Toronto-Dominion Bank (TD) 2016 Q2 法說會逐字稿

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

Thank you. Good afternoon and welcome to TD Bank Group's second-quarter 2016 investor presentation. My name is Gillian Manning and I'm the Head of Investor Relations at the Bank. We will begin today's presentation with remarks from Bharat Masrani, the Bank's CEO; after which Riaz Ahmed, 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 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 Pedersen, Group Head, US Banking; and Bob Dorrance, Group Head, Wholesale Banking.

Please turn to slide 2. At this time I would 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 is available in our Q2 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. TD delivered good results again this quarter. Net income rose to CAD2.3 billion, an increase of 5% from a year ago. And earnings per share were CAD1.20, also up 5%.

Our Retail business has benefited from good organic growth, positive operating leverage, and continued foreign exchange benefits from our North American strategy. Our Wholesale Bank also performed well. While provisions for credit losses rose in both the Retail and Wholesale portfolios, this was largely a reflection of continued weakness in the oil and gas sector. Overall credit quality remains strong.

Overall, I am pleased with our performance for the first half of the year. Earnings are up 6% and earnings per share are up 5% for the year to date. Our CET1 ratio at the end of the second quarter stood at 10.1%, up 20 basis points from the prior quarter. And our leverage and liquidity coverage ratios remain in line with expectations, reflecting the strength of our balance sheet. Our reported results this quarter include a CAD116 million after-tax charge related to our direct investing business in Europe. Riaz will address this in his remarks.

Turning to our businesses. Canadian Retail net income was CAD1.5 billion this quarter, up 2% from a year ago as we earned through a higher tax rate. Personal and Commercial banking earnings was supported by higher loan and deposit volumes, increased revenue, and good expense management, offset by higher provisions and further margin compression.

Of note in the quarter, we had record mortgage retention rates of renewal and we grew business banking volumes at double-digit rates. Our Wealth business delivered more than CAD10 billion in net asset growth for a second consecutive quarter, despite challenging market conditions. And TD was ranked Number One for pension fund assets under management by Benefits Canada for the fifth year in a row.

Our Insurance business continues to perform well. While earnings were relatively flat in the quarter, net income before taxes continues to grow, reflecting significant improvements in revenue and claims performance. We continue to assess the effects of the fires in Fort McMurray, which occurred after quarter end. Given that our businesses benefit from loss mitigating and sharing arrangements to insurance or reinsurance, we do not expect the impact to be material.

Our US Retail segment generated earnings of $459 million in the quarter, up 6% from last year. I'm particularly pleased with our revenue performance, up 6% this quarter. Loan and deposit volumes increased at double-digit rates. We're requiring new households faster than our competitors, and we are doing it by leveraging all our distribution channels, with digital credit-card sales particularly strong this quarter.

While provisions for credit losses rose from a year ago, reflecting portfolio growth and allowance build, they declined quarter over quarter, as did impaired loans. Core credit metrics remain strong. We also continued to see the benefits of a stronger US dollar in our consolidated earnings, with Canadian dollar earnings up 13% year over year and 15%, including the contribution from TD Ameritrade.

Net income in our Wholesale Bank was CAD219 million this quarter, down 11% from a year ago, as good top-line performance was offset by higher credit provisions related to the oil and gas portfolio. All of our Wholesale businesses had an active quarter, with underwriting and advisory revenues particularly strong. Domestic origination markets improved, and TD Securities won several significant mandates in the quarter, co-leading TransCanada pipeline's CAD4.2 billion [bought] deal and advising Shaw on its acquisition of Wind Mobile and disposition of Shaw Media. Our US business also continues to perform well, with origination activity strong during the quarter.

