Toronto-Dominion Bank (TD) 2011 Q4 法說會逐字稿

(Audio already in progress) --- conference call. At this time all participants are in listen-only mode. Following the presentation we will conduct a question-and-answer session. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today, Thursday, December 1, 2011 at 3 pm Eastern Time. The conference will be turned over to Mr. Rudy Sankovic, Senior Vice President Investor Relations, momentarily. Please stand by, the conference will begin shortly.

Good afternoon and welcome to TD Bank Group's fourth-quarter 2011 investor presentation. My name is Rudy Sankovic, and I'm the of investor relations for the Bank.

We will begin today's presentation with remarks from Ed Clark, the Bank's CEO, after which Colleen Johnston, the Bank's CFO, will present our fourth-quarter operating results. Mark Chauvin, Chief Risk Officer, will then offer comments on credit quality, after which we will entertain questions from those present in the room and from prequalified analysts and investors on the phone.

Also present today to answer your questions are Bob Dorrance, Group Head, Wholesale Banking; Tim Hockey, Group Head, Canadian Banking, Auto Finance and Credit Cards; Bharat Masrani, Group Head, US Banking; and Mike Pedersen, Group Head, Wealth Management, Insurance and Corporate Shared Services. Following our fourth-quarter investor presentation, we will be extending our call to review our IFRS opening balance sheet disclosures and to answer any questions on that subject. There will be a short waiting period between calls while we set up, but you will not be required to log in again. We would like to keep the call to a tight one hour, and then 15 minutes for the IFRS component. So I will try and monitor that fairly aggressively.

Please turn to slide 2. At this time, I would like to caution our listeners that this presentation contains forward-looking statements and there are risks that actual results could differ materially from what is discussed. 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 may not the appropriate for other purposes. Certain material factors or assumptions were applied in making these forward-looking statements. For additional information on these factors and assumptions, please see our 2011 MD&A available at TD.com.

With that, let me turn the presentation over to Ed Clark. Ed?

Thanks, Rudy, and thanks, everyone, for joining us today. I hope I don't hurt anyone's feelings if I don't stay for the exciting discussion of IFRS after the investor meeting. Colleen is going to take you through the fourth-quarter results in detail, but I would like to give you my thoughts about the quarter and the year. Then I would like to focus on what our feelings are about 2012.

Now, obviously this quarter was an excellent finish to a record year for TD, with all of our businesses delivering strong results. Total adjusted earnings grew 30% with double-digit increases for each of our businesses. Our Personal and Commercial Banking businesses on both sides of the border continued to have strong loan and deposit growth, and our Wealth business saw strong inflows of new client assets. Wholesale bounced back from a tough third quarter to turn in a strong result with much improved trading revenues despite the continued challenging global environments, helped as well by higher security gains.

Overall, it was clearly a great quarter.

Let me take a look back at 2011. I think the last 12 months really speak to the earnings power of our retail-focused business model and the growth it is capable of delivering. This time last year, our full year adjusted earnings just crossed the CAD5 billion mark for the first time. Well, now, we have crossed the CAD6 billion mark. That's a 20% growth over last year in an environment which, to put it mildly, has been rather challenging and uncertain.

If you look at each of our businesses, all of them made really strong contributions and thrived despite the headwinds they faced. The growth and performance of TD Canada Trust in 2011 was nothing short of spectacular. TD Canada Trust set the pace for the rest of the industry in terms of delivering the best customer service and convenience, again winning a number of prominent accolades. With 17% earnings growth this year and a remarkable 13% compounded growth since 2006, TD Canada Trust remains an incredible growth leader.

We have driven this growth through relentless focus on reinvesting in our franchises to make sure we always stay ahead of the competition -- 24 new branches, Sunday hours, a significant investment in additional small business and commercial offices are examples of how we have invested to stay ahead.

Our insurance business also had a very strong year, driven by strong premium growth and improved claims management. This is another business in which we have consistently invested and where we are now seeing good returns. Our global wealth business also had a record year with 27% earnings growth. We continue to do well at gathering new client assets and improving client satisfaction metrics. We also saw healthy trading volumes, a byproduct of the volatility in the markets. The business is focused on offering our retail and business banking clients legendary TD service and leveraging our leadership position in online brokerage.

TD Bank, America's Most Convenient Bank, had another strong year, despite some very tough regulatory and economic headwinds. We delivered strong growth while continuing to build out our Maine to Florida footprint, opening 37 new stores and wowing our customers. We also successfully integrated The South Financial Group, giving us a top five position in South Carolina, where we have just announced a major hub investment. We are confident about our ability to continue to win market share even in a difficult economy. We have outperformed our US peer groups by a wide margin in terms of loan growth. Through a combination of strong organic growth and acquisitions, our US adjusted earnings grew 33% this year, a powerful indicator that our service and convenience proposition does work.

Our Wholesale Bank finished a difficult year on a strong note and showed that by having a diversified, client-focused business model, you can withstand harsh operating conditions like those we faced in 2011. We have got a business that now competes for the number one or two position relative to its Canadian peers, a tremendous accomplishment. It wasn't long ago where we set out our sights on being a top three dealer. We have clearly reached that goal. These results again show that our strategy of growing a North American bank without going out the risk curve, by investing in franchises with repeatable earnings potential allows us to outperform in challenging operating conditions.

Our successes this year were also again recognized by Euromoney, a leading business magazine, which named TD as the best bank in North America for the third year in a row. Now, none of this could have been achieved without the people who run this bank and their dedication to meeting the needs of our customers and clients. Our team of over 85,000 employees was outstanding this year. On behalf of the Board and the entire senior executive team, I would like to take this opportunity to thank them for their efforts.

