Toronto-Dominion Bank (TD) 2015 Q1 法說會逐字稿

Welcome to TD Bank Group's First Quarter 2015 Investor Presentation. My name is Rudy Sankovic, and I'm head of Investor Relations for the bank. We'll begin today's presentation with remarks from Bharat Masrani, our CEO; after which Colleen Johnston, the bank's CFO, will present our first-quarter operating results. Mark Chauvin, our Chief Risk Officer, will then offer comments on credit quality, after which we will entertain questions from those present, and from pre-qualified analysts and investors on the phone.

Also present today to answer your questions are Tim Hockey, Group Head Canadian Banking, Auto Finance and Wealth Management; Mike Pedersen, Group Head US Banking; Bob Dorrance, Group Head Wholesale Banking; and Riaz Ahmed, Group Head Insurance, Credit Cards, and Enterprise Strategy. Riaz is also responsible for the capital and treasury activities at the bank.

Please turn to Slide 2. At this time, I would like to caution our listeners that this presentation contains forward-looking statements. There are risks that actual results could differ materially from what is discussed, and that certain material factors or assumptions were applied in making these forward-looking statements. Any forward-looking statements contained in this presentation represent the views of management, and are presented for the purpose of assisting the bank's shareholders and analysts in understanding the bank's financial position, objectives, and priorities, and anticipated financial performance. Forward-looking statements may not be appropriate for other purposes.

I would also like to remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results to assess each of our businesses, and to measure overall bank performance. The bank believes that adjusted results provide readers with a better understanding of how management views the bank's performance. Bharat will be referring to adjusted results in his remarks.

Additional information on items of note, the bank's reported results, and factors and assumptions related to forward-looking information, are all available in our Q1 2015 Report to Shareholders. With that, let me turn the presentation over to Bharat.

Thank you, Rudy, and good afternoon. I want to comment briefly on Q1 before I turn it over to Colleen for a more detailed review of our results. Overall, I'm very pleased with the quarter.

Earnings per share were up a solid 6% year over year, with all of our businesses performing well. Today we announced a CAD0.04 increase to our dividend, up a healthy 9%, reflecting the Board's confidence in the stability and strength of TD's long-term earnings power. This increase should move our pay-out ratio closer to the mid-point of our 40% to 50% target range. On the capital front, our common-equity Tier 1 capital position remained strong at 9.5%.

Let's take a closer look at our financial performance. TD's earnings of CAD2.1 billion speak to the strength of our business model, diverse business mix, and organic growth engines, which were evident in the healthy loan and deposit growth we delivered on both sides of the border. The strength in both credit and the US dollar were also helpful contributors to our financial performance.

Our Canadian retail business delivered year-over-year earnings growth of 8%. This result was fueled by good volume growth in our personal, commercial, and wealth businesses. In fact, just recently TD mutual funds exceeded CAD100 billion in AUMs. We also benefited from great performances in credit cards and insurance.

Strong results in our US retail segment led to a year-over-year increase in earnings of 15%. Good organic growth in loans and deposits, strong credit quality, good expense management, and improved margins versus the fourth quarter contributed to an impressive start to 2015.

However, we continue to expect modest growth in the US for the full year. We expect credit to normalize. Our NIM for the full year will be down compared to 2014, and we anticipate lower securities gains. Our wholesale bank had a solid quarter, with good trading results in a volatile market, offset by lower fee-based revenues.

Let me now turn to some of our major focus areas for this year. TD's strategy is and has been about growth. We have delivered on this goal in the past, and we intend to do so in the future. This quarter demonstrated the strength of our growth engines, but major external forces like technology innovation, regulatory changes, and the sustained lower rate environment impact our business and industry. We are evolving our strategies to adapt to these changes.

Let me share a few examples. We're making great slides in advancing our digital and mobile capabilities, including modernizing our technology infrastructure to drive agility and improve efficiency. Equally important, these efforts will better serve our customers' needs across all of TD's distribution networks.