Let me take a moment to comment on provisions for credit losses. Mark will address this in more detail, but at a high level, credit metrics remain strong across our portfolios. We have seen continued weakness in oil-and-gas-impacted areas, but trends in impaired loans and provisions are in line with expectations. Nonetheless, we made a further addition to our collective allowance this quarter to reflect credit deterioration in oil-and-gas exposures, as well as volume growth in the rest of our portfolios. Overall, we have been saying for some time that we expect that credit to be a headwind to earnings this year, given the benign PCL rates we reported in 2015. That is now materializing; however, we remain comfortable that we are adequately reserved and losses will be manageable.

Looking more broadly, the environment remains uncertain. Global economic growth is trending up, but the pace of the recovery remains slow and uneven. The low-growth, low-rate environment continues to affect recoveries in most developed economies, but conditions are stronger in our footprint. While recent economic data in the US have been mixed, domestic demand appears to be firming and the investments we have made in our business are paying off.

We are well positioned to continue to take share. In Canada, the economy's adjusting to a lower commodity-price environment, albeit from last quarter's lows, and we'll feel the impact of the Fort McMurray wildfires. But fiscal stimulus will provide some offset, and the lower cost of raw materials is driving growth in other parts of the country where our market share is higher. Against this backdrop, we remain steadfast in our approach. We will continue to generate organic growth and compete where we see opportunities that are within our risk appetite. We will stay focused on managing base expenses as we have done very effectively so far this year. And we will continue to invest in delivering a better customer experience across all our channels.

Last quarter, I highlighted some milestones on this journey. Let me update on our most recent accomplishments. TD Bank, America's Most Convenient Bank, scored another big win in 2016 J.D. Power survey, taking the Number One spot for retail banking in Florida. This builds on our success in J.D. Power's last small-business banking survey, where we were ranked Number One in the Northeast region.

In Canada, TD MySpend, the real-time money management app we launched this month, already has more than 180,000 customers and double that many accounts. And we extended customer service through Facebook Messenger to the US after debuting it with great success in Canada last December. We also announced that we will be introducing Apple Pay for our Canadian customers, a service we already offer in the US. We are excited to build on our leadership position in the digital space by adding Apple Pay to a strong suite of mobile payment options that includes our TD App, [stamps] and Pay, in the US, and our participation in UGO Wallet in Canada.

To wrap up, I'm pleased with our results in the first half of the year. We continue to execute on our strategy of building for the future, operating with excellence and adapting to an ever-changing environment. As ever, our greatest strength is our people. We were reminded of that this month as we witnessed their remarkable response to the devastation in Fort McMurray. To the people of Fort McMurray, as you return home to begin the long, hard work of rebuilding your homes and communities, TD will be there to support you now, and in the future.

And to our colleagues, some of whom I met in Edmonton earlier this month when I visited the region, I know how tirelessly you have been working to support the recovery effort. Those of you with the TD Mobile response fleet provided on-site emergency assistance to evacuated bank and insurance customers. Those at the TD Helps Advice Center who are supporting customers with urgent financial needs. Those of you at TD Insurance who gave immediate support to our evacuated insurance customers by arranging living allowances and finding temporary accommodation and who are now preparing to help customers rebuild, replace or repair their homes and automobiles when Fort McMurray reopens.

And the thousands of colleagues who have made matching donations through TD to the Canadian Red Cross, thank you -- your compassion and dedication are inspiring. I know we can accomplish great things together.

With that, I will pass it over to Riaz.

Thanks, Bharat, and good afternoon, everyone. Please turn to slide 5. This quarter, the Bank earned adjusted EPS of CAD1.20, up 5% year over year. Canadian Retail earnings grew 2%. US Retail adjusted earnings grew 15% in Canadian dollars and 7% in US dollars. And Wholesale earnings declined 11%, reflecting higher credit provisions in the oil-and-gas portfolio. Adjusted total revenue increased 7% year over year, or 4% excluding FX and acquisitions, led by loan, deposit and wealth asset growth. Growth was partially offset by margin pressure. PCLs increased year over year but declined quarter over quarter. Adjusted expense growth was 7% year over year, or 1% excluding FX and acquisitions.