I'm also very pleased to announce and welcome that 1700 employees from MBNA Canada have now joined TD Bank. We are delighted to have you on board. The MBNA acquisition closed today, making us a top-tier dual-card issuer in Canada. We now have a unique position in the marketplace with strong affinity positions in both insurance and credit cards.

Let me now share a few thoughts about 2012. In the last six months we have certainly seen a negative shift in the mood about the global environment. There is still lots of uncertainty about how Europe's debt issues will ultimately be resolved. Clearly, there is some tail risk of a major political failure. The most likely outcome currently seems to be a series of muddling along adjustments. The likely net effect will be slower growth and possibly a mild recession.

In the United States we're seeing some signs of recovery. Businesses now have strong balance sheets and have achieved significant productivity increases. They are investing but are reluctant to do so boldly because of the risks in Europe, worries about the US political polarization and the continued fragility in the mood of the US consumer. Absent the problems in Europe, it is not impossible that the US economy would get some real traction. Given, however, the current European outlook, we expect slow growth and at best only moderate reductions in unemployment rates.

Interest rates are at historic lows and are not likely to rise significantly anytime soon. Despite the global headwinds, we are feeling positive about TD in this environment. Our possibly pessimistic view of the economic outlook is not matched by a pessimistic view of our prospects. We have seen that a business model built on service and convenience combined with continuous reinvestment will always outperform on a relative basis. We enter 2012 with strong momentum.

TD Canada Trust should deliver solid growth despite low rates and an expected slowdown in consumer lending. We expect loan growth will continue in the mid- to high-single-digit range with a strong contribution from business banking volumes and continued personal loan growth, though at a slower rate than we have seen in the last couple of years. Offsetting this growth will be continued margin pressures. We will manage our expenses very closely to ensure that we deliver positive operating leverage.

In the United States, we delivered a record year in 2011 despite the impact of the new overdraft regulations and tough economic conditions. We are confident we can do the same with the new interchange regulations, which are expected, as you know, to take away approximately CAD50 million to CAD60 million in growth revenue per quarter next year. We have said we will recover this over the next two years by introducing new products and optimizing our fee structure. We will continue to reinvest in our franchise by opening 30 new stores and continue to grow our loans and deposits at a faster rate than our competitors. We expect that our US business will see modest earnings growth next year despite the impact of interchange fees.

Our Wealth business has good momentum and should continue to see steady flows from new clients, despite the volatile markets. Though difficult to predict, we expect to see decent growth in Wealth if the capital markets hold up. Our insurance business, which will be combined with Wealth starting in fiscal 2012, should continue its strong growth trajectory with the MBNA acquisition and expected premium growth adding to the bottom line.

Turning to our Wholesale Bank, while this is a difficult business to do forecasting, TD Securities should see continued growth in our core dealer operations next year. Offsetting this will be the fact we're unlikely to see the same level of security gains that we saw in 2011. We expect this business to generate a solid risk-adjusted return on capital next year despite the tough trading environment. We will continue to invest in the future of our franchises while ensuring that expenses don't grow faster than revenues.

In terms of earnings outlook, we remain committed to our medium-term target of 7% to 10% adjusted EPS growth. Given the economic and regulatory headwinds we face, we will have our work cut out for us to get there. But that's certainly what we would like to do. I'm confident that we have a proven business model and an extraordinary management team to ensure we continue to grow in both relative and absolute terms in these tough times.

Let me make a few comments about our capital. We are in a very strong position going into 2012. We expect our Basel III common equity Tier 1 ratio on a fully phased-in basis will be comfortably above 7% by the second quarter of 2012, and will be above 7.5% by the first quarter of 2013. In 2011 we generated over CAD2.5 billion in excess capital through earnings growth and after raising our dividends twice, another impressive achievement. With that said, we will continue to manage our capital very prudently.

With that, let me wrap up and turn the call over to Colleen.

Thanks, Ed, and good afternoon, everyone. Let me take you through our results, and we will start with a review of the full year.

2011 total Bank adjusted net income was CAD6.3 billion, a new record, up 20% from last year, and adjusted EPS was CAD6.82, up 18% year-over-year, also a new record. Our 2011 results are a testament to the franchise earnings power of our retail businesses in both Canada and the United States. In total, our retail businesses delivered total adjusted earnings of CAD5.7 billion, up 20% over 2010 and also a new record. Retail earnings were 88% of total Bank earnings.

TDCT had a record year, delivering CAD3.6 billion in earnings, up 17% over 2010. The personal bank, business bank and insurance businesses all had record years. Strong volume growth, positive operating leverage and improved credit helped drive another year of great performance.

Wealth Management -- by far a record year in difficult markets. Our global Wealth business delivered CAD569 million in earnings, up 27% from last year. Strong client asset growth and good transaction volumes were the key drivers. The U.S. Personal and Commercial Bank delivered a record year with over $1.3 billion in adjusted earnings, up 33%, driven by excellent loan and deposit volume growth, improving organic PCL and acquisitions. We continue to invest in our US footprint and build on the core fundamentals of the business.

Wholesale Banking had a good year in the context of challenging markets with earnings of over CAD800 million, down 18% from a very strong performance in 2010. Strong security gains partially offset weaker dealer results.

Our Corporate segment loss narrowed to CAD274 million on an adjusted basis, an improvement of CAD263 million from 2010 due to segment transfers and higher earnings on unallocated capital. Tier 1 capital ratio finished the year at a strong 13%. We achieved positive operating leverage of 1% during 2011. Q4 expenses were elevated, as expected. As we move to 2012, we planned a lower rate of expense growth to maintain positive operating leverage while still investing for the future. Overall, this was an excellent result for TD.

