Toronto-Dominion Bank (TD) 2012 Q2 法說會逐字稿

Good afternoon, and welcome to TD Bank Group's second-quarter 2012 investor presentation. My name is Rudy Sankovic, and I'm the Head 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 second-quarter operating results. Mark Chauvin, Chief Risk Officer, will then offer comments on credit quality, after which, we will entertain questions from those present and from prequalified analysts and investors on the phone.

Also here 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 P&C Banking; and Mike Pedersen, Group Head, Wealth Management, Insurance and Corporate Shared Services.

Please turn slide 2. At this time I'd 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 and may not be appropriate for any 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 Q2 2012 MD&A and 2011 Annual Report available on TD.com. With that let me turn the presentation over to Ed.

Good afternoon. Thank you, Rudy. And thank you all for joining us today. Colleen is going to be up shortly to talk about our second-quarter results in detail, but I'd like to start by sharing a few thoughts on the quarter and tell you a little bit more about how I feel about the rest of the year.

Now, this was another very strong quarter for TD with adjusted earnings per share growth of 12% versus the second quarter last year. Our retail business generated record adjusted earnings of CAD1.6 billion, up 14% from a year earlier.

Our Canadian Personal and Commercial operation performed very well, delivering 14% adjusted earnings growth despite the low rate environment and slowing personal loan growth. Our US Personal and Commercial Bank, Wealth and Insurance businesses all delivered record results.

Our Wholesale Banking results were in line with our expectations despite difficult markets late in the quarter.

Together with our robust performance in the first quarter, the second quarter's strong performance has produced impressive results for the first half of 2012, with adjusted earnings of CAD3.5 billion and adjusted EPS of CAD3.68. We expect similar adjusted earnings and EPS numbers in the second half, which implies a lower growth rate for the balance of the year. We continue to work hard to stay in the 7% to 10% earnings growth increase that we've indicated before, despite increasing headwinds.

So let's look at each segment. Our Canadian Personal and Commercial bank expects to deliver good results in the second half of the year, driven by positive operating leverage, solid volume growth, stable credit performance and good MBNA results. We expect to continue to see margin compression into 2013 as interest rates remain low.

In Wealth and Insurance, it's a mixed picture. The Wealth business has performed very well this year, but it has been impacted by uncertain markets and lower trading levels. Still, despite the challenging environment, we expect solid results from Wealth, thanks in part to expense management and continued good client asset inflows. Insurance is set to deliver strong results for 2012 through solid premium growth and good claims management.

Our US retail bank should deliver strong lending volume growth driven by residential mortgages, indirect auto loans and commercial lending. We also expect to see strong growth in organic deposits as new stores mature.

The regulatory environment continues to be a headwind as we try to mitigate the impact of the Durbin Amendment. And low interest rates will continue to exert some pressure on margins. Overall, though, we expect solid adjusted earnings growth for 2012.

In Wholesale, market volatility, driven primarily by resurgence intentions in Europe, will have an impact on the business, primarily through a moderation in trading revenues. Nonetheless I am confident that our client-driven franchise model will generate return on equity in the 15% to 20% range for the year.

Now I've referred several times to the macroeconomic environment and the headwinds it is creating for our businesses. We expect this to be a recurring theme. We've said before that the recovery will take time, and that is still our view. The Eurozone sovereign debt crisis has flared up again, underscoring that the ECB's liquidity injection earlier this year provided only temporary relief and did nothing to address the region's underlying structural problems.

While the euro concept may be a flawed construct, unwinding it has its own perils. Meanwhile, reducing public sector deficits with no alternative growth measures poses both social and economic risks. For now we don't believe that the upheaval in Europe will derail the US recovery, which [recent] data seems to confirm is gaining momentum. Households are slowly repairing their balance sheet and job growth has held up fairly well.

The main risk in the United States outlook is a fiscal shock next year as a variety of tax incentives expire, injecting a dose of austerity that the economy may not be robust enough to absorb. The US economy has proven its resilience time and time again. We are encouraged by that, but we still believe that the recovery will be slow and interest rates will remain low for some time to come.

In Canada the picture is brighter, but there are challenges here too. Let me make a comment briefly on the housing market. Looking back, a robust housing sector was a positive factor contributing to Canada's recovery from the economic downturn. A strong banking system, combined with low interest rates, fueled this industry. The risk of course is that this positive contributor becomes a negative factor if it leads to a sharp correction in housing prices.

The government has attempted to mitigate this risk by gradually tightening [CMH] standards. We supported these moves. More recently, OSFI has issued guidelines for the sector and intensified its oversight of lending practices.

Now we do not believe that Canada has ever been at risk of a US-style meltdown. The structure of our housing market and the nature of our lending practices are different. But it has clearly been prudent to lean against the collateral effects of low interest rates. While the direct cost to the banks of a sharp correction will be quite absorbable, the effects of a large correction on the economy warrant prudence.