We continue to extend our service and convenience model into our digital channels. Mobile deposit -- remote deposit capture and image-enabled ATMs on both sides of the border are great examples. We're also piloting different branch and store formats, working to both optimize our retail distribution network, and adapt to changing customer preferences.

Additionally, we are enhancing our products to better meet the needs of our customers. The recent launch and success of our new flex line HELOC product in Canada is a great example. In the US, we are very focused on increasing our customer's share of wallet by proactively offering new products and services. All these initiatives will help TD to be more responsive to our customers' evolving needs.

We're also adapting to a world where many new competitors are unencumbered by legacy systems, and using their speed to compete and win. As such, we are working harder to become a fitter and faster organization. Our productivity focus is an important element of this initiative. I've said previously that we will re-double our efforts to increase our efficiency and streamline our cost base. While I'm satisfied with our expense performance so far, we know we have to do more, and we are.

We continuously review our Canadian and US retail distribution networks to ensure our branch and store locations are optimized. Last year we reviewed some of our corporate functions. Given our significant growth over the past decade, including integrating our acquisitions, we've expanded these reviews across the organization. They will take place over the balance of the year.

In particular, we are focusing on streamlining our executive and corporate management structures outside of our client-facing areas. We are working hard at modernizing our processes and infrastructure for better efficiency and effectiveness. Initiatives range from digitizing processes, with a view to eliminate duplication, to leveraging our North American platform to drive cost savings.

Finally, we're adding more discipline to our expense processes and practices, with particular focus on all discretionary spending, big and small. This is simply a reality of today's slower-growth world.

All these initiatives are being carried out in a systemic and thoughtful way; the TD way. We want to announce our ability to compete and win without sacrificing long-term growth prospects for short-term gains. It will take some time before we see a meaningful impact to our expense base. But we expect to see an improvement in our efficiency in the medium term.

Looking ahead, a number of economic headwinds will continue to challenge the industry in 2015. I'll talk about two that are top of mind with just about everybody; oil prices and interest rates.

The Bank of Canada has said the decline in oil prices is unambiguously negative for the Canadian economy. We agree. However, the impact will be uneven. Oil-producing provinces will bear the brunt of the drop, while others including Ontario will likely benefit from a weaker dollar and stronger export demand.

From a credit perspective, we believe our direct exposure to oil and gas producers is manageable. We're not seeing any signs of deterioration, though it is early days. From a business perspective, we believe TD is relatively well placed, given our higher concentration of business in Ontario.

In the US, the drop in oil prices is equal to a long-awaited fiscal stimulus, leaving more money in the hands of consumers. Lower energy prices are likely to be a positive for the US, which is already in the midst of a recovery. Again, I think TD is well positioned to benefit from an improving US economy, particularly in our markets along the Eastern seaboard, where oil prices should help drive future growth.

On the interest rate front, during the quarter we saw a flattening of the yield curve, and material drop in both short and long rates. The 30-day BA rate dropped by 27 basis points, and the five-year swap rate by 84 basis points. The impact of these declines will place continued pressure on our margins in Canada.

Overall, 2015 will continue to be a tough and uncertain environment, with increased regulatory expectations, and intense competition on both sides of the border. However the fundamentals of our business remain strong, and I'm confident in the resilience of our model. Our Canadian retail business continues to deliver good results, and is well positioned for future growth.

Our US franchise continues to deliver peer-leading loan growth, and will further benefit from our exposure to a robust US recovery. Our wholesale business continues to grow by extending its franchise model into the US to take advantage of our strong retail and commercial presence.

To conclude, I'm confident that our strategy, brand, and great people will continue to create value for our customers, grow our franchise, and build an even better bank. Thank you very much. Now I'll pass it on to Colleen.

Thanks, Bharat, and good afternoon, everyone. Let me take you through our results. Please turn to Slide 4.

Turning to Q1, we delivered adjusted EPS of CAD1.12, up 6% year over year. The quarter reflected strong growth in our retail businesses, with record results on both sides of the border, solid wholesale performance, and a higher corporate segment loss. The quarter benefited from continued credit favorability and a strong US dollar.

