Toronto-Dominion Bank (TD) 2016 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to TD Bank Group's first-quarter 2016 investor presentation. Please be advised that this call is being recorded. I'd now like to turn the meeting over to Ms. Gillian Manning, Head of Investor Relations. Please go ahead.

Good afternoon, and welcome to TD Bank Group's first-quarter 2016 investor presentation. My name Gillian Manning, and I'm the Head of Investor Relations at the Bank.

We'll begin today's presentation with remarks from Bharat Masrani, the Bank's CEO, after which Riaz Ahmed, the Bank's CFO, will present our first-quarter operating results. Mark Chauvin, Chief Risk Officer, will then offer comments on credit quality, after which we will invite questions from pre-qualified analysts and investors on the phone. Also present today to answer your questions are Teri Currie, Group Head, Canadian Personal Banking; Mike Pederson, Group Head, US Banking; and Bob Dorrance, Group Head, Wholesale Banking.

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

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

Additional information on items of note, the Bank's reported results, and factors and assumptions related to forward-looking information are all available in our Q1 2016 report to shareholders. With that, let me turn the presentation over to Bharat.

Thank you, Gillian. And thank you, everyone, for joining us today. Q1 was a good quarter for TD. We demonstrated our ability to grow earnings in a challenging environment, with net income up 6% from a year ago to CAD2.2 billion, and earnings per share up 5% to CAD1.18.

Our retail businesses performed well, as organic growth, expense discipline and a stronger US dollar helped offset the impact of higher taxes and credit provisions in line with expectations. Our wholesale business had a tougher quarter due to difficult markets. Our Basel III Common Equity Tier 1 ratio ended the quarter at 9.9%, and our leverage and liquidity coverage ratios remain strong.

Reflecting these strong fundamentals, we declared a CAD0.04 dividend increase today, taking our dividend to CAD0.55 per share, an increase of 8%. Good news for investors. We also completed the share buyback program we announced last quarter, repurchasing 9.5 million shares for cancellation to offset dilution from our dividend reinvestment program and issuance related to stock options. Overall, I'm pleased with these results which reflect good execution under demanding conditions.

Turning to our businesses, Canadian retail net income rose to CAD1.5 billion this quarter, up 4% from a year ago. Our banking and wealth franchises performed well, benefiting from higher volumes, rising fee income and tightly managed expenses. Personal banking delivered record growth in mortgage originations and checking account balances.

Our wealth business grew net assets by more than CAD10 billion, despite volatile equity markets. And we completed the rollout of check imaging across our Canadian branch network, an innovation from our US franchise that is improving the customer experience and reducing costs. As expected, these good results were partly offset by higher provisions for credit losses, further margin compression due to prolonged low rates, and higher taxes.

Our US retail segment generated record earnings of $470 million this quarter, an increase of 3% in US dollars and 20% in Canadian dollars. Revenue was up 5% year over year, reflecting strong growth in loan and deposit volumes as we continued to take share. In particular, we saw continued good momentum in household growth with our rate of customer acquisition again outstripping the industry.

Other favorable factors included a sequential increase in margins and strong expense management across the board. While provisions for credit losses rose, this was largely due to an allowance build to reflect volume growth.

Wholesale banking net income was CAD161 million, down 16% from a year ago. Higher fee-based revenue from M&A activity and corporate lending was offset by reduced equity trading volumes and lower security gains. While domestic origination markets were subdued, our US platform continued to make good strides, with TD Securities named co-lead on several marquee transactions.

Looking ahead, our results this quarter highlight the challenges we will face during the balance of the year and how we will meet them. We have signaled for some time that we expected a normalization in credit conditions. That became apparent this quarter. But while provisions rose, this was due in large part to volume growth, prior-period recoveries, and the negative impact of foreign exchange.

Underlying loss rates remain acceptable. We did experience some negative credit migration in oil and gas portfolios, and we added to reserves accordingly. We continue to monitor our oil and gas exposures closely and remain confident that any losses will be manageable, given the small size of this exposure relative to our balance sheet.