At the moment we see signs that the housing market is slowing. And the risk of a sharp correction are diminishing. We believe OSFI's interventions will have a further dampening effect. As a result we do not see a need at this time to tighten further, given that the effects of the announced changes have yet to be fully felt.

Rather, we should wait to see how the markets evolve. If further restraint is required we favor focusing on high-ratio loans.

Looking forward, given low interest rates we believe we will have to continue to work hard to stay in the 7% to 10% earnings per share range over the next few years. It's why we are focused on making productivity management a competitive advantage for TD. Expense management will be increasingly an important driver of our ability to deliver positive operating leverage and to find the resources to continue to invest and grow market share. As we discussed at last month's investor day, we are focused on finding permanent reductions to our cost base, which will then in turn allow us to invest in growth initiatives that will drive our franchise for the future.

To wrap up, I am pleased with our results today and proud of the management team's impressive performance. As we work through these challenging times we are going to keep doing exactly what we have been doing for the last 10 years -- stay focused, execute on our business strategy, invest for the long term, and exploit the growth strategies we outlined at last month's investor's day. With that let me turn it over to Colleen.

Thanks, Ed, and good afternoon. Please turn to slide 4.

We are very pleased with our Q2 2012 results. Total Bank adjusted net income for the quarter was CAD1.7 billion, up 14% from last year, while adjusted diluted earnings per share was CAD1.82, up 12% versus Q2 of 2011. These strong results were driven by record adjusted earnings in our retail business, CAD1.6 billion, up 14% from last year. Wealth, Insurance and US P&C all posted record quarters.

Results in our Wholesale bank were solid, with net income of CAD197 million. Net income was up 5% versus last year. The corporate segment had an adjusted loss of CAD20 million versus a loss of CAD29 million in Q2 of 2011.

Please turn to slide 5. This slide shows you the reported and adjusted view of earnings this quarter. The difference between the two views was due to six items of note. None of these are new this quarter.

Please turn to slide 6. Canadian P&C had another very good quarter. Adjusted net income was CAD838 million, up 14% versus last year. Excluding MBNA earnings growth was solid this quarter at 9%. MBNA earnings were elevated this quarter due to better than anticipated credit performance.

As you know, Q2 contained a full quarter of results from MBNA, which added 10% to adjusted revenues, 7% to adjusted expenses, 22 basis points to NIM, and CAD95 million to PCL.

Adjusted revenue growth of 4% excluding MBNA was solid this quarter due to good volume and fee growth and an additional calendar day versus the prior year, partially offset by lower margin on average earning assets. The retail business continued to generate good but somewhat slower personal lending volume growth, with year-over-year increases of 7% in real estate secured lending and 13% in auto lending. Business lending volume growth remains strong at 14%.

We continue to see strong deposit volume growth with personal deposit volume increasing 6% and average business deposit volume increasing 9%. Credit quality remained steady with personal banking PCL, excluding MBNA, down 10% compared to last year due to better credit performance and enhanced collection strategies.

Excluding the impact of MBNA, margin was down 12 basis points compared to last year due to the low rate environment, portfolio mix and competitive pricing pressures. Margin was down 2 basis points sequentially. For Q3, we forecast margin to increase slightly, driven by seasonal business activity and pricing initiatives. However, we expect the low rate environment will continue to contribute to margin declines in Q4 as well as in 2013.

Adjusted operating leverage was 2%. While expenses were slightly elevated this quarter due to timing of business initiatives and one extra business day, we continue to expect positive adjusted operating leverage for 2012.

Please turn to slide 7. Wealth and Insurance, excluding the impact of TD Ameritrade, delivered strong results despite continued difficult capital markets. Net income of CAD318 million was up 23% from last year and 8% sequentially. Both businesses had record earnings this quarter.

Wealth earnings were up 3% year over year. Revenues were flat as strong asset and fee growth in the advice and asset management businesses was offset by lower trading volumes in direct investing. Expenses were down 1% due to proactive management actions.

Insurance earnings were up 51% year over year as a result of lower claims for weather-related events, the addition of MBNA, good premium growth, and claims improvement. MBNA contributed 9 points of bottom-line growth.

Expenses in Wealth and Insurance were up 1% year over year. TD Ameritrade contributed CAD47 million to TD this quarter, down 18% from last year and down 15% sequentially, partially due to lower trading volumes.

Please turn to slide 8. US Personal and Commercial Bank delivered record adjusted net income of $358 million for the quarter, up 9% from last year and up 4% from last quarter. The increase was primarily due to very strong organic growth.

US P&C's organic volume growth excluding acquisitions continued to be very strong. Excluding the Chrysler Financial acquisition, average loans increased by 10% with residential mortgages up 30% and commercial loans up 7% compared to last year. Average deposits excluding government deposits and TD Ameritrade IDA's were up 8%, with personal deposits up 8% and commercial up 4%.

TD Ameritrade sweep deposits grew 23% compared to last year, but were down 2% sequentially.