Adjusted total revenue increased 4% year over year, or 2% excluding FX, led by strong loan, deposit, and wealth asset growth, the addition of Aeroplan, and better insurance performance. The strong growth this quarter was partially offset by margin compression, reduced security gains, and lower corporate segment revenue. Adjusted expense growth was 7% year over year, or 3% excluding FX. Half of this quarter's expense growth was due to business initiatives, including regulatory projects. The remaining expense growth was related to base expenses, partly offset by productivity savings.

As Bharat mentioned, we announced a CAD0.04 dividend increase this quarter, up 9%. Overall, a solid result for the Bank this quarter.

Please turn to Slide 5. This slide presents our reported and adjusted earnings this quarter, with the difference due to one item of note, which you have seen before.

Please turn to Slide 6. Canadian retail delivered a record quarter, with adjusted net income of CAD1.4 billion, up 8% year over year. The increase was driven by continued good loan, deposit, and wealth asset growth, good credit management, and strong growth in insurance and credit card earnings, including a full-quarter impact of Aeroplan.

Loan and deposit growth was good this quarter. Total loan growth was 6% year over year, with real estate secured hedging volume up 4%, and business lending growth up a strong 9%. Card growth also remained strong at 9%, driven by Aeroplan, while auto lending grew 15%. Deposits increased by 5%, due to strong growth in core checking and savings accounts, up 9%, while business deposits were up 8%.

Margin was down 4 basis points sequentially, primarily due to competitive pricing, a decline in refinancing revenue, and the low rate environment. We expect margins to trend down slightly for the balance of the year, reflecting the impact of a continued low-rate environment.

Credit performance continues to be favorable, with the quarter also benefiting from a debt sale. PCL and personal banking was down CAD29 million. Business banking PCL decreased CAD11 million, mainly driven by higher recoveries.

Adjusted expenses were up 8% year over year, primarily due to higher employee-related costs, including revenue-based variable expenses and growth initiatives. These increases were partially offset by productivity gains. Overall, a great start to the year for Canadian retail.

Please turn to Slide 7. US retail excluding TD Ameritrade had earnings of $457 million, up 15% year over year. Results for the quarter reflected strong organic growth, favorable credit, and good expense management, partially offset by margin compression and lower security gains. Revenue decreased by 1% year over year, as strong volume and deposit growth was offset by lower gains on sale of securities, lower Target revenues, and lower margins partially driven by competition.

Excluding the decline in security gains and lower Target revenue, US retail revenue rose 2% year over year. Target's contribution to earnings was relatively consistent year over year. The lower Target revenues were largely driven by an accounting re-classification.

Average loans were up 9% year over year, with a 3% increase in personal loans, and a 15% increase in business loans. Average deposits increased by 5%. Margin increased six basis points quarter over quarter, driven primarily by an increase in deposit margins as a result of treasury actions, partially offset by loan margin compression. We are forecasting some variability in margins over the course of the year, but we expect the full-year margin to be roughly at the same level as Q4 of 2014.

PCL decreased 31%, due primarily to lower losses in auto lending and real estate secured lending. Expenses were down 3% versus last year. The decrease was driven by strong cost control, a positive pension item, and lower Target revenue share. Earnings from our ownership stake in TD Ameritrade in US dollars were up 22% year over year, due mainly to increased TD Ameritrade earnings, which rose 10% versus last year. All in, a strong performance in the US.

Please turn to Slide 8. Net income for wholesale was CAD192 million, down 17% compared to a strong first quarter last year. Revenue was down 1% year over year, as strong equities and FX performance was offset by lower fixed-income trading. Non-interest expenses were up 5%, driven by higher initiative spend, and the impact of foreign exchange. ROE this quarter was 13%, reflecting higher allocated capital to the segment, and foreign exchange.

Please turn to Slide 9. The corporate segment posted an adjusted loss of CAD143 million in the quarter, compared to a loss of CAD38 million in the same period last year. The elevated loss was the result of a prior-year gain on sale of TD Ameritrade shares of CAD38 million, the impact of treasury activities and funding mix, including lower preferred share recoveries; and lower favorable tax items. Compared to the prior quarter, adjusted net income improved CAD22 million.