Mark will address credit in more detail in his remarks, but at a high level, credit quality remains strong across our Canadian and US portfolios, and we are comfortable that we are adequately reserved. More generally, the heightened focus on credit and falling commodity prices reflects growing concern that fiscal and monetary authorities will be unable to prevent a slowdown in the global economy. The resulting increase in risk aversion has unsettled financial markets and shaken confidence in the outlook.

While this volatility can be unnerving, it is important not to lose sight of the fundamentals. TD's business model is strong. Our retail focused strategy and deposit-rich balance sheet have proven their resilience and continue to position us well to earn through the challenges ahead. Let me tell you how.

First, while resource-rich provinces in Canada are struggling, cheaper energy prices and a falling currency are giving a lift to export-oriented manufacturers. This is boosting economic growth and employment in central Canada, where TD has an outsized presence. We expect to continue generating good organic growth in these markets, leveraging the power of One TD to meet our customers' banking, wealth management and insurance needs.

Second, we will draw continued strength from our sizeable US earnings base. The appreciation of the US dollar has increased our earnings in Canadian dollar terms. It also reflects the prior improvement in the US economy.

While the instability in financial markets has sparked concerns that the US recovery may falter, steady gains in job creation and wage growth are supporting consumer spending, and business investment is holding up well, particularly along the Eastern seaboard, where we are based. Our retail franchise will benefit from these conditions as well as our ability to consistently take share. In this environment, our North American footprint is a significant advantage.

Finally, the hard work we did last year to manage our cost base has equipped us better to respond to volatile markets and rising competition from non-traditional players. Customer needs are evolving and long-term success depends on the ability to invest today in the products, delivery channels and technologies of tomorrow. By improving our productivity and streamlining our processes, we've generated savings that we are reinvesting to enhance the customer and employee experience and drive continued outperformance in our businesses.

Let me take a moment to highlight a couple of milestones that speak to these successes. In 2015, TD became the first Canadian bank to introduce touchscreen, image-enabled, envelope-free ATMs.

In December, TD Direct Investing regained the number one ranking among the Canadian banks in the Globe and Mail's annual online broker survey. Our redesigned web broker platform was recognized as best client website for delivering a more intuitive and personalized investing experience.

In January, we opened the TD Cisco Lab in Toronto, where a dedicated team will collaborate on FinTech solutions in areas including employee, mobility, the Internet of Things, contact center operations, and energy conservation. Together with the TD Lab at Communitech and our new Waterloo technology center, this latest hub further expands our innovation ecosystem.

And just this month, we launched an employee pilot for TD MySpend, a new mobile app that will help customers track spending in their personal and credit card accounts and manage their financial wellness in real time on their smartphones. You can expect to hear about more such achievements in the quarters to come, as we continue to grow our leadership position and deliver best-in-class customer service in the online and digital banking space, just as we have in our branches and stores.

To wrap up, I'm pleased with our first-quarter results and the discipline our businesses are showing. While the outlook remains uncertain, we are achieving profitable growth, staying within our risk appetite and continuing to adapt and innovate.

I'd like to thank our 80,000 employees across the globe for continuing to deliver for our customers and our shareholders. We have much to be proud of, and I'm confident that together we can build on this momentum in the year ahead. With that, I'll turn it over to Riaz.

Thank you, Bharat. Good afternoon, everyone. Please turn to slide 5. This quarter, the Bank earned adjusted EPS of CAD1.18, up 5% year over year. Canadian retail earnings grew 4%, and US retail earnings grew 20% in Canadian dollars and 3% in US dollars.

Wholesale earnings declined 16% versus Q1 in 2015. Adjusted total revenue increased 12% year over year, or 4% excluding FX and acquisitions, led by loan, deposits and wealth asset growth and higher fee income. Growth was partially offset by margin compression.