The gross impact of the Durbin Amendment remains in line with our previous guidance, and we continue to implement strategies to offset the impact. There were a few unusual items in the quarter, including securities gains of roughly CAD80 million from our investment portfolio, and elevated legal and credit-related expenses.

TD Auto Finance had record originations in Q2, but faces headwinds in the second half from the rolloff of higher-margin legacy loans.

Total PCL was up 7% from last year.

Adjusted expenses increased over last year, primarily due to investments in the core franchise, including new stores, legal and credit-related expenses and the Chrysler Financial acquisition.

Please turn to slide 9. Wholesale delivered good results this quarter with net income of CAD197 million. Earnings were up 5% versus Q2 of 2011 due to higher revenues across a number of business lines, most notably investment banking, and the positive impact of a favorable tax item, partially offset by higher non-interest expenses and declining fixed income trading.

Annualized ROE for the quarter was strong at 19.5%.

Trading-related income was solid at CAD278 million. Negative market trends in the late stages of the quarter resulted in lower fixed income trading revenue. We remain comfortable with our previous guidance of CAD300 million per quarter over a normalized cycle.

PCL was in line with the second quarter last year. Expenses increased 12% year over year, primarily due to higher operating expenses.

Please turn to slide 10. On an adjusted basis the corporate segment posted a loss of CAD20 million in the quarter compared with the loss of CAD29 million last year. The change was primarily due to lower net corporate expenses.

I'll guide you back to a higher loss for Q2 -- sorry, for Q3 and Q4 in the CAD40 million to CAD80 million loss range, which partially reflects our pattern of higher expenses in the second half of the year.

Please turns slide 11. With revenue growth expected to remain constrained in a slow-growth economy we remain committed to our focus on expense management while investing for the future. Our adjusted efficiency ratio in Q2 was 56.8%, a 150 basis point improvement over Q2 of last year. We delivered positive adjusted operating leverage of 290 basis points this quarter as a result of acquisitions, solid core revenue growth and prudent expense management.

Excluding acquisitions and FX, we expect a low single-digit rate of growth for adjusted expenses in 2012. Expenses remain a major focus across the Bank, with our planning process for 2013 now well underway.

Please turn to slide 12. Looking at capital our Q2 Tier 1 capital ratio was 12% and our pro forma Basel III ratio was 7.4%. Our guidance remains unchanged on Basel III.

Please turn to slide 13. We are working to deliver within our 7% to 10% EPS growth paradigm, but likely closer to the bottom end of that range. We expect our businesses to post second-half earnings at roughly the same level as in the first half. Corporate segment losses are expected to be higher in the second half of the year versus the first half due to higher expenses.

With that let me turn it over to Mark.

Thank you, Colleen, and good afternoon, everyone. Please turn to slide 14.

As a reminder the debt securities classified as loans in the acquired credit impaired loan portfolios have been excluded from the credit slides.

Canadian credit quality remained strong across all the portfolios. PCL was down CAD7 million compared to last quarter, despite one extra month of MBNA results. While it's still early, performance of the MBNA credit card portfolio exceeds our expectations.

The positive trends in the US credit portfolio continued during the quarter. Although PCL increased due to the lumpy nature of commercial losses during the quarter, steady improvement in the underlying credit metrics remained evident, as indicated by -- impaired loans and new formations are down in the quarter; delinquency continues to reduce; criticized and classified loans have fallen; and we are seeing fewer problem loans on the horizon. Based on these trends we are expecting PCL to reduce during the remainder of the year.

Lastly, I can confirm there has been no change in the performance of the acquired portfolios and debt securities classified as loans this quarter.

With that, I'll turn the presentation back to Rudy.

Great. Thanks, Mark. We'll now open it up for questions. And to give everyone a chance to participate, please keep to one question and then requeue and we'll get to you if there is time.

We'd like to keep this call to end to the hour and promptly at 4 o'clock if we can. (Operator Instructions).

Before ending the call today I will ask Ed to offer some final remarks. So why don't we get started in the room first. Was there any questions by anyone present? John?

John Reucassel from BMO Capital Markets. A question for Ed or Tim; you talked about the OSFI rules; you want time to see how that works, the new OSFI rules on consumer lending.

Could you give us a sense of how you know they're going to be working, like what external is it going to be -- is it as easy as slower consumer loan growth relative to GDP growth? And the OSFI rules, as I understand them, actually haven't been implemented yet; that might happen this summer or the fall. Do you think that's pulling forward some loans, or is the industry acting proactively to institute some of these?

Why don't I start and then hand it over to Tim. I guess -- I think our just experience is that if OSFI shows a concern, I think it's a difference in the regulatory environment in Canada and the United States, is that the United States runs a more prescriptive system, and so you would wait exactly to get all of the rules and then you'd say -- you figure out in US well what can I do and what I can't do given those rules.