Please turn to slide 10. Our Basel III common equity Tier 1 ratio was 9.5% in the first quarter, versus 9.4% in the previous quarter. The increase reflects solid organic capital generation, partially offset by actuarial losses on employee benefit plans, due to the decline in long-term interest rates. Overall, we continue to remain well positioned for the evolving regulatory and capital environment. With that, let me turn it over to Mark.

Thank you, Colleen, and good afternoon, everyone. Please turn to Slide 11. Strong credit performance continued across all portfolios during the quarter. Provision for credit loss rates are at cyclically low levels, with new impaired formations and gross impaired loans remaining stable quarter over quarter, when adjusted for the weakening in the Canadian dollar. The provision for credit loss rate decreased to 29 basis points in the quarter, down 4 basis points from Q4, and 11 basis points year over year.

With respect to the oil and gas sector, a series of stress tests were completed during the quarter to determine the potential impact of sustained low oil prices on the Canadian and wholesale business segments.

The tests indicated that sustained low oil prices are not expected to have a significant impact on the bank for the following reasons. First, lending within the oil and gas industry is governed by disciplined underwriting standards, based on strong collateral positions. Second, unsecured consumer credit exposure to the region's most impacted is less than 2% of the bank's total Canadian consumer credit exposure. Third, the bank's higher concentration in Ontario, and lastly, the positive impact of low oil prices on our Ontario and US businesses. As a result, I don't believe the sustained low oil prices represent a material risk to the bank.

Looking forward, I'm satisfied that credit quality across the portfolio should remain strong over the balance of the year based on current economic forecasts. Now, I'll turn the presentation back to Rudy.

Thank you, Mark. We'll now open it up for questions. To give everyone a chance to participate, please keep to one question, and then re-queue if there's time. For those participating in person, can I ask you to identify your name and firm before asking your question. Before ending the call today, I will ask Bharat to offer some final remarks.

So, why don't we get started in the room? John, you're the only guy in the room. (laughter)

John Aiken with Barclays. Mike, I was hoping to pick on you first. I know it's a little bit old news with the tick-down that we saw in the number of branches in the US. I was wondering if you could update us in terms of what the plans are for de novo expansion within your operations but also address a couple points that Bharat touched upon in his prepared commentary talking about managing expenses in this type of environment, mirrored with the potential growth that we're going to see in the US economy at some point?

Lots there. I think stats this quarter were that we opened three and we closed 21 stores. You will see us do both, and the numbers will go up and down by quarter. We are still of the view that opening stores in great locations is a fantastic way to ensure continued customer acquisition and continued sales.

Our sales activity, our customer acquisition activity, is still about 85% through its stores. It's changing, but it's still really important. We'll still do that. But clearly given what's going on in terms of digital adoption, mobile, and so on, where we're seeing huge transaction increases, both on the service and the sales side.

For example, 10% of our checking accounts are now sold through mobile and digital. We are also continuing to optimize our store network. We'll have more to say on this as the quarters evolve, but we will continue to do both.

On expenses, I was obviously pleased with the performance this quarter. I'd say things did go our way a bit. But even if you ignore those things, we were at least flat year over year on expenses. I think that's very pleasing, given that we're investing in stores, investing in technology, digital, regulatory changes, and so on.

Productivity is a big focus for us going forward. It involves everything from optimizing our distribution capabilities across digital and physical, to looking at end-to-end processes, to looking at the kinds of organizational issues that Bharat alluded to, et cetera, et cetera.I'm sorry there was one more thing, which I didn't actually catch.

The outlook for growth on the eventual rise in the US economy, in terms of what can we expect in terms of relative deployment of capital within the region?

We're obviously very bullish on the US in the medium to long term. In the short term it's a difficult environment because of the things we talked about before -- in TD's case, the year-over-year securities gains effect, the potential normalization of credit, and the year-over-year margin.

We still think, though, that we can deliver modest growth this year, and that we'll continue to invest in the business in digital, in technology, in improving our store network. Obviously, any rate increases are upside to all of that.