Adjusted expense growth was 12% year over year, or 1% excluding FX and acquisitions. Quarter over quarter, expenses declined CAD83 million on the same basis. The Bank posted operating leverage net of insurance claims of 4.3% for the quarter.

Please turn to slide 6. Canadian retail delivered net income of CAD1.5 billion, up 4% year over year, led by loan, deposit and wealth asset growth and higher fee-based revenue. The increase was partially offset by higher PCL and a higher effective tax rate.

Total loan growth was 6% year over year, with personal lending up 5%, and business lending growth up 10%. Deposits increased by 5% due to growth in core checking and savings accounts, which are up 10%. Business deposits grew 3%, and wealth assets were up 2%.

Margin declined 4 basis points quarter over quarter, primarily due to the low interest rate environment, competitive pricing, and some seasonal impacts, such as lower mortgage renewal revenue. We expect margins to remain under modest downward pressure, reflecting the interest rate environment and depending on product mix and competitive factors.

PCL increased 3% quarter over quarter, primarily reflecting higher commercial recoveries in prior quarters. Adjusted expenses were flat to quarter one of last year, and our efficiency ratio improved.

Please turn to slide 7. Our US retail bank posted record earnings of $470 million, up 3% from Q1 2015. Results for the quarter reflected revenue growth and expense management, partially offset by higher credit losses and margin compression from the prior year.

Total loan growth was 15% year over year, reflecting a 9% increase in personal loans and a 20% increase in business loans. Average deposits increased 9%. Margin increased 3 basis points quarter over quarter, reflecting higher deposit margins and positive balance sheet mix. Overall, absent interest rate changes, we expect margins to be relatively stable in 2016.

Credit losses increased quarter over quarter, reflecting increased allowances for commercial loan volume growth and lower recoveries this quarter. Credit quality remained strong. Expenses were up 1% year over year, reflecting higher volume and investments to support the business growth, partially offset by productivity savings.

Earnings from our ownership stake in TD Ameritrade increased 4% year over year, primarily reflecting higher asset-based revenue and reduced operating expenses, and partially offset by lower transaction-based revenue this quarter. Aggregate US retail earnings were up 3% year over year in US dollars and 20% in Canadian dollars.

Please turn to slide 8. Net income for wholesale was CAD161 million, down 16% versus quarter one last year. Revenue decreased 7% year over year, reflecting lower equity trading and lower security gains, partially offset by higher revenue in fee-based and fixed-income and currency businesses. Non-interest expenses were down 1%, due primarily to lower variable compensation and lower operating expenses, partially offset by foreign exchange translation.

Please turn to slide 9. The corporate segment posted an adjusted loss of CAD178 million in the quarter, compared to a loss of CAD143 million in the same period last year. The increase in net corporate expenses reflects ongoing investment in enterprise and regulatory projects, including unfavorable currency translation for US dollar expenses this quarter.

Other items include higher provisions for incurred but not identified credit losses, due to volume growth and negative credit migration and exposures impacted by low oil prices within the Canadian retail and wholesale loan portfolios, partly offset by higher revenue from treasury and balance sheet management activities.

Please turn to slide 10. Our Common Equity Tier 1 ratio was 9.9% at the end of the first quarter, flat to Q4 2015. Internal capital generation in the quarter was offset primarily by the common share repurchase and actuarial losses on employee benefit plans.

This quarter we completed our previously announced normal course issuer bid, repurchasing 9.5 million shares. Our leverage and liquidity ratios are consistent with the last quarter. Overall, our balance sheet remains well positioned.

I will now turn the call over to Mark.

Thank you, Riaz. And good afternoon, everyone. Please turn to slide 11. Credit quality remained strong during the quarter despite continuing uncertainty in the economy and challenges in the energy sector. Gross impaired loan formations ended the quarter at CAD1.7 billion, up CAD379 million, or 6 basis points quarter over quarter.