Please turn to slide 6. The Canadian Retail segment earned net income of CAD1.5 billion, up 2% year over year. The increase reflected loan, deposit and wealth asset growth and lower insurance claims, partially offset by lower margins, higher PCL, and a higher effective tax rate. Total loan growth of 6% year over year, with personal lending volumes up 5% and business lending volumes up 11%.

Deposits increased by 6%, reflecting growth in core check and savings accounts, which were up 8%. Business deposits grew 4% and wealth assets grew by 3%. Margin declined 3 basis points quarter over quarter, reflecting certain adjustments made in the prior quarter, the low interest rate environment, and competitive pricing. We expect margins to remain under modest downward pressure, reflecting the interest rate environment, product mix, and competitive factors.

Credit losses increased 15% quarter over quarter, reflecting higher provisions this quarter and a sale of charged-off accounts in the prior quarter. Expenses increased 1% year over year.

I would like to take a moment to give you an update on Fort McMurray. We are continuing to assess the impact of the wildfires. We expect we will experience some losses in our banking businesses and higher claims in our insurance businesses in the third quarter. However, as a result of our smaller footprint in Alberta, and because of mitigants including reinsurance in our general insurance business, mortgage insurance in our personal banking, and third-party insurance held by our commercial-banking customers, we do not expect the impact to be material. I estimate less than 5% -- CAD0.05 per share over time.

Please return to slide 7. The US Retail Bank posted earnings of $459 million, up 6% on an adjusted basis from Q2 2015. Results for the quarter ended -- reflected strong revenue growth, partially offset by higher expenses and PCL; total loan growth of 13% year over year, reflecting an 8% increase in personal loans and a 17% increase in business loans. Average deposits increased by 10%.

Margin was stable quarter over quarter, reflecting the full-quarter benefit of the December Fed rate increase, offset by lower loan margins and balance sheet mix. Overall, absent interest rate changes, we expect margins to be relatively stable in 2016.

PCL decreased 23% quarter over quarter, primarily due to typical seasonal reductions in credit card balances. Adjusted expenses increased 4% year over year, reflecting investments in the business and timing. Adjusted expenses are up 2.4% year to date, excluding impact of acquisitions.

Earnings from our ownership stake in TD Ameritrade increased 13% year over year, reflecting asset growth and higher trading volumes in that business. Aggregate adjusted US Retail earnings were up 7% year over year in US dollars and 15% in Canadian dollars.

Please turn to slide 8. Net income for Wholesale was CAD219 million, down 11% year over year, primarily due to higher credit provisions this quarter. Revenue decreased 2% year over year, reflecting lower fixed-income trading and equity underwriting fees, partially offset by higher advisory and corporate lending fees.

Credit losses were CAD50 million, a CAD38 million increase quarter over quarter, primarily reflecting specific provisions in the oil-and-gas sector. Non-interest expenses were down 1%, reflecting lower operating expenses and variable compensation, partially offset by some foreign exchange translation adjustment.

Please turn to slide 9. The Corporate segment posted an adjusted loss of CAD120 million this quarter, compared to a loss of CAD139 million in the same period last year. Net corporate expenses increased slightly year over year, reflecting ongoing investments in enterprise and regulatory projects. Other items increased CAD38 million year over year, reflecting contributions from positive tax items recognized in the current quarter and higher revenue from treasury and balance sheet management activities, partially offset by higher provisions for incurred-but-not-identified credit losses.

On a reported basis, the Corporate segment loss includes a CAD116 million after-tax charge, reflecting impairment of goodwill, non-financial assets, and other charges related to our direct investing business in Europe. This business has had recurring losses, indicating that the goodwill and intangible assets do not have continuing value. We are considering opportunities to prevent further losses in this business.