Thanks, Mike.

Thanks, John. Operator, why don't we go to the phones, please?

Meny Grauman, Cormark Securities.

Hi, good afternoon. Bharat, you talked about how it will take time before you see meaningful impact on expenses. I just wondered if you could elaborate a little bit in terms of why that's the case?

As a related follow-up, if you needed to, could you speed that up? What signals would you look for in order to give you the sign that it would be appropriate to speed that up?

What I meant by these things take time, in the sense that you want to make sure it's done in a thoughtful way. We have a fantastic franchise. These are opportunities that are natural for us in the sense that we've grown tremendously over the past few years. We've acquired a lot of companies, a lot of businesses. We've been integrating those. But there comes a time where we can optimize our structure so that we are more effective in dealing with our customers, get closer to our customers, et cetera.

For us, this is -- the effectiveness part is as important as anything else in it. We want to do it in a thoughtful way. Frankly, our culture is such that we want to ensure that when we do it that every stakeholder of ours is well informed, and we're doing it in a manner that is consistent with our strategy and what we stand for.

I don't see this as an immediate need for us. We've been very clear that we are not going to make short-term goals just to meet a particular number. This is franchise building for us. This is how we sustain our model. We feel the pace at which we are going is most appropriate.

The second part of your question, yes, we are an adaptable company, obviously. That is a key hallmark of TD. If circumstances change, obviously we will look at what else we can do to make sure we're adapting. But I'm pretty happy with the pace at which we are going, and I think it's a good thing for our Company.

Thank you.

Thanks, Meny. Next question, operator?

Steve Theriault, Bank of America Merrill Lynch.

Thanks very much. I'd like to ask a couple questions on cards for Riaz. Riaz, next quarter the year-on-year comps get more meaningful within Aeroplane in now for a full year. It may be timely to provide us with an outlook on how you see that book growing? We've had indications from a couple of other banks that card growth may be picking up a little. Is that true at TD?

You acquired a number of non-TD customers with the purchase. Can you update us on how much success you've been having cross-selling to those acquired customers who weren't previously TD customers, and which products you're having the most success with?

Yes, Steve. I'd say in terms of the outlook, I'm very pleased with where our sales volumes are going. I think we acquired a number of assets, and are in the middle of now optimizing our infrastructure and our model. I think we are seeing our performance in both our historic card business, as well as Aeroplan continues to exceed our expectations, and I'm pretty happy with where that's at.

In terms of the acquisitions of the direct business, those are -- and the private label portfolios -- it is not that easy necessarily to franchise those customers to other products. I think we continue to take a look at what we can do on that front; but that is not what the direct-mail model generally does, and that is not usually what the private-label model does, either.

But as you saw today, we did announce an extension of our program agreement with Target. That should tell you that we're very happy with that business model, as is Target. We're quite happy to have it extended, and gives us more confidence to continue to invest in the program. Particularly to your point on the co-brand side of that program, we should be able to see a better performance from here on.

When I hear you say optimizing the infrastructure and the model, should I take that to mean there's still a little bit of time where you're going to take a pause before you accelerate that process, or not necessarily?

Well, I think in the post-conversion period, just before we entered our conversion of the direct mail MBNA business, we had stopped marketing. Then in the post-conversion stabilization period, our marketing haven't picked up. I think yes, you would continue to see some softness; but I'm very optimistic we'll be able to bring that up as our marketing campaign starts kicking back in later on this year.

You mentioned Target earlier in your remarks. I noticed the Target balances were up for the first time in a little while. Is that getting back on track, and is that momentum sustainable?

Yes, it is getting back on track; and yes, I think it is sustainable. I think with the extension of the program, it gives both parties more confidence to invest in it. I think you'll see as those investments are made that the program should expand nicely.

Thanks for all that color.

Thanks, Steve. Operator, next question, please?

Peter Routledge, National Bank Financial.

Hello, thank you.

Two of your peers have now reduced their minority stakes in wealth managers. The argument, or at least one of the rationale for doing so, is it's very expensive in terms of capital. Are you -- how do you think about that with respect to Ameritrade, and your minority stake in Ameritrade?