Please turn to slide 5. Turning to our Q4 results, total Bank adjusted net income for the fourth quarter was CAD1.6 billion, up 30% from last year and 4% sequentially, another record. Adjusted diluted earnings per share for the quarter, CAD1.77, up 28% over last year, also a new record. These strong results were driven by continued momentum in both our Canadian and US retail businesses, which delivered total retail adjusted earnings of CAD1.4 billion, up 18% from last year.

Results in our Wholesale Bank were also stronger despite very difficult markets. Adjusted net income of CAD288 million was up 33% from last year. These impressive results were primarily due to solid trading results coupled with a higher than normal level of security gains in the quarter. Corporate segment adjusted loss was CAD80 million. Overall, these were very strong results with every business posting double-digit earnings growth.

Please turn to slide 6. TD's reported net income was CAD1.6 billion or CAD1.69 per share. Adjusted net income was CAD1.6 billion or CAD1.77 per share. The difference between reported and adjusted results was due to five items of note, all of which you've seen before.

Please turn to slide 7. Canadian P&C had another very strong quarter. Net income was CAD905 million, up 17% versus last year. Our business bank and insurance businesses delivered particularly strong results this quarter. Net income was down 5% from last quarter's record performance. Revenue was up 5% versus last year and 1% over last quarter. Excluding segment transfers, revenue was up 7% over last year. The year-over-year increase was driven by continued strong volume growth in real estate secured lending, auto lending, business loans and deposits as well as strong insurance revenue growth. These positives were partially offset by a lower margin on average earning assets.

Overall, average lending volumes were up 8% year-over-year, driven by real estate secured lending, which grew 8%, and business lending, which increased 14%. Average deposit volumes were up 5% with core personal deposits increasing by 10% and business banking deposits growing at 11%. While personal deposit growth was positive for the quarter, we continued to see negative trending in the term deposit book, down 7%, largely driven by competitive pricing actions. We are implementing profitable strategies to reverse this trend.

Excluding the impact of segment transfers, margin was down 16 basis points compared to last year and 6 basis points sequentially, due to the low rate environment, increased pricing competition and changes in portfolio mix. We saw continued momentum in our insurance business, which had another strong quarter with revenues benefiting from premium growth and better claims experience. Provision for credit losses of CAD212 million was down CAD27 million or 11% over the prior year, due to improved credit portfolio performance, improved collection strategies and segment transfers.

Expenses increased 2% compared to last year. Expenses were elevated in Q4 this year and in the comparative period last year. Sequentially, expenses were up 8% due to timing of business investments, marketing initiatives and employee-related costs. Operating leverage was 3% this quarter, or 5% excluding segment transfers. Overall, this was an excellent performance from TDCT.

Looking to 2012, we expect continued solid growth while margins will remain under pressure. Positive operating leverage, stable credit plus the acquisition of MBNA Canada, should help drive high single-digit earnings growth.

Please turn to slide 8. Global wealth management, which excludes TD Ameritrade, delivered strong results despite difficult and volatile markets. Net income of CAD139 million was up 18% from last year but down 5% sequentially. Revenue was up 9% from the prior year, primarily driven by increased fee-based revenue from higher client assets and increased transaction volumes. Expenses increased 8% from last year, mainly due to higher variable costs and higher employee and project-related costs. TD Ameritrade contributed CAD54 million to TD this quarter, up 64% from last year and 13% sequentially, due to higher base earnings.

On the whole, this was another strong quarter for global wealth. Although equity market volatility makes prediction challenging, we are cautiously optimistic that increasing client satisfaction and steady inflows of client assets will drive good net income growth in 2012.

The Bank has completed its review of segment reporting. Starting in Q1 2012, we will be reporting a new segment, Wealth Management and Insurance. These businesses both now report to Mike Pedersen. Four quarters of restated results will be available late January as part of our supplementary IFRS disclosures.

Please turn to slide 9. Our U.S. Personal and Commercial Bank delivered strong adjusted net income of $325 million for the quarter, up 18% from last year but down 9% from last quarter. The year-over-year increase was primarily due to strong organic growth, improving asset quality and acquisitions. While there are various pluses and minuses versus the previous quarter, the decline was largely related to a more normalized level of other income plus the one-month impact of the Durbin amendment. Excluding the impact of acquisitions and segment transfers, revenues showed good organic growth of 8% compared to last year, due to strong volume growth and improved fee income. Organic volume growth continued to be very impressive. The core loan portfolio increased by 13% with residential mortgages up 42% and commercial loans up 10% compared to last year. Core deposits, excluding the impact of acquisitions, government deposits and TD Ameritrade IDAs, were up 13% with personal deposits up 11% and commercial up 21%. TD Ameritrade sweep deposits grew 30% compared to last year and 14% sequentially.

Compared to last quarter, margin on average earning assets was down 7 basis points to 3.51, which was largely related to acquired loan accounting. Total PCL was down $17 million or 12% compared to last year as asset quality continued to improve modestly. The credit performance of acquired loans was in line with expectations. The decline in PCL quarter over quarter was acquisition accounting-related.

Excluding the impact of acquisitions and segment transfers, expenses grew 11% compared to last year, largely due to new store expenses and investments in infrastructure. Looking to 2012, we expect single-digit growth in the US P&C segment. As outlined last quarter, the Durbin amendment is expected to negatively impact gross revenues by approximately $50 million to $60 million per quarter in 2012. We expect to recover lost revenue in the next two years through new product initiatives and fee optimization. We are confident that TD Bank, America's Most Convenient Bank, can continue to take share, and we plan to open more than 30 stores to support this continued growth.

Overall, it was a strong quarter for the US Personal and Commercial Bank.

You will note that we have improved our disclosures related to acquired credit impaired loans and our acquired non-agency CMO portfolio. These balances have been removed from our impaired loan disclosures. We have provided increased disclosure related to the underlying portfolios and related credit marks.