In Canada I think we run a better system, where OSFI says, I am worried about this area, and I am looking to you to do a risk-adjusted approach to make sure that you're not doing things you shouldn't be doing. As soon as you say that to a lending system people tighten in. And so I think -- our assumption is that that's what will go on here, is just at the margin, people will go for tighter implementation than they would've gone otherwise.

So what I would add is that OSFI came out with the guidelines, asked the industry to respond, we went back; and as the response deadline has now passed, we expect them to come out with the final interpretation of the rules probably in the summer sometime, and that will include an implementation timeframe.

Some of the rules that might be implemented, depending on feedback or not, will have fairly significant systems implications, so therefore, there is always an implementation timeline. Who knows, could be six months, could be a year depending on certain things.

So -- but to your final question as to when we will know, we are clearly seeing the market starting to soften now. And as you say, these guidelines have not been implemented yet. By the time that they do get implemented, I think Ed's comments were pretty clear. We'll have them implemented -- they will have a slowing effect; there is no question.

So in addition to those changes, we are not advocating for any additional changes at this time. I think we have been quite -- I say we -- the government in Canada, have been quite prudent in sort of timing the moderation in lending guidelines to make sure that we have a slowing effect as opposed to a crash effect.

But has this pulled forward any borrowing that you --?

Don't think so yet. It's not widely known, but I believe, when they are published, then there likely will be more articles about how one can get ahead of it. And there is usually -- every time we've done this we've seen a bit of a pulling forward effect, but nothing so far.

Okay. Thanks, John.

Michael Goldberg, Desjardins. It looks like you had a high level of loan rehabilitations in the second quarter, quite a bit higher than previous quarters. Is this indicative of an improving trend in loan quality? Where is it happening? And do you expect it to continue?

So, Michael, when you say loan rehabilitation, are you talking about the reduction -- the increase in OREO in the US?

No, the cure sales and repayments going up significantly.

Okay. So what we -- as I indicated, there's been a couple of factors. Is that we have -- we did see a change in the US on a regulatory perspective; they have been looking at -- because foreclosures are being so extended and long, you're getting to a point where -- and this is really an industry issue, where banks have a substantially -- got ownership but title hasn't actually transferred. So the regulatory community went through that and tightened up the guidelines, so you saw a bit of a shift this quarter. So that was one factor. That's a one-time --

It's invented a new task here. So if we are paying to mow the lawn, we own the house.

So that was one factor. The other factor is that we are seeing a higher resolution then coming in, right? So we are cleaning up more of the problem loans than what we've seen coming in, and that's been evident in the last couple quarters. And that's probably one of the biggest things I would look to, to say things are getting improving and getting better going forward.

And is that in particular in the US?

Well, in Canada, I mean the portfolios are quite strong to begin with, right? So it's really -- I mean I kind of put them in this -- the wholesale has de minimis problem loans to begin with. The Canadian commercial is running at very low rates, so one loan will make a difference, but it is still at a historically low level.

And then in terms of the retail, we really see that portfolio back to kind of the pre-recession levels and at a run rate which I think is quite good. So I don't see anything materially changing there.

But what you did see -- and actually you would've seen an increase for MBNA because now as we go further in that, so that kind of -- notwithstanding that we still went down a bit. So it's all to me indicative of a strong credit quality.

Thank you.

Jason Bilodeau, TD Securities. Ed, you talked a little bit about the interest rate environment continuing to be a headwind for the business, but once again we are starting to see a little bit chatter that maybe Canada may be among the first to start moving up rates in the fall, maybe 2013. I'm just wondering if that's materially different than your outlook, or are they just sort of fairly small and gradual increments that wouldn't materially change your view in the low rate environment?

Well, I think, depending on your forecasts -- I mean there are some forecasts where it would make a material difference to the operations in Canada. I think it depends on how pessimistic view you have of what Europe is going to look like and it's rebound effects on Canada. And so I think in this period of uncertainty, I think policy makers are going to be biased to hold rates down rather than move up. And so I think we should be running the business on the assumption that rates stay low, and therefore getting the cost structure down to accommodate that. And if it turns out that rates move up faster than that, that's just a bonus, but we are not going to run the bank on the basis that rising interest rates solve our problem for us.

Right, that makes sense. I guess what I'm trying to get at is -- understand the sensitivity a little bit. If rates go up 25, 50 basis points in the back half of the year in Canada or early 2013, is that still what you would consider to be a pretty difficult low-rate environment, or does that start to actually alleviate some of the pressure for you?

It doesn't alleviate the need to still lower the cost structure because the rates at which we're rolling off -- things are rolling off and the rates that we are putting new tractors on will be lower than what we are rolling out. But it will be substantial. We have enough -- our core accounts are big enough that 25 basis points times a big number is still a material number to us.

Okay. Thanks.

John Aiken, Barclays. Just a couple of quick questions on the Chrysler Financial. Colleen, in your prepared remarks you talked about the roll off of the auto loan and concerns about that. I'm assuming that's just on the spread in the revenues, not necessarily on volumes. Correct?