Peter, this is Bharat. We're very happy with our stake in Ameritrade. This has been central to our wealth strategy for many years. It continues to perform well. I can't comment on what others are doing, but we are very happy, and this is a key investment for us.

It's more than just an investment. It plays a very important role in our wealth strategy going forward in the US, as well. Very happy with our positioning.

My back-of-the-envelope analysis would be if you looked at the earnings and contribution, both direct and indirect you get from your Ameritrade alliance relative to the capital that would be freed up, if you divested yourself entirely of it, it seems to me the ROIC isn't that great. Am I wrong in that assessment?

You can look at ROIC in many different ways. You can look at it at a point in time. For us, this is very strategic and important in our overall business mix. We've been in it for many decades, and feel that it provides great value for us.

The returns you are talking about, I don't know what inputs you're using, Peter. But we are happy with not only the strategic positioning, but the returns we are getting.

Last time I checked, TD Ameritrade was trading at CAD36. That would put the market cap at about CAD20 billion. That would not be a bad return for any investment these days.

The point I was making is if you were to divest it, that would be a heck of a gain, and a heck of release of capital for TD. That's just my point.

Peter, it's Colleen. Maybe I can just clarify. In terms of our total return, we have our direct contribution from earnings, but also earnings on the sweep deposits in the US retail bank. Our returns overall are in the mid-teens, so we're quite happy with our returns in that business.

That's on the allocated capital to --?

Correct.

Yes, okay. Quick technical question, in your Basel III common equity Tier 1, I noticed there was a big spike in the deduction for the cash flow hedge reserve. What's driving that? Is that just currency, or something else?

Well, that's driven -- yes, and on the interest rate side, as well.

Okay, does that settle back down, or is that going to be a recurring drag through 2015 on capital?

There's only certain parts of that number that actually directly affect capital, not all of it. I could take you through the details separately, in terms of the piece that does and doesn't.

Okay. Yes, let's take it off line.

Thank you. Peter, could we have the next question please?

Robert Sedran, CIBC.

Hi, good afternoon.

Colleen, you mentioned the growth in auto lending in Canada. I don't know if this is a question for risk, or if it's a question for the business line, but a few of your competitors have noted that they've been under-emphasizing that business because they don't like the risk profile. How does the bank feel about the risk-reward in that sector? Has it been deteriorating, and what might make you de-emphasize that business as well? What conditions would you need to see?

Rob, it's Tim. From our point of view in the US, there's no question there has been some degradation in the US industry, but frankly our strategy is almost contrary. We've actually gone up market even beyond our original business plan into the prime and the super-prime space. I'm just looking at some numbers. I can see our credit scores have gone up. Our leverage has gone down.

The average term has gone down. Our 30-day delinquency rates are dramatically lower than the industry. I get very much the optics around what's happened at the frothy end of the auto market, but we're not participating at that level. We're actually quite comfortable at the space we're in.

I was actually coming more from the Canadian angle, Tim. Is it a similar story in Canada?

We're not seeing anywhere near the amount of change in the profile in the prime or the near-prime space. There's been more activity and entrants into the non-prime space. A number of years ago there was a very small number of players.

You have to remember in the competitive non-prime space in Canada, it gets lots of participation at the best times in the market, and all of the participation from competitors dries up. We're a consistent player. We're very comfortable with our asset quality and our business performance. But right now there are new entrants in the non-prime space; but again, we're quite comfortable with our credit metrics.

The Canadian growth rates you're seeing, you're comfortable with, and you are comfortable that they're sustainable?

Absolutely, and we're taking share.

Thank you.

Thanks, Rob. Next question, please.

Gabriel Dechaine, Canaccord Genuity.

Good afternoon. Colleen, can you dumb the accounting down for me a bit, just to explain the impact that you were referring to on your revenues and on the expense line from Target? You said year-over-year the profit wasn't that much different, but somehow it doesn't work out that way due to some accounting?