Please turn to slide 10. Our common equity Tier 1 ratio was 10.1% at the end of second quarter, a 20-basis-points increase, due primarily to organic capital growth and unrealized gains on our AFS securities, partially offset by risk-weighted assets growth and our other items in the quarter. Our leverage and liquidity ratios are consistent with last quarter. Overall, we remain well positioned for the evolving regulatory and capital environment.

I will now turn the call over to Mark.

Thank you, Riaz, and good afternoon, everyone. Please turn to slide 11. Credit quality remains strong, as evidenced by a 3-basis-point quarterly reduction in the Bank's overall loss rate, to 42 basis points, despite further increases in collective allowances. Canadian Retail gross impaired loan formations have remained stable over the past five quarters at 19 basis points.

In Wholesale, further deterioration in the oil-and-gas-producer portfolio occurred during the quarter, despite a recent strengthening in oil prices. This trend was expected, as leverage borrowers exhaust available sources of liquidity. The four new impaired formations in the oil-and-gas sector totaling CAD142 million were expected, representing previously designated high-risk accounts.

The CAD384 million decrease in US Retail formations for the quarter was concentrated in the Personal consumer segment. The legacy interest-only HELOC product accounted for $201 million of the decrease, resulting from completion of the remediation effort began over a year ago for a major portion of the portfolio. CAD126 million of the decrease was attributable to strengthening in the Canadian dollar.

Turning to the next slide. Gross impaired loans decreased by 2 basis points, or CAD232 million, to CAD3.57 billion. Canadian Retail and Commercial portfolio performance continues to trend near cyclical low levels, unchanged at 29 basis points quarter over quarter.

In the US, our performance continues to be good across all portfolios. The CAD353 million decrease noted during the quarter is due to a CAD297 million strengthening of the Canadian dollar and a $58 million decrease in legacy interest-only HELOC gross impaired loans. The decrease in legacy interest-only HELOC impaired loans resulted from the decline in new impaired formations mentioned earlier and the return of customers to performing status. Further reductions are expected this year.

Please turn to slide 13. As announced last 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 these credit slides, however, we continue to report the gross amount for US Retail PCL to better reflect portfolio at quality.

Provisions for credit losses were CAD592 million, down CAD56 million, or 3 basis points, quarter over quarter, to 42 basis points. Canadian Retail credit loss rates increased 5 basis points during the quarter, to 30 basis points, roughly in line with last year's performance of 29 basis points.

US Retail PCL was down CAD123 million, or 27 basis points during the quarter, primarily due to seasonal reduction in US card volumes and strengthening of the Canadian dollar. Collective allowances for incurred-but-not-identified losses recorded in the Corporate segment increased CAD60 million during the quarter due to continued credit deterioration in consumer, commercial, and wholesale exposure impacted by low oil and gas prices.

Please turn to slide 14. Turning to oil and gas now. There has been little change in the composition of our oil and gas-related exposure over the quarter. Drawn loans to the oil and gas producer and servicer segment increased CAD200 million to CAD4.4 billion, continuing to represent less than 1% of total gross loans and acceptances. Excluding real estate-secured lending, consumer lending and small-business banking exposures to Alberta, Saskatchewan, and Newfoundland and Labrador represents 2% of the Bank's gross loans and acceptances.

As expected, credit deterioration and loan impairments in oil-impacted portfolios and regions are continuing. The recent increase in oil prices, while encouraging, is not likely to have an immediate positive impact. In the Corporate and Commercial segments, we are now seeing the impact of sustained low oil and gas prices which is reflected in the -- for new impairments and related provisions in the segment this quarter.

The signs of deterioration in the consumer lending portfolios in impacted provinces seen last quarter are continuing, but, to date, increases in credit losses have been largely offset by stronger-than-expected performance across the rest of the country. While we are regularly performing detailed assessments of our oil-and-gas exposure as the challenges facing this sector play out, to date the pace of negative credit migration, new impairments, and credit provisions remain within our expectations. We continue to be adequately reserved for the problems that lie ahead, barring a significant decrease in oil and gas prices.