Yes, that's right. So what -- really two things are happening right now. So the legacy book is declining and the spreads were quite good on that business. The newly originated business, which again, we saw record originations, but we are seeing thinner spreads on that business, and we're working hard -- I'll turn it over to Tim to comment on this, but working hard to really optimize that margin going forward. But that's the dynamic you have in the book right now. Tim, I don't know if you wanted to elaborate on that.

Yes, Tim, just sorry, if I can step in, because that -- was the follow-on question was, it looks like we've seen some very strong growth coming out of the auto lending business; and are we at an inflection point now? Are you starting to see the business pick up from the deal that you've brought on? Or is this still just going to be a bit of a slow burn?

There's no question from a sheer volume point of view, we are now -- call it at a running rate every month in the US only of about CAD800 million. So that's a significant uptick, and we are now well over 8,200 dealers. Now, year-end, essentially, we are at the point where we are saying, okay, now what's the best way to optimize the risk-adjusted margin, so it's not just going for pure volume of both dealers as well as volume itself, but where is there spread available to be taken?

What's transpired in the market over the last year is prime and super prime has gotten very tight. And there is some risk-adjusted margin to be taken in the sort of near-prime -- not sub-prime, we are not interested in that, but in the near-prime space. So as a result we are trying to say, now, based on the market dynamics where can we really broaden out the spread?

Great. Thank you. Any other questions in the room? Michael, I'll ask you to requeue. Thanks. We will go to the phones now, please, operator.

Steve Theriault, Bank of America Merrill Lynch.

Just to follow up on the auto loan roll off, just quickly, so is it the conclusion then that the roll off will have a material impact on the margin sort of in the near term or not necessarily?

I'm trying to think about the margin -- the TDAF US specific margins. In the near-term, let me get back to you on that. I think I've got a file that I -- the bottom line --

Steve, are you asking about the US P&C margin?

Broadly, yes.

Or are you asking about the TDAF margin overall?

No, the US P&C margin. Like, is it big enough to see it come through that?

Yes; I don't think so.

No.

I mean maybe, Bharat, you want to comment generally on where margins are; you see margins bump around a little bit. You saw an increase this quarter; part of that was the ACI accounting, which we called out in the slide. So you see things bump around a little bit. But I think we have sort of a reasonable range that we expect going forward.

Yes, so, Steve -- there is -- this is Bharat. There is a slight headwind on margins, obviously, with overall rates being depressed, so you'll see compression in over time. But many quarters ago we said the range you should expect from the US is between 350 to 375 basis points, and I think that is still an appropriate assumption, given what we know today.

Okay. Okay, that's great. I wanted to ask Bob Dorrance, please, a question on risk-weighted assets. You had a big step up in Q1 on the back of Basel 2.5, and in short order you've pared, it looks like about CAD3 billion off the risk-weighted this quarter. So maybe you could just talk about some of the things you're doing specifically to get the relief; is there runway for more of that?

And maybe you can't answer this, but I'll ask it anyway. Is there the possibility of getting back to the high CAD30 billion range of RWAs, and getting back a lot of what you lost at the beginning of this year?

So I think the quick answer is that we implemented the model at the beginning of the year, so this is the first time when all the desks are really working with the model -- the models. And the ask of them was to review their businesses, look at all the positioning that they were taking to make money and see if they couldn't do it in a more effective way, a more optimal way. That's what's been going on.

I guess as an example, non-investment grade credit is significantly impacted by stressed VAR. So the ask there is let's just, from an inventory perspective, hold less non-investment grade credit. And in fact that's what the market is doing. We are not the only one that's implementing this strategy.

So I think what you are seeing is just both the market and ourselves respond to the new rules, and our job is to try to keep the same level of profitability revenue and use as the optimal amount of capital to do that.

Is there more room for improvement? I think that there -- potentially there is. Offsetting that, VAR is also impacted by market factors, so those are not controllable. And if market factors deteriorate that can add to VAR.

On the other hand we are still looking at ways as to how we're using the capital that we have in the business to see if we can't reduce it. I don't think we can get back to where we were before when we started; no.

Okay, thanks, Steve. Next question please, operator?

Robert Sedran, CIBC.

I just wanted to return to the issue of the housing market. I guess, Tim, you answered an earlier question to suggest that that market is already slowing, and I guess my question is if the market is already slowing, is it a good idea to have any more changes in terms of the framework that OSFI is putting forth? I mean is there any risk that we overshoot, and rather than tapping on the brakes we actually slam on the brakes? And you sound comfortable that's not going to happen; I'm just curious as to why.

There is certainly a risk that the factors already put in the marketplace will have an overshoot factor, but we don't see it as being large. And as we say there's already been -- if you talk to our chief economist, he'd say there's a 10% to 15% correction in the housing market that is appropriate anyway.