Please turn to slide 10. Adjusted net income for Wholesale was CAD288 million this quarter. Results were up 33% from last year and more than double versus Q3. Continued sovereign debt concerns as well as lackluster economic data in the US led to significant volatility in the quarter. This supported higher revenues for our equities and currency trading businesses, partially offset by lower fixed income and credit trading revenues due to lower volume. Results for the quarter also included a higher than normal level of security gains. On a quarter-over-quarter basis, trading revenues improved due to better trading in our fixed income, currency and equities businesses. DVA adjustments on the Bank's own liabilities was not a driver of higher trading revenue.

TD Securities continued to make strong progress in growing franchise revenues, and this is clearly evident in our league table results. Provision for credit losses for the quarter was CAD3 million. Expenses were up 19% compared to the previous year due to higher variable compensation, higher employee-related costs in franchise businesses and investment in risk and control infrastructure. Going forward, we expect the operating environment to remain challenging in 2012. We remain confident that we can generate a solid risk-adjusted return while remaining within the risk appetite of the Bank.

Please turn to slide 11. On an adjusted basis, the Corporate segment posted a loss of CAD80 million compared with a loss of CAD163 million last year. The decrease was primarily due to segment transfers, higher earnings on unallocated capital and lower unallocated Corporate expenses. Updated guidance for the Corporate segment will be included when the Bank provides IFRS parallel-year results in late January.

Please turn to slide 12. While there are no material changes to our fourth-quarter Basel III outlook, I did want to highlight a few items. Let me start with Basel II Tier 1. As I mentioned, we finished the year at 13%. However, the Tier 1 ratio will be impacted by several items in Q1, including IFRS phase-in, the MBNA transaction, Basel 2.5 and the deduction for our insurance subs. We currently expect our Tier 1 ratio to decline by approximately 110 basis points in Q1.

At year end, our pro forma Basel III capital ratio was 7.1%. This increase includes the Q4 equity issuance relating to the MBNA Canada deal, which closed today. Once you factor in the full impact of the acquisition our Basel III ratio moves back down to approximately 6.7%. We continue to expect to be comfortably above 7% by Q2 of 2012.

With that, I will turn the presentation over to Mark.

Thank you, Colleen, and good afternoon, everyone. Please turn to slide 13. As in the past, we have excluded the debt securities classified as loans and the acquired credit impaired loan portfolios from the credit slides. The latter consists of the Florida FDIC-covered loans and the acquired credit-impaired loans from the South Financial and Chrysler Financial acquisitions. We exclude these portfolios to provide what we believe is a more representative picture of US credit performance.

Overall, the Canadian credit portfolios continued to produce the strong credit performance that we have come to expect over the past couple of years. That said, we are concerned about the increasing level of consumer debt held by Canadians. We regularly assess the impact this could have on our portfolios, and we are adjusting our credit strategies where appropriate.

Throughout the year, US credit quality has continued to improve. We have seen some lumpiness in PCL performance, but this is expected as we exit the bottom of the current credit cycle. Overall, our underlying credit trends are positive. In particular, new formations have slowed, the level of problem loans is reducing each quarter, delinquency rates are improving and resolutions and recoveries are accelerating. While we are happy with our Canadian and US performance, the ongoing global economic uncertainty concerns us.

Having said this, we haven't seen any adverse effects on our credit performance and our leading indicators remain positive. A detailed breakdown of our credit exposure to Europe is provided in table 39 of the MD&A. As outlined in the table, exposure to the high-risk countries continues to reduce with the majority of the remaining exposure to AAA countries and the highest-quality banks within these countries. We are closely monitoring these exposures and remain satisfied they do not represent a significant risk to the Bank.

Finally, our acquired portfolios and debt securities classified as loans continue to perform as expected.

Now I will turn the presentation back to Rudy.

Thank you very much, Mark. Now we will move to the Q&A portion of the call. As a reminder, there will be time for questions about IFRS in our second segment, so I would ask you to please keep questions to the fourth quarter. To give everyone a chance to participate, if possible, please keep to one question and then re-queue. For those participating in person, can I ask you to identify your name and your organization before asking your question?

And before ending the call today, I will ask Ed for some final comments and remarks. So why don't we get started in the room, and if there's any questions from our analysts in the room -- Michael?

Michael Goldberg, Desjardins Securities. Bob, CAD286 million of trading revenue this quarter, more than 2.5 times third quarter, but still 25% below fourth quarter last year. So is CAD286 million above normal, below normal or sustainable?

I'm not sure that there's a true answer to that question, Michael. I think what I look at, at least, is for the year we had just under CAD1.1 billion of trading revenue. In prior years we were quite a bit above that as we came out of the 2008 financial distress scenario. But if you go back prior to 2007, our normalized range was in and around CAD1.2 billion annually. So that would be an objective. That's a target. So CAD300 million a quarter, on average. I certainly think we have the trading capability to do that. What's not forecastable is what markets allow. So if there is such a thing as normalized markets, our objective is CAD1.2 billion.

John Reucassel from BMO Capital Markets. A two-part question, one for Mike Pedersen, we'll start. It was surprising to see the brokerage commissions and other revenue line up in the quarter, given what we saw. Was there something unusual in particular going on in that segment?

And then for you, Tim, just talk about the outlook for loan growth and the margin competition you are seeing there. Maybe dissect this squeeze in the margin pressure in the quarter versus prepayments or whatever else you might have seen.

So we saw pretty strong trading, particularly in the beginning of the quarter. I think there was trading on the volatility. We saw that weaken a bit toward the end of the quarter heading into this fiscal, but there was nothing unusual anywhere, no growth.