Formations in the Canadian portfolios have remained stable over the last four quarters at 19 basis points. In Canadian commercial, we expected negative performance to emerge in the oil and gas segment, which was evidenced by CAD21 million in new impairments across a number of service and mid-market customers. On a positive note, there were no new formations in the wholesale portfolio during the quarter.

The CAD379 million increase in US retail formations for the quarter was concentrated in the personal consumer loans, with CAD121 million of the increase due to foreign exchange. Continued renewal of the legacy HELOC interest-only products no longer offered by the US Bank accounted for CAD151 million of the increase.

As outlined in last quarter's call, if a customer does not qualify under current underwriting standards when their interest-only HELOC comes due for renewal, we are required to classify the exposure impaired, based on regulatory guidance, even if payments are current. The increase in US HELOC gross impaired formations is expected to moderate in future quarters, leveling off by year end.

Please turn to slide 12. Gross impaired loans increased CAD555 million, or 7 basis points for the quarter, to CAD3.8 billion. Performance in the Canadian retail and wholesale portfolios remained strong. The level of Canadian retail gross impaired loans continued to trend at cyclically low levels, largely unchanged quarter over quarter, at 29 basis points.

In the US, our performance has been good across all portfolios with the exception of the HELOC portfolio for the reasons indicated earlier. Of the CAD518 million increase in the US retail segment, CAD260 million, or roughly half of the increase, is attributable to foreign exchange.

CAD246 million of the increase is due to ongoing renewal of legacy interest-only HELOCs, of which 90% remain current with their payments. The HELOC portfolio is adequately reserved with stable credit losses forecast for the balance of the year.

Continuing to slide 13, as announced earlier this quarter, US strategic card PCLs are now reported in the US retail segment on a net basis, including only the Bank's contractual portion of credit losses. For the purpose of the credit quality slides, however, we will continue to report the gross amount for US retail PCL to better reflect the quality of the portfolio.

Provisions for credit losses are CAD648 million, up CAD98 million, or 5 basis points quarter over quarter, to 45 basis points. Loss rates in the Canadian retail portfolio remain constant at 25 basis points.

Allowance for incurred but not identified losses recorded in the corporate segment increased CAD65 million during the quarter, due largely to negative credit migration in Canadian retail and wholesale exposures impacted by low oil prices. This trend is expected to continue in the absence of a recovery in oil prices.

The quarter-over-quarter PCL increase in US retail was CAD63 million, CAD28 million of which is due to foreign exchange. The balance is attributable to volume growth reserve builds for commercial loans and credit cards.

Please turn to slide 14. Now I'd like to take a moment to discuss our oil and gas exposure. Drawn loans in the oil producer and servicers segments increased CAD500 million to CAD5.2 billion, representing less than 1% of total loans and acceptances. As expected, we are experiencing negative credit migration and low impairments in this segment of the portfolio. Based on the current level of oil prices, we expect this trend to continue.

Excluding real estate secured lending, consumer lending and small business banking exposure to Alberta, Saskatchewan, and Newfoundland and Labrador represent 2% of the Bank's gross loans and acceptances. Although we are seeing definite signs of deterioration in consumer lending, delinquency and loss rates in the impacted regions, to date, loan losses have been largely offset by strong performance across the rest of the country.

To conclude, the key takeaways in the quarter are, first, credit quality remains strong in the Canadian and US portfolios. Second, US portfolio losses have largely normalized from unsustainably low levels in 2015, with losses expected to remain stable over the balance of the year. And, lastly, our major concern continues to be low energy prices.

I previously indicated credit losses attributed to low oil prices could result in a 5% to 10% increase over 2015 actual levels. We are now approaching the upper end of the range in the current price environment. While material reduction in oil prices for an extended period would push losses slightly beyond this range, I am comfortable that losses will remain well within manageable levels, based on our relatively small exposure to the oil sector.

With that, operator, we are ready to begin the question-and-answer session.