Am I certain that we are not going to overshoot? Of course not. Which is why we say we've given feedback on the OSFI guidelines. Some of them may be put into place; some of them may be changed, and let's watch to see what happens.

At the end of the day low interest rates do trump lots of other factors. And housing is incredibly affordable still, so there has to be a little bit of leaning into that for us to slow down on the market overall. But there certainly is a risk that it will overshoot.

Okay. Just a quick follow-up -- I don't want to ask a second question? But Colleen, you mentioned the MBNA having an impact on Insurance and Wealth of 9%. Is that to the overall or just to the Insurance part of the segment? If I think of the 16%, is it actually 9% excluding the (multiple speakers)?

No, so this is strictly related to the insurance bottom line. So we grew by 51%. Ex-MBNA Canada we would've grown by 42%, so it was still a fantastic quarter, needless to say.

Okay. Thank you.

Brad Smith, Stonecap Securities.

Thanks very much. I had a couple of questions just with respect to the US segment disclosure; Colleen, I believe that you mentioned in your preamble something about some legal costs in the quarter. I was wondering if you could elaborate on that and perhaps put a number on that.

I was curious about that because you I believe took a very large accrual in the fourth quarter, and the implication of what I heard you say was that there were further expenses hitting the P&L relating to legal.

The second question that I have is just sort of a general question. You mentioned an CAD80 million gain on sale of some AFS securities. As you know, I follow the US regulatory filings fairly closely, and I saw an CAD80 million gain come through there in the December quarter. I was just wondering, is that the same gain?

So to start with your first question, we did have some items that we would call unusual in the quarter. But overall I would say they netted out to more or less a neutral effect. So on the revenue side we did have the securities gains of about CAD80 million. We are not disclosing a specific number, Brad, but we did have very much elevated legal and credit-related expenses and higher PCL. So I'd say net net, that was pretty neutral.

And then -- so if you look at the 9% growth in the bottom line on a year-over-year basis, I would really characterize that as core fundamental growth. So, again, it was quite a good quarter.

It is -- as we both know it is tough to go back and look at the call reports and completely align it with what we are reporting on the segment side. The GAAP view is different, so the US returns are on a US GAAP basis we are reporting now under IFRS, so you won't always see a complete connection there. But we did have additional legal expenses this quarter for some items that we settled.

Great. Just with respect to that GAAP versus IFRS issue, I mean what I am seeing here now is just a general decoupling on your expenses between your call report, which was about CAD1.3 billion in expenses in the latest quarter, and the roughly CAD960 million that you are showing as adjusted expenses. Is there some different type of allocation going on? Where would that difference be going in the consolidated statements?

Again, there are differences between the legal entity view versus the management reporting view, which is the one that we are reporting from a segment standpoint. And there really hasn't been any substantial shift in that, but that's why it is hard to compare the two views.

But accounting differences aside, the legal view ends up going somewhere in the management view, does it not?

Yes; I mean that would be the starting point, typically, for the segment results, is you would have the legal entity view, and then, again, you may have other items that relate to that entity, but may not be incurred directly in the entity. So those are some of the differences that do come about.

Okay. Thanks so much.

Peter Routledge, National Bank Financial.

Thanks very much. I was just noticing on page 29 of your report to shareholders, assets to capital multiple kind of ticked up for the first six months of this year pretty significantly to 18.1 from 17.2. So I guess what's driving that? Is that just loan growth and deposit growth in Canada and the US, A? And B, how much of that is a resistor to future balance sheet growth, given that you're getting closer to the OSFI limit?

So we are quite comfortable with where we are right now on the assets to capital multiple; at 18 we've still got lots of room. IFRS is impacting that result to a certain extent. Then we also had a balance sheet reclass this quarter, which added to our assets so that we would've seen a bit of a tick up in that. That was accounting related certain wholesale assets. But overall we are quite comfortable with where we are on that ratio.

Under IFRS that will be more -- correct me if I'm wrong, but it seems like that will be more of a gating capital issue than say the Tier 1 or common equity Tier 1 ratio. Given that, does it change how you look at the marginal profitability of a loan? Does a low spread product like a Canadian mortgage look to be like a weaker ROE product than, say, a commercial loan, given that you're going to be near the limit on that ACM ratio?

The boss wants to take this one.

I think at the margin we are still bound by risk-weighted assets rather than the leverage test, even under Basel III. So I think for the moment, there is a point where you could so derisk the Bank that you would actually change your capital allocation models. But for the moment we're using a risk-weighted capital test.

Okay. Thanks.

Gabriel Dechaine, Credit Suisse.

Good afternoon. Just a question here on the mortgage book, just the maturation of it, or the rollover I guess. As I understand it in '08/'09 spreads were in the 200 basis points range, and now they are in the 80 basis points range. What kind of -- what percentage of the book has already repriced at those levels and maybe those numbers are off?

