersen:]

So it’s Mike. I’ll take the first part and then I’ll let Riaz take a stab at the second. So I would say that our focus on the U.S. business is on organic growth at this time. As I said before we feel we’ve got lot of levers to pull and that’s our primary focus. We do of course look at things as they come up from time to time and in that respect I’d say we are more focused on potential asset plays in the line of the Nordstrom kind of thing or similar things then we are on for example larger branch based acquisitions, but our focus is on organic growth.

[Riaz Ahmed:]

Stefan, its Riaz. I’d say on the question of becoming a GSIB as you know both under the BCBS as well as the U.S. rules the test is a multi factor weighted test of which the balance sheet is only one factor to be considered. So we’ve been in our calculations we’re nowhere near being designated GSIB or either international here in the U.S.

[Unidentified Analyst:]

Okay. Great, thank you.

[Operator:]

Thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead.

[Doug Young:]

Good afternoon. Most of my questions have been asked and answered, but I guess the one that I was kind of just hoping you could enlighten me on is the collective IBNR did increase I think in U.S. 48 million and I think that’s different than I think the impact or what caused that was different than what caused the gross impaired loans increased but and I think you refer to it as allowance build. Can you flush that out for me in terms of what that relates to?

[Mark Chauvin:]

Yes it’s Mark. Two factors were driving that, one is as you grow volumes and the U.S. is experiencing good volume growth. You are adding to your reserves and its showing up in the IBNR. And the second area is there is a seasonal mixture to two of the asset categories such as credit cards and indirect auto, which typically in the second quarter or the quarter ending April tend to have an improvement in quality which results in a reduction in your allowances as well as a reduction in volume to payouts. But that naturally comes back in the third quarter and so we’ve seen a – that swing in the third quarter and cards and indirect auto which was really totally within our forecast but it resulted in the increase in the allowance as well as with the commercial side. But it was driven by effectively volume I guess is the simple answer.

[Doug Young:]

Volume, and so this you would expect it to reverse in the next quarter, is that a sense…

[Mark Chauvin:]

Well I think the volume – I would expect it to stay constant to increase with volume, but not to the same extent because the seasonal factor won’t play as much a factor in the next quarter and everything else being equal just it would be in pace with volume.

[Doug Young:]

So this has nothing to do with migration, it’s more of a volume.

[Mark Chauvin:]

Yes, not credit qualities. It would be migration. And so we look at it and we decompose it and it was driven by volume not credit quality.

[Doug Young:]

And then just a second, I guess calling on the set one ratio, do you hedge out your FX risk within the set one ratio or no?

[Colleen Johnston:]

I can turn this to Riaz, but the answer is yes we do.

[Doug Young:]

Yes, okay.

[Colleen Johnston:]

So I just answered this.

[Riaz Ahmed:]

I won’t - get angry.

[Colleen Johnston:]

Riaz, [Indiscernible] luckily.

[Doug Young:]

Thanks.

[Colleen Johnston:]

Yes, we do.

[Doug Young:]

Thank you.

[Operator:]

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

[Peter Routledge:]

Thanks, I just want to come back to Meny's question a little earlier about the mortgage approval process. I’m kind of having a hard time reconciling the diligence you talked about and your peers talked about as well with sort of the service aspiration of turning around approval less than 24 hours. So, what would you say to a skeptic who thought well there’s no way they can hit their service goal and due diligence and there has to be corner cutting in their due diligence.

[Tim Hockey:]

Well those are the standards that we actually have negotiated. It’s Tim answering here. What we’ve changed in the last little while as we entered into an outsourcing relationship with First National and they have a very dedicated senior lending team. So what we do is we basically have outsourced our adjudication and our funding of the mortgages. They are writing to our specifications. There is no auto adjudication which to your question might impact your turnaround times but we’ve negotiated as part of our pricing the ability to actually get those approval rates back and quickly and we’ve seen a substantial improvement in the turnaround times to the brokers which is one of the reasons why we are up strongly in real estate secured lending. So we’re quite comfortable and given this is a relatively new relationship the oversight that we put in place with the TD folks on the ground is measuring to a brand newly established standard care.

[Mark Chauvin:]

I would only add Peter is that the verification of income or the down payment can occur after the approval. It’s in the fulfillment process.

[Peter Routledge:]

Okay, so you have – you can still improve the conditional approval and then….

[Mark Chauvin:]

The fulfillment is after that and maybe you have to have all that documentation in order to fund and you may identify the problems then and not fund.

[Peter Routledge:]

Okay. And one other question, if despite all this at some point it sounds that a small but productive cohort of third parties have put or submitted mortgages with faulty or misrepresented underwriting data. And if those insured mortgages are sitting on TDs balance sheet, could your mortgage insurers deny the claims on those mortgages even if no TDs employee was directly or indirectly involved in that misrepresentation?

[Mark Chauvin:]

The insurers position, they refer it to as fraud for shelter and that’s where someone may overstate their income in order to get to into a house as long as there has been no employee of the organization involved in that, their position that does not invalidate insurance.

[Peter Routledge:]

Thank you, that’s very clear. Appreciate it.

[Operator:]

Thank you. There are no further questions at this time. I will now turn it back to Bharat Masrani for closing remarks.

[Bharat Masrani:]

Thank you operator. As you’ve heard with all the answers and again the most importantly the results, very proud of how the teams have delivered yet another strong and growing number from TD. So thank you to everybody for a terrific job well done and look forward to seeing you in the next 90 days. Bye, bye.

[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.