(Operator Instructions)

We'll take the first question from the line of Robert Sedran from CIBC.

Hi, good afternoon. Mark, just to come back to that 5% to 10% comment, because I think people, and I know I'm a little bit confused by it. In the context of a quarter where loan losses are up 26% sequentially, to say that oil is potentially less than 5% to 10% more, are we talking just about the oil and gas specific provisions or are you talking about portfolio-wide or provision-wide 5% to 10%?

That number represents our view or the impact of low oil prices on wholesale or non-retail loans that are directly related to oil. So that would be oil and gas producers and servicers, as well as the impact to consumer credit in the impacted provinces, based upon elevated levels of unemployment, and our current view of what the economy would look throughout Canada under that scenario. So, if you look at it, it's probably, in this quarter, the spike up, the collective allowance that we established at CAD65 million, was really largely to reflect the negative migration in the oil and gas sector and in the consumer portfolios in those regions.

So, that's really a step up as part of that process. Based upon current prices, and if they were to stay at this level for a sustained period, I still think in the 5%, or probably closer to the 10% range now, for a year increase from 2015 would still be appropriate.

And that's if they hang around this level for, say, the balance of the year?

And in the future years, though, a very slow recovery in oil prices.

Okay. So, I guess the view is that it's basically going to get lost in intra-quarter volatility, given it's far smaller than what we saw this quarter, for example.

Given the relatively small size of our portfolio, I think you could look at the 45 basis point loss rate that we recorded at Enterprise this quarter includes a build up in the reserves. And I would say that, that's the level that I would look at, barring a recovery in oil prices.

Okay, thank you.

We'll take the next question from the line of Peter Routledge from National Bank Financial.

Hi, thanks. Mark, a more specific question for you. You have a paragraph in your shareholders report about non-prime loans in Canada. I guess these are automotive loans. And the PCLs go up to 7.96% from 3.43% in a quarter and that jumped out at me. I wonder if you could give us a little color on that?

Yes. I would say on the indirect auto in Canada, prime and non-prime, or what you're referring to, is the one area that we're seeing the initial credit losses in the oil-impacted provinces. So, that was one factor that drove it up.

And there has been some other operational changes that we implemented in the collection processes for indirect auto, which has had an impact to spike it during the quarter. We expect it to get part of it back next quarter going forward. But those are probably the two major drivers in that one quarter increase.

Does that shock you? I read that, and I went -- wow, that's a really big lift. Does that cause you to look at your portfolio and say maybe there's more risk in there than we think in our stress testing?

No, I'd say it did not. It has created a lot of attention, though, in terms of the operational changes that we implemented, to make sure that we bring things back to a lower level. But we are expecting them to increase in that sector. But the loss rate itself, the operational issue was a bit of a surprise, but that really wasn't related to an economic factor.

Fair enough, thanks. And just for Mike, in US retail, net income up 3%, pre-provision income year over year up 11%. It's generally a trend I've seen over the last four quarters. It just seems like you're giving up your organic growth to higher credit losses. Maybe get your thoughts on that.

Yes. I was actually very pleased with the quarter. Last year, remember, we had a very strong quarter, as well, and that was helped by two things. One was a one-time expense item that was positive, which we did call out. The other was low PCLs in the quarter because we had both releases and recoveries last year.

In that sense, I actually regard this quarter as very strong. We had very good revenue growth and good expense management that enabled us to earn through the PCL increase, which was an increase we have been expecting and alluding to in terms of the prospective normalization of the credit environment.

Presuming you get the same level of pre-provision income growth, will we see that flow directly to the bottom line in 2016?

I expect that we'll have fairly good revenue growth in 2016. I was careful at Q4 and characterized the outlook as modest [NI-ED] growth in 2016. The truth is we've had a strong first quarter and we had the rate increase, so that makes me more positive for the year. So, I'm hopeful the revenue growth will continue.