So from a margin point of view, we were down about 6 basis points quarter-on-quarter, which is more than we thought. A very large number of moving parts, as you can imagine. And when we look through them one by one, unlike most quarters, pretty much every single one of them went against us in the quarter, which is a bit unusual. But having said that, if I had to group them I would say that we had about 2 points of decline from competitive pressure, notably on real estate secured lending products. And that's sort of inclusive of a mortgage breakage, so I include that in that product mix.

We had about a little less than -- well, just say it's a third, about 2 points basically from a balance sheet mix. We grew our loans a lot faster than we grew our deposits on the quarter, and I would say the third mark -- or the third was just the continued low interest rate environment, where we have got our tractors and things that are just coming on at a lower rate than they were. So that's how we would make up the 6.

Okay, and just on the loan growth outlook, do you see the mortgages in the commercial lending?

So, of course, with the close of MBNA today, we get a bump and we will all of next year from a year-over-year. But if you sort of strip that out, we would see that we continue to have a decline in the year-over-year growth rate from the rates we have had, but frankly not as much as we, again, would have expected maybe a couple of quarters ago. We still forecast quite a strong growth on our credit on the business banking side. So it's mostly on the personal side that we see slowing.

Thanks, John. Any other questions in the room? Okay. Operator, why don't we turn it over to the phones, please?

Peter Routledge, National Bank Financial.

Hi, thanks, a question for Mark. On page 37 of the sub pack, I just want to understand your European counterparty exposure. In particular, you break out your European counterparty exposure. I know it's a gross number, to CAD57.7 billion. Can you talk about maybe the exposures drawn versus repo versus OTC? What kind of mitigants might be in there, collateral, for example? And also, I noticed the repo style transactions to European counterparties dropped by quite a substantial number. Maybe you could provide some color on that.

Okay. Well, in terms of the repo style transactions at CAD20.1 billion, that's a notional number. So the contingent number would be much smaller. And all of that is secured with collateral which would be all high-grade cash or collateral. And it would not include any sovereign debt from the PIGS. But really, it's concentrated in sovereign debt of Canada, US and UK and Germany and the Netherlands, to some degree.

And France?

There is a bit -- France would be the minority. There is a bit to France, but it's probably less than 5%.

And then, if you look at -- and all of our repos are from terms of over a day to under 90 days, so they turn quickly. In terms of the -- I can't really comment on why it changed quarter -- if you look over the last four quarters, it does change a fair amount just by the nature of it. And it must simply be the attractiveness of the trade itself.

If you go to the next column of the OTC derivatives, that number excludes collateral. So if you include collateral, which, again, is the same high-quality type of collateral I mentioned for repos, a little more restrictive, in fact, so it wouldn't have -- it would have a very small amount of France. And then others, it's generally cash, either US or European. And if you take the cash out and net it down, it comes to about CAD4 billion to CAD5 billion.

And as you know, it's all under a CSA. So the mark-to-market is collateralized, so the majority of the exposure is what we refer to as the future potential exposure of where it could go over the term of the trade kind of on a statistical 95% confidence basis, again, to the large counterparties in the AAA rated countries, generally speaking.

Andre Hardy, RBC Capital Markets.

Thank you. I was going to ask a similar question. I guess you didn't address the CAD23.5 billion of drawn exposure to Europe on the same page, Mark?

Yes, so that is -- the majority -- well, that's all investments, effectively. I would say the vast majority are investments that are held in our investment portfolio, either in Europe or in Canada or the US. And it is restricted to the high-grade sovereigns again, and it would not include exposures to the -- other than the amounts that we would have declared. But it's generally to US sovereigns or agencies or items such as -- well, not US, because it's Europe, but to European sovereigns.

Do you have a sense of how much is UK versus Euro zone?

Well, it's specifically -- in our disclosure, if you look in the MD&A on the more granular breakdown we provided, it gives it exactly at CAD5.8 billion, is the UK portion.

Okay, thank you.

Steve Theriault, Bank of America Merrill Lynch.

Thanks very much. I just wanted to follow up first on Michael Goldberg's question to Bob, going back to the trading revenue. October was probably a bit of a rebound month, I guess. But I was still surprised the equity trading contribution specifically was as high as it was. I think it was the highest we've seen since, I think, 2009. So, Bob, is there anything unusual going through the line, maybe some derivatives trades that are more one time in nature that are maybe creating some of the lift there? Can you give us a little color on the equity business, in particular?

And then, also, if I might sneak in one quick other question -- I'm not sure who wants to take it, Bharat or maybe Colleen -- there was a really dramatic increase in the Ameritrade deposit accounts in the quarter, to the tune of I think just about CAD7 billion, which I think is the highest ever. Is that just money going to the sidelines at Ameritrade, or is there something more unusual going on through there?

I'll just quickly talk to the equity side. It was a very strong quarter for the equity derivatives business, which benefited from an increase in volatility in equity markets. We run a variety of businesses within the equity derivatives, ranging through option swaps, etc. Overall, we try to run the business to be long vol, to the extent that we can, that clients allow us, etc. So we were long vol, and vol went up, so we were able to take advantage of that. So that's definitely a trading aspect of the business. So the one key cause of why it probably would have been higher than typically that line would be.

But no big like total rate of return swaps that were sized or anything like that?

No, it was an explosion in the VIX in August.

Okay.

It's Ed here. On the Ameritrade, there are certain sort of institutional rules and, frankly, also some process rules that has meant that we haven't been able to get all of the money over all in one lump. This is probably one of the last of the big lumps to come over that account for -- there's the normal growth and then there was a few things that we are able to now move over. So you won't see those kind of increases every quarter from now on. It will be more normal.

Robert Sedran, CIBC.

Bharat, the pace of mortgage loan growth remains quite strong. So I have two related questions. The first is, how much of this is just a thinning out of the competitive environment, and how much perhaps relates to price?