And then also, just on page 17, the securitization, the supplement, sorry -- you had a big uptick in securitized assets mortgages and the amortization of them as well, of the -- the securitized amount was CAD7.6 billion; you are usually in the CAD3 billion to CAD4 billion range or closer to CAD4 billion. Is that some sort of sign of a big refinancing spike, or what's going on there? I don't quite understand it.

Why don't I start with your second question, then we'll go back to Tim on the overall margins.

So yes, when you look at that particular page, I think it's lines 2 and 3 looked quite inflated. They both were inflated, and you have to sort of look at the two more on a net basis. But we did do some additional securitization this quarter, which did affect line 2. So again, it's hard to sort of interpret the two lines individually, is the way I would phrase it.

What -- I can see why one would be -- like the line 2, the CAD7.6 billion just choose to securitize a bunch; why would the amortization spike up?

So that becomes your -- that's your pay down number. So, again, you have to look at the two and you can top up obviously, so you have to look at the two more on a net basis.

So that's people paying down their mortgages, and you have to resecuritize -- or securitize new mortgages into the (multiple speakers) program?

Right; we can top up in the pool.

So it is refinancing activity?

It can be, yes.

Okay. All right, thanks.

Back to Tim on --

Just generally on the real estate secured lending portfolios, your 200 basis point number was quite high. Traditionally, the margin on a mortgage -- call it whether it be HELOC, fixed or a fixed mortgage is about -- call it 85, 90 basis points. We're running a little bit higher than that I would say, but it is drifting down as you would say because of primarily a mix shift. We have seen quite a shift from variable interest rate mortgages to fixed as people are taking advantage of low rates to lock in for longer term, but the general margin erosion is onesies and twosies, at best, in that whole portfolio.

Great. Thank you. Next question, please.

Sumit Malhotra, Macquarie Capital Markets.

Thanks, good afternoon. First, numbers very quickly for Tim Hockey. If I look at the balances, the as-at balances for the Canadian portfolio, on page 27 of your presentation, credit cards -- the credit card balance down about CAD400 million quarter over quarter. Can you remind me -- well maybe first off just tell me how much of this relates to the targeted MBNA runoff that you had communicated when that purchase was made? And how much of that -- I think it was a teaser rate portfolio that was going to be planned runoff. Where should we see that number settle out in terms of the planned runoff of that portfolio?

Yes; let me jump to the answer of your last question, which is we expect to see about CAD1.6 billion runoff of that teaser rate at the end of this year pretty much.

I would say that one of the factors we're finding out with MBNA, as you've heard from Colleen, there's no question that the credit performance of that book is better than we expected. And part of that has to do with the underlying economics of the teaser portfolio. So I would say our view is changing as to the quality of that business. So we still expect to see the runoff of some of the business, but that was our -- we are on plan for about a CAD1.6 billion runoff of that book.

And so it was -- if I had the numbers right here, it was roughly CAD7.4 billion when the acquisition closed in December that you added to your credit card portfolio, so the CAD1.6 billion is off that base?

I think that was a couple of months of results. I think it's actually -- we should sort of settle out at around the CAD6.2 billion, I think, is the number I had in my head in forecast.

Okay. That sounds right. And then on capital, probably for Ed Clark -- so your Basel III communicated today at 7.4%; I think it's fair to say you're adding roughly 30 basis points a quarter from normal course operations. What we have -- I guess the feeling I have is that Basel talked about a floor of 7%; OSFI has indicated they'd like closer to 8%. And then after that, the banks would like for lack of a better term a little bit of walking around money. So it certainly seems like you're going to get to that 8% level, perhaps 8% plus, by the end of the year. And please correct me if I'm wrong.

My question for you, TD has never been a bank that's been overly interested in buybacks, at least in the last number of years. It seems like the acquisition -- the pace of acquisitions has slowed somewhat in the US. Can you remind us on how you're thinking about outlays for capital deployment and what priorities would be, particularly when you look at the operating environment as it is?

I certainly look forward to the day where we have to answer that question and to -- and have excess capital and try to figure out what to do with it.

I would say in terms of acquisitions, you know, our current focus has been and continues to be more on the asset side. As you know we have a significant portfolio in the United States, and as margins thin on the deposit side that does make sense if you can find the right assets and only if you find the right assets; and we probably walk away from 10 deals for every one that you might think of doing. But if we can find assets to put along that that earn a good rate of return on the incremental capital, then we would redeploy capital to do that. So far as I say, those have been hard to find that meet our tests. But I think that's probably the natural place we would put capital for the moment.

And is that number -- if you are in the range of 8% to 8.5%, is that, in your mind, an excess capital position, or perhaps not yet with some of the changes that are happening on the regulatory front?

I think we've indicated 7.5% to 8% for the year end, and I think we are comfortable that we will certainly make that. I think we are waiting for some guidance; I think most people assume that the guidance from OSFI is going to be 8% of what the national SIFI is. But I think in the second half of this year there are going to be guidelines coming down from the SSB, and I think you will get some indication from OSFI as the pace at which they want us to go to that. So I think by the end of the year we will have clarity about what that number is, what pace you have to get it and what kind of cushion you would want to have in getting there, but we haven't got that guidance yet.