On expenses, it reflects the productivity work we've been doing. We are going to invest, but I'm still looking to fairly lower expense growth this year and strong positive operating leverage. So that --

But you aren't worried about provisions eating up the benefits of that operating leverage?

As Mark said, we don't expect them to grow from the current level during 2016.

Right. Okay, thanks.

Thank you. The next question comes from the line of Gabriel Dechaine from Canaccord Genuity.

Good afternoon. Just want to talk about some Alberta stuff and the US cards business. In Alberta, can you give me just the specific balances of your auto loans, unsecured personal loans, and credit cards in Alberta, or the oil-exposed regions, I should say?

It's Mark. Yes, I can. And RESL is CAD43 million. 62% of that is insured.

Billion, you mean.

Yes, I'm sorry, billion. I've got to get in the billions. CAD2.5 billion on cards. And then personal lending, like unsecured lines of credit and such, is CAD1.6 billion. And TD auto finance is CAD4.2 billion. It represents, in terms of the Bank's consumer credit, it's around 17% is in Alberta.

Okay. So, it's pretty proportionate to the population. Then on the US business, it looks to me like -- the cards PCLs, not a big spike here, but it looks like there was some underlying deterioration there on a quarter-over-quarter basis. Is there anything going on there that we should be aware of?

And then just in general, how do you manage that, the cards business from a collections business from a collection standpoint, if and when it does become an issue? Because -- and maybe this is just a bad theory -- but does the consumer have as much urgency to pay off a store-branded credit card in a period of stress as they would a directly issued by the bank card? Or is that a wrong analysis?

Maybe I could take the first part of the question. The increase really was not risk driven but volume driven, if you go through the various portfolios in the cards portfolios, whether it's in the target -- of course Nordstrom is new so that's an addition so that's a step-wise up increase. But if you look through -- and we do an analysis of what drives the increase, and actually from a risk perspective, it was relatively stable. It was really a volume-driven exercise that resulted in the increase.

How do I make that assessment, though? This is it from your data from your slide deck, page 25. If I look at the GIL ratio in credit cards, it's 150 basis points, it was 125 last quarter, it was lower than that the prior quarter. Yes, there's seasonality there, perhaps, but how do I look at those numbers and say -- oh, that's volume driven, not risk driven?

I'm looking at our reserving methodology to give you the numbers that I've given, which would be more detailed analysis based upon the credit metrics. I'd have to look at those numbers on the slide and get back to you on that.

It's Mike. There's one factor that's built into our numbers and that we expect, and it's behaving as we expected. That is that, with cards, as we build that book quite fast, there's a phenomenon we call seasoning, which means that in the second year, you tend to get a little more delinquency and loss than you do in the first year. So, as you build it, that gets reflected as the cohort season. So you're seeing a little bit of that across the portfolio. But it's behaving as expected. Nothing that causes us any worry.

With respect to your second question, it's difficult to answer because we have built in expectations of losses for each of the partner portfolios. And we have many. And all I would say is they're also behaving as expected and that we don't see anything that worries us.

Thank you. Just a quick one here. The US auto loan book, you have a very small, if any, exposure to subprime, if I recall correctly. It's mostly prime and super prime, right?

It's really de minimus subprime. We do not do subprime but maybe one or two.

And even near prime is about 10% of the portfolio.

Okay. That's what I have in my notes. Thanks.

Thank you. The next question comes from the line of Meny Grauman from Cormark Securities.

Hi, good afternoon. Just touching on the 5% to 10% credit losses, you talked about the underlying assumptions regarding economic performance in the rest of Canada. I'm wondering if you just could comment on what kind of real GDP expectations you model in, ex-Alberta, when you model that out, and maybe the unemployment, as well?

Are you referring to the regions outside the oil-impacted provinces?

Yes. What are you assuming for the rest of the country in terms of offsetting strength in the rest of the country?