With respect to Fort McMurray wildfires, our immediate concern is for our customers and employees, and we are focused on providing whatever support we can in these difficult times. Our credit exposure to the region is modest, and future losses are not expected to be significant.

To conclude, the key takeaways this quarter are: first, credit quality remains strong in the Canadian and US portfolios; and, secondly, low oil and gas prices continue to represent a credit concern. Having said this, I remain comfortable that total losses attributed to low oil and gas prices are unlikely to exceed my previous guidance of 5% to 10% over 2015 actual levels, which equals roughly CAD100 million to CAD200 million per year for a period of two years.

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

(Operator Instructions)

Sumit Malhotra, Scotia Capital.

Thanks, good afternoon. My question is for Mike Pedersen and it has to do with loan growth in the US. You obviously had a very strong trend here over a period of time but it did seem like sequentially, across your consumer portfolios, the pace of loan growth had slowed particularly noticeably.

I know there's been movements in interest rates I wouldn't have thought that was enough to put a real crimp in loan demand. Could you give me some color on what was happening in quarter and whether there's been any change to the outlook as far as the consumer side of the equation is concerned?

Yes, the issue there is that we had very large pay-offs at the end of Q1 and in particular one very large loan. So as you look at the averages quarter over quarter, that was in Q1 not in Q2. We're not seeing any difference in outlook other than that fact and I expect to continue to see good growth in business lending.

And just one more for your segment and I'll leave it there. It has to do with timing and pace of expense investment. On the back of the restructuring charges you took last year, I assumed that the pace of expense growth would be slower and we certainly saw that the last couple quarters. A bit of an increase around 4% in terms of expenses year over year in Q2.

As you think about the investment spend that you've communicated to us, is the level of expense growth you saw this quarter more in line with what we should think about? Or were there specific projects or timing that maybe impacted this pace of expense increase?

Yes, good question. If you look at the 4%, about 1% of that was the effect of M&A, so the strategic card alliance from last year and the extra day as a result of the leap year. So you take those out, it's more like 3%.

In addition to that, we had a few issues in the quarter. We moved a call center from Texas to South Carolina which is obviously not something that's going to recur. And then there was a bit of timing between Q1 and Q2.

I look at it for the first half our expense growth was 2.4%, ex the M&A. And my hope would be that as we look into the second half, it won't be too different from that. It will bump around a little bit quarter by quarter.

Thanks for your time.

(Operator Instructions)

Robert Sedran, CIBC.

Hi, good afternoon. I'm not sure who it's for Riaz or Mike again, but the margin this quarter, with the benefit -- the full benefit -- of the Fed move was flat. And the guidance going forward is irrespective of what the Fed does. We think it's going to be flat -- or sorry, even if the Fed doesn't move, it's going to be flat. What gives you the confidence that some of the trends that hold back the margin this quarter, other than the Fed benefit, are not going to recur in coming quarters?

Yes, so again, great question and we obviously have the full effect of the rate increase in Q2. So we're looking forward from Q2. This is all absent rate increases, to be clear. Simply, what's going on is that on the one hand, we expect deposit margins to be stable from Q2, again in the absence of rate changes.

On the other hand, we are seeing some continued loan margin compression but it's less this quarter than it was last quarter. And it was less last quarter than it was the previous quarter. This slowing is slowing down, if you will -- or the compression is slowing down.

We think the loan margin compression will be offset by, essentially, mix. And that's both the mix of loan origination but also the fact that we expect deposits to grow slower than loans. So effectively, deposit margins stable, and some offsetting stuff in loan margins leading to our expectation that margins will be relatively stable for the remainder of the year.

Do you have any insight, Mike, into why the loan compression or loan margin compression is slowing?

I think its been going on for a long time and there's at least two things going on. One is that the farther we get into this trend, the less the effect of higher margin stuff rolling off and new stuff coming on at lower margins. But the other thing is that I think the competitive intensity we're seeing around pricing is slowing a bit relative to where it was, say, a year ago.