Yes, Gabriel. Stepping back on it, the way the accounting works for Target is that we include 100% of the revenues, 100% of the credit losses in our P&L. The way we square the equation is through the expense line, which is essentially the revenue share, and those lines will move.

The accounting classification that affected us this quarter was essentially a move between credit losses and revenues, which gives the appearance that revenues are down more than they are. When you net the various lines out and take some of our own specific costs, the net contribution is relatively consistent. But because, again, of the gross-up factor, it can create some distortions in the individual P&L lines. That's why we like to call it out when it makes a difference.

Okay, maybe we'll take that one off line. But from an expense standpoint, it was cited as one of the reasons why expenses were down, less profit share to Target? What would the --

That's right.

What would the expenses have looked like if not for that factor?

If not for that factor and the pension credit, expenses would have been relatively flat on a year-over-year basis in the US, which I think is a terrific result when you consider the investments that we're making in the business, obviously the bar being raised on everything we're doing in our operations there. Obviously, a great sign that the productivity initiatives are working, and I know this has been a huge area of emphasis for the US retail bank. I think a great result.

I agree with that. Mike or Colleen, on the -- let's say the Fed raises in Q4, calendar Q4, whenever it is. Would we see a material pick-up in your US margins in 2016, all else equal, or do we have to wait a little longer than that?

If you start, Colleen, I can finish. (laughter)

What we've talked about in the past is we've talked about various scenarios. The one we cite the most often is a 25-basis-point increase. But that's really happening across the curve. Where we've talked about the first-year impact of being about the CAD300 million, that's not strictly in the US. That's split between Canada and the US about 60/40.

On that specific question, as rates rise we would start to see some benefits; but if only the short end moves, we wouldn't see a benefit of that size. I don't know whether Riaz wanted to weigh in from a treasury standpoint. Anything to add?

It's Mike. I was just going to say that as we've said before, roughly speaking, the benefit to the US is proportional to our share of deposits within the bank. Your specific question, I'll just add one thing.

We've said to you that we've effectively locked in our 2015 deposit margins. If rates were to stay where they are, there's some downward pressure. A 25-basis-point increase would mitigate that; but notwithstanding that, it would clearly be positive for us.

The lock-in of the deposit margins, that's just this year, not next year?

That's what we're saying at this point, right.

Okay. Thank you so much.

Thanks, Gabriel. Could we have the next question, please?

Sohrab Movahedi BMO Capital Markets.

Sohrab, are you on the line?

Sumit Malhotra, Scotia Capital.

Thanks, and good afternoon.

My question is a two-parter for Tim Hockey. First, in the Canadian PNC segment, it didn't look like we saw the normal seasonal decline in the core expense line from Q4 to Q1 that we've -- that's been the normal pattern for TD Canada Trust. Can you talk a little bit about the project activity that's been impacting that line, and whether we are going to see a more quote-unquote normalized expense growth trend, especially given some of the revenue head winds you've talked about in the upcoming quarters?

Sure. If I take a look at the Canadian retail expense growth, no question that the first quarter was elevated per our normal run rate. There's a number of reasons for that. Part of it is actually an elevated level of project spend.

Part of it is timing. You might think that's a bit unusual, because it's not normal. We tend to have a bit of a low investment in Q1 and then ramping up to Q4, as everybody knows. In actual fact, we've got quite a bit of project activity you alluded to.

I'm not going to give specific examples, but we're quite excited about many of the things that will be launched in the spring market -- new customer enhancements; products, for example. But what I can assure you is that year-over-year gain will be drifting down throughout the rest of the year, and this was a bit of an anomaly.

You're starting off a little bit behind the eight ball, so to speak, but do you think positive operating leverage in this business line on a full-year basis is a reasonable goal?

That's our goal.

Second question, also for you, Tim, is on the pure wealth portion of the business. We see on the pure wealth side earnings flat, on both the quarter over quarter, and more surprised to see on a year-over-year basis. Despite choppiness recently, I think equity markets over the course of the year have still been conducive. We see that in some of your individual lines like the mutual fund line. Specifically for wealth earnings, is that more of an expense issue in your view, as well, or is there other parts of the revenue line that are holding that business back?