Yes, the primary drivers in the consumer credit analysis is what it would impact to be unemployment. We have fairly significant increases in the oil-impacted regions, but we don't in our current economic forecast review for the rest of the region is not to have a material change in the unemployment rates and, therefore, you don't see a deterioration in consumer credit in our more concentrated areas being in Ontario. In fact, the reality is, what we've seen in this quarter is a strengthening in credit quality in those regions versus the deterioration that we've seen in the oil-impacted provinces.

Do you run a more severe scenario analysis where you assume maybe more of a downturn in the unemployment rate?

We run numerous stress tests on an ongoing basis, on an Enterprise-wide basis. It would have peak to trough reductions in GDP of up to 3% to 4%, and home price reductions into the 25% range, employment peaking in the mid-teens.

And we actually have scenarios that would also be as harsh as the CCAR scenarios that we do in the US, and we really translate those across the Enterprise. But that's a different exercise. That's an Enterprise-wide stress testing exercise to determine our capital adequacy and whether we feel we're well-capitalized to satisfy ourselves on those fronts.

Would you be comfortable releasing any of that impact on credit specifically?

Not really, no. Obviously, credit losses go up, but they -- I wouldn't want to give specific ranges.

Okay, fair enough. And then I just wanted to ask about the reserve build and just if you could maybe comment on the process around that? I think you mentioned maybe one of the factors driving that was the weakness you're seeing on the indirect auto side. Just any comments in terms of how quantitative that process is.

I would say it's a highly quantitative process. So, really, for the non-retail portfolio, it will be largely driven by the migration you experience in the portfolio. In the oil and gas segment, you've seen fairly significant negative migration. We have seen other areas. When it migrates, it just requires you to carry a higher reserve against them.

In terms of the retail portfolios, it's based upon your delinquency and other credit metrics. And as these change, it drives a higher number. So, that's the exercise we went through. And I'd say the CAD65 million increase, that is the outcome of what we feel is the appropriate reserving methodology, which is probably 85% math and the balance is an overlay of judgment. But the judgment in the current uncertainty tends to be on the conservative side and might bolster your numbers slightly.

Thank you very much.

Thank you. The next question comes from the line of Sohrab Movahedi of BMO.

Thank you. A question for Teri first. The Canadian Banking segment, excellent expense performance and operating leverage, zero expense growth. Is that -- obviously not repeatable. So, what do you think as far as the operating leverage outlook over the next two to four quarters, let's say?

We continue to strive for positive operating leverage, net of claims for the full year. There will be some bumpiness in quarters. And we will, of course, continue to look at investments that make sense as we go through the year. We don't think flat expenses are sustainable through the year, as you mentioned, but we do expect to actively and prudently manage expenses so that we come in under last year's level.

Okay. And maybe one for Bharat and/or Mark. There was a good quote from Jacob Lew saying -- don't expect a crisis response in a non-crisis environment. Are we still in a non-crisis environment vis-a-vis this oil and gas stuff?

This is Bharat. I think it is easy, and I said this in my comments, it's unnerving because of the volatility we are seeing and the sometimes correlation that's approaching 1 on oil prices to market sentiment. And I think we need to take this in perspective, in a sense, especially from TD's perspective, as I pointed out.

We have a particular business model that has shown resiliency in the past. We are retail focused. We have a deposit-rich balance sheet. The business mix we have between Canada and the US, that provides us with a huge advantage. If you look at what we've done on the productivity front to allow us to make the investments and to adapt to the environment we're finding ourselves in. Put all those things together, this is what normally you should expect out of TD.

But to your general question, yes, there is a regional story, without a doubt. But I think the other part of the story is that central Canada appears to benefit from it, as it should. Manufacturing seems to be coming back. Exports are stronger now than they were in the previous years, and currency is helping in that regard. And you've seen fundamental moves in the US. I mentioned in my comments what you're seeing in employment growth, in wage growth, especially on the Eastern seaboard.