Thank you.

Sohrab Movahedi, BMO Capital Markets.

Thank you. Staying with the topic of NIM, maybe for Teri, in Canada, the NIM has got this declining trajectory. Do you expect that to continue into 2017?

We would continue to project modest downward pressure to margins, again impacted by the interest rate environment, product mix and competitive factors. We did have in this quarter, on a quarter-over-quarter basis, the issue of the recognition of the commissions paid to auto dealers that we talked about last quarter, and year over year acquisition-related items, the credit mark release from the acquired credit card portfolio last year. So net-net we'd still project modest downward pressure and still NII positive.

So modest more or less in line with the last few quarters except for this operation of the last specific quarter?

Absolutely.

And if I can just sneak one in for Mark. Mark, the allowances, whether it's specifics or collectives, relative to your credit RWA seems to be around 95 to -- call it plus or minus 95 basis points. If I look at it over the last five to ten years, that's probably more like 115 basis points and it's probably peaked out in the 140 basis points coming out of the crisis.

When you think about your collectives and the additions that you're making, what have you, is that a good way of thinking about where you may actually peak out at? Do you expect to be below trend line on this ratio? Or do you expect it to revert back up to, let's say, the 115, 120 basis point average over the last five to ten years?

You're talking about a trend line for the portfolio and really where we're experiencing difficulties is a very small part of the portfolio being the oil and gas sector. So I don't -- and if we look at the credit cycle now through the general portfolio, it's a very strong part. We have good credit loss rates across all of the portfolios. And based on our view of the economy over the next year in both our key markets we don't see that changing between now and into the new year.

But on the oil and gas sector, I do see that amount increase. I don't think of it in terms of RWA. I think where we are now is appropriate. I could see further increases over the balance of the year as the issues play out. But I really can't give you a number relative to what RWA would be.

Okay, thank you.

Meny Grauman, Cormark Securities.

Hi, good afternoon. Wanted to ask about expenses. We're seeing some competitors come out with a fresh round of restructuring charges. I'm wondering what you see as the potential for further restructuring charges, now that we're half way through the year?

Meny, this is Bharat. As you know, last year we did go through a restructuring in the bank and that was necessary. We are happy that it is now complete. We have been able to improve our productivity, and at the same time, make the investments that are absolutely necessary in our bank. So that portion is now, for the most part, behind us.

As I'm happy that we are able to now get the benefits of that. And as my comments, I said we're going to be quite fixated in our base expenses. But at the same time, make sure that we have enough capacity to make the necessary investments.

So that's how I would see it. You are asking me do you see future restructuring charges? Never is a long time, but generally we are pretty happy with where we are and what we have been through last year.

Thanks for that. And if I could just ask a quick question on trading. If you could comment on the composition. It looked a little different than what some of your competitors have been reporting, especially in terms of fixed income and some of the drivers in that business. It didn't look like you saw as much of a lift as some of the other competitors, although admittedly maybe it's hard to compare too closely.

Yes, I think it is hard to compare too closely. It can reflect, obviously, different mix of businesses that we're all involved in, both on product as well as geography. It's a short period of time in which you're seeing it as well. One quarter has lots of volatility in the numbers. So I think had a strong quarter in trading. Basically started after the middle of February, so it was a shorter quarter.

Having said that, I think that it looks pretty stable relative to previous trends. All I can say, I can speak to our quarter but I really can't speak to how other banks perform on a relative basis.

So in terms of the fixed income business, there's nothing you'd highlight as being usual in that business for the quarter?

No. There was a reasonable amount of volatility in credit within the first half. And so some of the credit parts of fixed income were negatively impacted in the first quarter and then positively impacted in the second quarter by the movement in credit markets. Then if you look at fixed income as the pure government business, there's different drivers to that. That had a better first quarter in our case and not quite as strong a second quarter.

Thank you.