And then, on -- I see the Case-Shiller Index continues to decline and the housing market continues to slide a little bit. How should we feel about credit risk as this book builds? Like, how big -- when you think business mix, how big would you like the mortgage book to be as a longer-term aspirational target?

So just on the -- why are we growing at the rate we are growing, I think -- and I mentioned this before -- what is going on is, because of the rate cycle, there's a huge amount of refi activity in the United States. And frankly, our legacy institutions when we acquired them did not have much of a mortgage business. And so, when we put in a new platform, came together as one bank from Maine to Florida and our brand now, with the service and convenience proposition, we are able to take advantage of this refi boom.

So what happens is that these TD customers that had their mortgages elsewhere, and as they refi, they like to bring them to TD. So that's why we are seeing the growth in our book that you have just noted. And until this rate cycle continues, until this refi boom continues, I would expect us to benefit more so than perhaps the overall market might suggest.

As far as credit quality goes, the geography where we are located continues to be quite strong. In fact, in our underwriting, it is very strong, very high FICOs. The loan-to-values are very impressive. We monitor this on an ongoing basis. So frankly, I'm not worried about the credit that we have in the mortgage book and I'm quite happy to continue to do the business that is available out there.

So how big should this business be? I've said this before, that whenever we have a mortgage client, we have more than four other products with that client. When we don't have a mortgage with a client, then we have approximately two products with that client. So very quickly in the US, which is relatively a new phenomenon, that mortgages are becoming a relationship product.

So I would like to continue to grow as long as we get the good quality mortgages that we are, as long as we are able to cross-sell other products and these are in our footprint, these are our clients, then I am happy to grow as much as I can. Yes, there is a limit as to how much of that we would carry on our balance sheet. We still have lots of room. Once we hit such a limit, then obviously we would have to think about how do we securitize them or sell them to Freddie or Fannie. But we are quite a ways from that point, currently.

Brad Smith, Stonecap Securities.

Sure, thanks very much. Colleen, a question for you -- in the U.S. Personal and Commercial Banking segment in the US dollar, slide 8 in the sub pack -- we are being shown an average invested capital there of CAD17.8 billion. The holding company in the US last reported in excess of CAD20 billion, both in the second and the third fiscal quarter. I was just wondering, where is the balance of the capital that is employed in the US reflected in the sub pack? And how do you separate the earnings relating to it, to make sure that we get a reflected return on invested capital in the US P&C banks that is representative of its realities?

So, Brad, when we disclose our segments' invested capital and our returns, we are not disclosing this necessarily on a legal entity basis. What we are disclosing is the economic capital that we have committed to that business, and that reflects the amount of core operating capital that we require as well as any amount of goodwill and intangibles. And that's the way our calculations work. So again, I think it's difficult to try and tie that back to the legal entity basis. There are various reasons that we need to hold more capital in certain cases at the legal entity level. So I think the key number to look at is the number that we show for the segment.

But, Colleen, realistically, if you are downloading capital into the US market and generating rates of return that are fractional compared to what you're showing us in your segment, don't you think that a fulsome reconciliation of that would be important, especially when the numbers are as big, in the CAD20 billion to CAD30 billion range?

I guess if what your question is, Brad, is whether or not there are earnings related to that capital that appear in the sub, that is not the case. The only earnings related -- the earnings would only be related to the amount of economic capital that we have dedicated to the business. So I'm very comfortable with the way we are portraying the numbers.

Yes, I would just note in closing, then, that the fact that the earnings that you report here are about CAD100 million above the legal entity earnings that you report in the US is -- it's quite remarkable, if you think that there is no earnings here related to that extra capital. Thank you.

Gabriel Dechaine, Credit Suisse.

Good morning. Tim, I didn't quite get your margin guidance in Canada, so just let me ask it this way. If nothing else changes competitively or rates wise, what's the additional downside to NIM, just from the rollover of your mortgage portfolio? And then what kind of mitigating actions are you taking to limit the amount of margin contraction you could experience?

And then just -- sorry, I'll sneak this one in there for Mark' that was a pretty juicy comment. You are adjusting your credit strategies where appropriate, and that was in relation to Canadian lending exposures. Can you expand on that, what it means exactly? Thanks.

Gabriel, I guess what you're asking is -- what's our outlook for margins? So the first, again, to note is that starting this first quarter we will see a bump as a result of the MBNA acquisition. But barring that, if you just didn't add in the MBNA acquisition, we're expecting to see a continued decline into the first few quarters, because that's pretty much all you can see out, about onesies or twosies, which is what we expected for Q4, frankly. Some of it is related to continued pressure on real estate secured lending, but there's a lot of puts and takes. And to your point about mitigating strategies, of course, we have some that we don't tend to put on an analyst call in terms of an answer.

Okay, what about the rollover or the refinancing, I guess, of the mortgage portfolio?

Yes. We don't break it out product by product. There are some products that are obviously in a much more competitive environment today than they were, and so they are repricing at different rates, and it depends on what the attrition level is versus the new originations. So I'd just say in aggregate that's the expectation of all of the puts and takes across our products.

Okay, thank you.

And the comment that I made was really to say that we run stresses on the Canadian consumer portfolio all of the time, and that kind of surfaces, maybe the unsecured, primarily, areas of credit that might be the most vulnerable. And so what you do is, you simply tweak the credit strategies or, effectively, the basis upon which you approve (inaudible) [edge] to tighten it up a bit to say that you have a lower impact, should that stress occur.

Sumit Malhotra, Macquarie Capital.

Two numbers questions, please, first for Colleen. On page 14 of the supplement, we see your balance sheet and assets up about CAD22 billion quarter over quarter, which is pretty normal for TD. But if I look at page 11, on the average asset side, you have a much more noticeable increase of about CAD50 billion. It seems like a wide discrepancy between the two numbers for a single quarter. Can you help me understand what's happening there? And, probably most importantly, was this somehow related to the increases we saw in either trading or securities gains in the quarter?