Thanks.

Mario Mendonca, Canaccord Genuity.

For Tim Hockey, the slowdown in real estate secured lending was apparent at your bank and many others. My suspicion of course, and this has been I think confirmed by what some of the retail -- or what some of the brokers are saying -- mortgage brokers that is -- is that the banks really did pull back, not so much in pricing but in other ways.

Could you talk about what TD did to slow down the mortgage growth? And then secondarily, is there anything else planned for the next quarter or are you pretty much content with where you are now?

In terms of additional actions? Again, tough to judge. I would say the actions we have taken for example is tighten up on our non-income verified lending, what's known in the industry as equity lending. That was at a level that we thought was too high, so that did have an effect in the last quarter.

There have been other smaller items, but it's no one large lever that's been pulled. I think the effects of the levers to date will continue to be felt over the next little while. And as we've said obviously that's even before the OSFI guidelines.

Do you anticipate introducing anything brand-new into Q3 that you hadn't already introduced in Q2 to slow down lending growth?

No.

No, okay. And then just a quick follow-up on expenses. Colleen, you referred to the back half of the year expense levels being higher; that's entirely consistent with what we've seen in prior years. But if I could take it back to Q4 '11 when expenses really popped, something like CAD300 million sequentially, and there were a number of reasons for that, pension expense, for example. Is that the sort of thing you would guide us to again in Q4 2012, another significant move, or was that specific to Q4 2011?

We do tend to have a pattern of large -- much larger expenses in the fourth quarter of each year. So it was a larger increase last year, but we did have that same phenomenon in 2010. So we are doing a lot of thinking about that as a management team, and looking at our forecasts.

I think, Mario, I'll be in a better position to give you an update on that outlook by the end of next quarter. But typically we do see a bit of a slower start in particular on some of our initiative spend, which tends to be a bit lower earlier in the year. And then that does tend to ramp up towards the end of the year. So it's something that is very much on our radar at the moment, but I'll give you more guidance next quarter.

But is it conceivable we could see that kind of a CAD300 million move quarter to quarter, or is that something you really want to wait to guide us on later?

No, I would say that our preference would be not to have a number as large as that.

I get it. Thank you.

I was going to say it's not out of the question, but anyway -- (laughter). We'll see where we end up. I hope Ed is right.

Thank you.

We've got time for one more question, please, and then we'll end the call with Ed's remarks.

Darko Mihelic, Cormark Securities.

Okay, Rudy, I'm going to sneak in two. Tim, real quickly, I've heard some concern that appraisal values in Canada -- some people are nervous about them. Can you discuss that, have you made any changes at TD?

And then my second question, also for Tim, is it looks as though deposit rates in the GIC market are spiking in the short end. It looks like TD might be one of the leaders in there, especially in the broker market. I'm wondering if you can talk to that as to why you would do that. And secondly, what impact if any that could possibly have on you.

I'll take the first question on the appraisal values in Canada. In some of the hotter markets, I guess Vancouver and Toronto, we are seeing -- we are not seeing them -- they're slightly above maybe purchase prices, but not wildly above. And we've always followed a policy of financing against the lower of the purchase price or the appraisal.

And the other thing that we follow is we've always followed a sliding scale, which protects you against inflated values at the higher end, meaning that we will lend 80% up to CAD900,000 but beyond that we would only lend 50%. So if you take a CAD2 million house you get a loan to value of 56% under the sliding scale. So we are really not seeing a lot of it, but we feel we have -- our existing policies would protect us against that.

On the term pricing in the broker market, I'll take that one away. I would say our general practice is that we want to make sure we price appropriately in term products to keep franchise customers rather than broker customers, because we are quite comfortable with our funding position generally. So if we are overpaying for deposits right now, then that's something I don't need to do.

Okay, I think -- sorry, there's one more question in the room, so Michael, over to you.

So with Ally in the US selling its Canadian operations and your interest in adding assets, what's the likelihood or interest that you could have in their Canadian auto receivables? And do you expect there to be a lot of competition for those receivables?

So, as you know, Michael, we don't comment on acquisitions, so I'm not going to change that policy today.

Okay. So I guess that concludes the questions very abruptly. (laughter) Anyway, over to Ed for final comments.

Well, obviously, we are both happy with the quarter and happy with the first half. And I think our outlook and our strategy remains pretty much the same. We like our business mix, we like our model, but we also recognize the economic and regulatory headwinds. And we get paid to try and make our earnings target, and that's what we intend to do.

Great. Thank you very much, Ed, and that concludes the second-quarter call. So thank you very much for attending or listening on the phone. Thank you.

Ladies and gentlemen, that does conclude our conference call for today. Thank you for participating. Please disconnect your lines.