It's a long way of saying that we are seeing many aspects of our business that are doing quite well. But that doesn't mean that we are oblivious of what's going on in one part of Canada or the oil-producing part of Canada. We're seeing stresses there and we're managing them, as you'd expect from TD.

Excellent. Thank you very much.

(Operator Instructions)

We'll take the next question from the line of Sumit Malhotra from Scotia Capital.

Thanks, good afternoon. I'm going to have a question for Mark Chauvin on page 34 of your supplement. So, I'm going to give you a minute to get there. And in the meantime, I'm going to ask Mike Pedersen a question.

For Mike, the question is on US net interest margin. Riaz stated that you were expecting NIM in the US to be flattish, absent any rate hikes for the balance of the year. Now, when I think about this quarter, you're up 3, you had the partial benefit of the rate hike during the quarter and the first full quarter of the Nordstrom's portfolio, which I presume both of which would have helped NIM. So when we think about it for the balance of the year, especially with the long end having moved as much lower as it did, why do you think you're able to keep it flat here in this environment?

You're quite right, in the quarter, we had a month and a half of rate increase. And on that issue, if it hadn't been for the rate increase, we'd be down 1 basis point, so there was a positive effect there. And Nordstrom was obviously also a positive factor.

The general dynamic for the balance of the year is that our deposit margins are being assisted by the rate hike. We're assuming no other rate changes. And there's some ongoing pressure on loan margins along the lines of what we suggested last time. With respect to the long end of the curve, we've taken Treasury actions so that for the next several quarters, we're not exposed to that.

I just hear you say those things. It sounds like it's more likely to be down than it is to be flat.

We expect them to be relatively stable. Remember, we get twice the benefit in terms of the rate hike than we did in this quarter, so we expect it to be relatively stable.

Okay. Let me then just move to the second one and we'll wrap it up there. On that page 34 for Mark, your credit card loss rates -- to go back to this uptick in US PCL -- when I look at your loss rates that are shown on line 41, over the last three quarters, you've had an increase of 100 basis points per quarter each of the last two.

Now, I know Q3 would have been just target, Q4 would have been the blend, and then Q1 you had the full Nordstrom's impact in there, as well. I wouldn't think there'd be a major difference in loss rates in these portfolios. Maybe you can correct me if I'm wrong, or perhaps just give me flavor as to why we've seen that magnitude of increase over the last couple of quarters.

I think to some extent it is a bit of a seasonal, not a seasoning, as very appropriately pointed out by Mike. But it's seasonal where you do find you have higher balances during this particular quarter, and you do end up seeing a higher spike in PCL. But we feel it's consistent with previous quarters. And I should quickly look back and see if it's the same.

But that would be the explanation. The Christmas spending, the increased level of balances that generate a higher reserve level, which then translates into a higher PCL for the quarter. It should drop off next quarter. It generally always drops off in the second quarter.

All right. So, the key takeaway, you said it earlier, you think where you are in provisions in the US this quarter is a good example of where you feel a run rate should be in 2016?

Yes. I think we've hit, we've been signaling the normalization is coming. I feel that Q1 shows a normalized rate, which basically relates to pretty good loss rates that we expect to continue, which will translate into fairly constant dollar levels for the balance of the year.

Thanks for your time.

Thank you. At this time, I'd like to turn the call back to Mr. Bharat Masrani for closing remarks.

Thank you, operator. As I noted in my remarks, pleased with the quarter. We were able to perform in a challenging environment, and shows the resiliency of our business model, business mix, and the diversifications that we have in our earnings.

That concludes our call. But before we close, I'd like to take this opportunity to thank Rudy as he heads off to a happy retirement. Over the last few years, Rudy has built a world-class IR team, winning accolades from our investors and analysts. I'd like to thank him for his leadership, adding to TD's winning IR brand.

At the same time, I'd like to welcome back into Investor Relations, Gillian Manning, whom you just heard earlier on, who will lead our IR team from here. Thanks again for joining us, and we will talk to you folks 90 days from now. Looking forward to it.

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