So the answer is no to your second question. In terms of the earning assets versus the total assets, it probably would be better if I got back to you on that one, Sumit, and just to square those two numbers, instead of doing it on the fly.

Okay. That's not actually earning assets, looking at average total assets, which went from CAD648 million to CAD699 million. So I think that would --

Okay, let me get back to you on that.

Okay, that's fine. And then my second one on the numbers side has to do with your other income page in the supplement, which is page 12, non-interest income. I was surprised to see the -- and this might be for Bharat or Tim -- looking at the service charge line, I was surprised to see that up CAD40 million quarter over quarter, despite the fact you told us that Durbin would impact the US for one month this quarter, and I'm assuming that the Durbin impact hits the service charge line. So I guess, if you could help me out here, Tim, was there some changes in your business that maybe offset the impact on Durbin, or just give me some color on what's happening here.

Yes. The short answer is, we did some repricing on the deposit accounts, and that had almost a full quarter's impact on our numbers.

So how much did that add for you in the quarter?

We don't disclose that.

Was the offset in your business completely matched on the downside in Bharat's business, or what are we looking at differential wise? You don't disclose that, either?

Don't disclose that, either.

Thanks for your time.

Brian Klock, Keefe, Bruyette & Woods.

My question is for Colleen. Colleen, can you remind me what the impact on the US net interest margin from the purchased loans was?

Sorry; what is your -- your question is on the purchased?

Yes. You said that that NIM contracted in the US P&C business and it was all related to the impact of acquired loans or purchased (multiple speakers) --

Oh, yes, okay. So what we are referring to there is really more of a mix issue. As you look at the income on some of those legacy portfolios, we did see a decline in the quarter which was probably a little greater than you would expect to see on a normalized basis. And then that contributed to the 7 basis points. So some of that relates to the South Financial as well as Chrysler.

So that's not purchase accounting, that's just the repricing of those acquired loans?

Yes. And it's, in certain cases, the runoff of the book. So in the case of Chrysler, as an example, you've got that book running off fairly quickly, and the initial -- the margins on that book were pretty thick.

Got you. And just one follow up really quickly, I guess on the expense side. You guys did tell us about the expense build for this quarter. I guess when you think going to the first quarter of 2012, how much of the expense build -- because the expenses did come in a little higher than guidance. What do you think we should expect to see come out when we move to normalized first quarter 2012?

I've been trying to get the answer to that question, so I'm very excited to hear what we are going to hear right now.

Yes, me too. First of all, I would -- this may sound feeble, but I would hasten to point out that foreign exchange was a factor in the quarter-over-quarter increase as well of about CAD30 million. But we were ahead of the high end of the range that we had provided with our guidance. Otherwise, it was about CAD270 million.

So as we look ahead to our forecast for Q1, excluding MBNA, the impact of the acquisition, which obviously will add some expenses, I think you could expect to see that number down probably about CAD150 million or so. But we tend to be a little bit conservative on that. Usually, you do see the Q1 number come down a fair bit. And again, we will be adding the MBNA expenses.

Mario Mendonca, Canaccord Genuity.

Good afternoon, a quick question -- if you could help me think through the change in the business and government deposits, just on the balance sheet as a whole, on page 14, from Q2 to Q4, about a CAD27 billion increase. And I imagine there's a number of parts. What I'm trying to get a handle on is, how much of that increase is just your traditional growth in commercial deposits versus, say, purchased funds or perhaps even TD Ameritrade as they go -- do the TD Ameritrade deposits go through there? If you would just help me think through that change.

So why don't I start, just from some of the key drivers, and then maybe we can have Bharat and Tim just comment in terms of what has been going on in the commercial businesses.

So first of all, you have seen fantastic growth in business banking deposits on both sides of the border. The other factor that you are seeing this quarter is you would have seen us raise a lot of senior debt. And part of that was pre-funding the MBNA acquisition, which we closed today. So that was a definite factor in the quarter over quarter.

The TD Ameritrade sweep deposits go into personal deposits, non-term, is where you would see that CAD7 billion increase. I don't know if Bharat or Tim had anything to add on the --

All I would say is, I think in your comment, in your prepared remarks, Colleen, you talked about a huge increase in commercial deposits in the US. And we've seen good growth in that number. And I would say overall we have been quite selective in the type of deposit business we do, given the rates out there. So -- but we are seeing some good growth, and these are core deposits. We are not seeing as much growth in government deposits, and that's on strategy because we want to make sure that we are only doing business in that segment that is core and franchise business for the Bank. But overall, quite happy with deposit growth, and some of those numbers are in Colleen's comments.

So, Colleen, just to be clear, the CAD27 billion -- would you say like two thirds of that is your traditional business deposit growth and the rest is purchased funding? I'm just trying to understand what that CAD27 billion from Q2 to Q4 represents.

Yes; I'd say that's roughly right.

Two thirds/one third?

Yes.

And then the one third in purchased funding or the wholesale?

Yes.

What assets are against that, roughly?

Yes, you would see that mostly in the available for sale. We've just put that into liquid investments.

Available for sale pending, what, reinvestment into lending and everything else, as the year progresses?

So reinvestment into the MBNA transaction, which closed today.

Oh, I see. Okay. That helps. That's helpful. Thank you.

Thanks, Mario. Thank you very much for your questions. And I'm going to turn it over to Ed for final comments.

Great. Well, obviously it was a pretty fantastic quarter, up 30%, and a pretty fantastic year, up 20%. And frankly, a year where we did better than I think we thought we were going to do going into the year. I would say we are certainly not unaware of the tail risks that are out there. And I think we have been managing the organization against those tail risks. And we are not unaware that I think we are looking at a growth trajectory for the world and certainly for North America that's slower than one might have wanted, with probably interest rates that are lower than one might have wanted.