Yes, it's actually many moving parts. If you look at the underlying fundamentals, as you mentioned, we're actually thrilled with the performance and the asset growth, 14% up year over year. We mentioned the high-water mark that we've reached on the mutual fund business. In fact, our long-term fund sales in the quarter, for example, were up 63% year over year. We're accelerating that business.

There's a couple reasons for why the actual headline 1% year-over-year number is a bit anomalous. And that is we had some positives in the first quarter of last year. So we had a high jump-off. We have, as you know, an over-weight in the direct investing business. Notwithstanding trades were up, the revenues for trades due to mix is a little bit down. New issuance, for example, for our advisory businesses were down in the quarter. So, net-net, the 1% sort of belies the underlying activity.

By the way, some of those investments we're talking about in projects are directly on the platforms in our wealth business. They'll come to be launched in the spring, as well. At the end of the day, we look at that and we think while 1% is a disappointing financial number, we're still on track to have quite a manageable shot at getting to double-digit earnings for the full year in our wealth business.

That's helpful. Thanks for your time.

Thanks, Sumit. Next question, please?

Sohrab Movahedi, BMO Capital Markets.

Hello. Sorry about that. Technical difficulties at this end.

Bharat, you've mention that obviously focusing on expenses, feeling adequately capitalized. As the outlook improves, as you're able to pull on the levers you're pulling on, where do you think the ROE of the bank can go?

We do have a -- Sohrab, we do have a fantastic business mix. As important as the mix we have is the growth engines. We feel as long as we are organically growing the bank, which we are on both sides of the border, and given how we measure capital, that should be additive to our capital. Now there will be bumps quarter over quarter depending on what happens with the FX in Bob's business, or whatever.

But overall we feel pretty good about as long as we are organically growing the bank, we have more customers today than we had yesterday, and hopefully we'll have more tomorrow. If we keep on doing what we've been doing for many years, I see we'll get decent returns from these activities. Feel comfortable with that. I think if the environment were to go hugely positive, obviously that would be hugely positive to us, as well. In the mean time, it's not as if we're not focused on what really matters. It's fundamentally growing the bank. Growing the bank means better returns for our shareholders.

Okay. Maybe specifically to that for Mike, on Page 7, the US retail ROE as you've reported is 8.5%. These are with obviously abnormally low credit losses, but also tough margin environment and so on. When you think over the next, I don't know, 12 to 18 months, maybe three years, something like that, where do you think you -- what are you aspiring for, as far as ROE in the US is concerned?

Well, our current operating ROE is well into the double digits. We think we can continue that and improve it. As we grow the business, obviously the goodwill overhang that we have will slowly dissipate. I think the things we want to prosecute, if you will, to improve that ROE are things like the productivity agenda I spoke to earlier.

Obviously, in addition to continuing to grow the franchise in terms of new customers, and we're doing very well there. Our household acquisition this year was 3.5%, which is way higher than the industry. But we also have this big share-of-wallet opportunity, given that this is something we're starting later than other banks. As I've said before, we're making tremendous progress on that, and I think we'll continue to.

One also does hope that eventually rates will start to rise a bit, which will help. I think there are lots of levers we have at our disposal to positively affect our operating ROE. And in combination with the fact that we'll grow organically and goodwill becomes smaller, that should help us going forward.

Thank you very much.

Thanks, Sohrab. Next question please?

There are no further questions at this time. You may continue.

Thank you very much. Bharat, I'll turn it over to you for final remarks.

Thanks, Rudy. Very pleased with the quarter. Very pleased with the dividend increase that we announced. When I look out into the future, I'm very happy with our positioning, business mix, and geographic diversification that we have in our businesses. Looking forward to make sure that we continue to perform in the appropriate way, which is the TD way.

I should mention that I couldn't be more proud of our 85,000 TD bankers around the world who continue to deliver for our shareholders on a consistent basis. Thank you for that. With that, Rudy, I will pass it back to you.

Thank you so much. With that we will end the meeting, and thank everyone for joining us today. Thank you very much.

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your lines. Thank you, have a good day.