So I think we find that before we start wallowing in pessimism, we have to keep on putting the fact that we have continued to outperform. And I would say, as an organization, we probably underestimate the advantage of out-performing. And so, by being able to take market share on both sides of the border and continue to adapt to make the kind of changes that you have to do to make money in this environment, those capabilities turn out to be worth a lot of money in the end. And so that's why when we look next year, we are still focused on maintaining earnings growth of 7% to 10%. We are telling you that that's going to be hard work to do that, but it's certainly what our vision statement tells us that we should be trying to do.

Thank you very much.

Great, thank you, Ed. And that ends our official Q4 earnings call. We are going to pause for 2 minutes to set up for our IFRS call. So everybody please stay on the line for 2 minutes while we get set. Thank you.

Ladies and gentlemen, this concludes the 4th quarter investor presentation. Please stay on the line if you wish to join the call for the review of the IFRS disclosures. If you wish to leave the call, please hang up. We will be back momentarily.

Welcome back to the IFRS portion of our call. Colleen Johnston, our CFO, will speak to you about the transition to IFRS and the impact that has on TD. She is going to be joined by Xihao Hu, Senior Vice President and Chief Accountant for the Bank. So, Colleen, I will turn it over to you to speak to the slide.

Thanks, Rudy. Hello again, everyone. So we will start the second part of the call. We did want to take some additional time today to discuss IFRS transition, specifically note 34 to our financial statements. Today, we will be discussing open balance sheet adjustments only. In late January, we will be rolling out our 2011 parallel year results under IFRS, and we will discuss P&L impacts in detail at that time.

I would like to start by commending and thanking my amazing finance team and all of the work that they've done in the last three years to get ready for IFRS. Their work has been truly world-class.

IFRS is now official. Effective November 1, 2011, it is GAAP for us and we will no longer be reporting under Canadian or US GAAP. Again, as you know, I'm joined today on the call Xihao Hu, TD's Chief Accountant.

From a business standpoint, IFRS represents an accounting change only and will not impact our business operations or decisions. The financial statement and regulatory impacts have proven to be manageable. Let me simplify this as much as possible.

Firstly, under IFRS, our shareholders equity declined by CAD3.9 billion, which consists largely of CAD2.1 billion of reduced goodwill with the balanced due primarily to the following impacts -- pension, CAD0.9 billion; de-recognition, CAD0.6 billion; and loan-related items, including origination, costs, and commitments of CAD0.4 billion.

For Basel II regulatory capital purposes, this initial adjustment will be phased in over five quarters, starting Q1 of 2012, with an impact of roughly 20 basis points per quarter. However, for Basel III purposes, the total impact will be roughly 50 basis points lower, as the pension amount has already been deducted in calculating our Basel III pro forma ratio from common equity tier 1 capital.

Let's talk about goodwill. Under the new IFRS rules we are required to value our transactions at the date of close, as opposed to the date of deal announcement. We have actually always thought this made more sense. The goodwill reduction arises because we have elected to retroactively adopt the new IFRS rules with respect to acquisitions. This has no impact on our regulatory capital ratios.

The lower goodwill relates entirely to US acquisitions. You may be asking how this will impact our US return on invested capital. Next year, we are making changes to our capital allocation methodology. The major change is that we will be allocating Basel III capital to our segments. The net effect of IFRS on these other changes means the US return measure will remain relatively unchanged.

Finally, our balance sheet assets will grow by CAD48 billion, due mainly to loan securitizations which will be going back on balance sheet. As mentioned earlier, we will go through the P&L impacts in January. However, our parallel year shows an increase in adjusted EPS of roughly 1% due to IFRS.

And with that, we will open it up to questions.

Great. Thank you very much, Colleen. So why don't we do the same. If there's any questions in the room, we will start with these folks. Otherwise, we will go to the phones. So Michael?

Michael Goldberg, Desjardins Securities. With the IFRS, insured securitized mortgages, as you said, Colleen, come on the balance sheet and use capital, if just in boosting your asset-to-capital multiple. How much do rates on these mortgages have to go up in order to achieve an acceptable return on capital for those loans, if they are on your balance sheet?

Well, as you know, Michael, those assets are not capital intensive at all, very low amounts of capital held with respect to that. It will have an impact on our TAC multiple, but that's a pretty minor issue for us. So securitizations still will continue to make sense for us in terms of being an advantageous way to fund the Bank. But obviously, we will not get off balance sheet treatment going forward.

Operator, any questions on the phones, please?

Mario Mendonca, Canaccord Genuity.

Good afternoon, just one quick question. Colleen, the MD&A deal closes; that takes your common equity tier 1 ratio of Basel III to 6.7. Are you then saying that there's another 50 basis point decline next quarter on implementation of IFRS?

No. So that -- so all the numbers that we've shown you under Basel III do include the impact of IFRS rolling forward over the next five quarters. It's essentially the impact. So that will not affect Q1. It will not be entirely in Q1.

No; I'm talking Basel III now. I'm not talking Basel III.

Right, same thing.

So -- and Basel III, you will also amortize in the effect over 5, quarters?

Yes, that's correct.

The full impact being 50 basis points?

Right, because we are already deducting the pension asset (multiple speakers).

That part I understood.

Yes.

The asset securitization. Okay, that's helpful, thanks.

There are no further questions on the phone lines. Please continue.

One last chance?

Okay, will thank you very much, Colleen, for the IFRS update. So that concludes the call. If we can be of further assistance to anyone, please give the investor relations team a call. And we will definitely try and help you out.

So that concludes the call, and we wish everybody the best of the holiday season. And we will see you here for the Q1 earnings call. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. Thanks for participating. You may now disconnect your lines.