Darko Mihelic, RBC Capital Markets.

Hi, thank you. My question is for Riaz. I'm trying to square something in the numbers, maybe you could help me with this. On page 5 of the presentation, you show revenues up 7% and expenses up 7%. But when you exclude FX and acquisitions, it's 4% and 1%.

When I do some back-of-the-envelope math using some of the other disclosures on the FX impact, it looks like the acquisitions, namely Nordstrom I'm presuming, had expense growth that was far greater than revenue growth. Am I right on that, first?

No, I don't think, Darko, that math would work that way. Because to the extent that our strategic cards portfolio is net positive, and performing consistently you wouldn't see that. I think it's just in the mix of Canadian dollars versus US dollar revenue versus Canadian dollar and US dollar expenses that you would find the differences.

Okay. And just to be crystal clear on that, the Nordstrom expenses, they are all reported in the US retail? Or is some of that in corporate?

No, what happens is that the retailer's share of the net cash flow gets reported in corporate. And then what's in the US retail segment is only our share, so that also gives you a little bit of variability.

Okay. I may have to come back to you offline on that one, I don't want to get too caught up in the nitty gritty. The question then for Mark Chauvin, with respect to the collective allowance. Mark is it an appropriate way to think of the allowance -- when we are looking at the allowance and trying to judge the appropriateness of it or the coverage of it, it was suggested that one way to look at it would be to take the collective allowance as a multiple of the specific ACLs that you have. Do you think that's a good measure? Is that something that we should get comfort from if we look at it that way?

That is somewhat of an accepted way of looking at it. In theory, you tend to look at having coverage of 1.5 to 2 times, thinking that would be an appropriate range.

Yours seems to be bigger than that, though. Yours is above 3.

Well, it's through the cycle. We are at a fairly strong part of the credit cycle for the majority of the portfolio, so you are seeing lower PCL than what you'd see at different parts, right? So it tries to be a through-the-cycle number. So that's probably one of the problems with that number is when you get through these periods it looks too large. But you have to look at more what your normal loss to the cycle would be and base it on that process. Does that make sense?

I'm not sure because you've been adding to it even though you've got --

But when you're adding to it, we've been adding to it driven largely by a sector being oil and gas. So really there are two things that drive a change in collective. It would be volume increases and we've seen a bit of that.

But the other is migration in the portfolio or deterioration in credit quality. The increases that you've seen in the last three quarters are really largely driven off of credit deterioration in the oil and gas sector-specific and non-retail and then in consumer credit in the impacted provinces.

Okay. So to wrap up then, when you talk about your forward-looking concept of stressed losses, you're encompassing within that some level of collective allowance? Or are you specifically referring to --

Well, I'm encompassing in that the collective allowance will transition into specifics at some point.

Okay, fair enough, thank you.

Mario Mendonca, TD Securities.

Good afternoon, two quick questions. First, probably for Mark. Could you help understand or break out the oil and gas exposure between oil and gas? And specifically, like I don't know how it's best to break it out.

I don't know if you can look at your total loans and say this is the amount that's supported by gas reserves versus oil reserves. Or whether you could say this is the exposure to gas only names. But is there some way to help clear this up for me?

Yes, so the way that we look at it is your oil and gas producer will have a blend generally. But we look at what's predominantly driving that, whether it oil or gas. I'd say it's very -- we would have very few that would be driven predominantly by gas. It's normally a blend that's weighted heavier to oil. And I would say the overwhelming majority of our portfolio would be borrowers at a heavier weighted to oil than to gas.

Looking forward, would it be correct to suggest that losses to the extent there are a lot more losses in oil and gas, would be weighted toward gas? And that's one of the reasons why you're not looking for any material increase in TD's losses?

The analysis that we complete, it's really an account-by-account analysis that stresses both the oil content and the gas content. And that's what has been used to arrive at my guidance of 5% to 10% or CAD100 million to CAD200 million per year for two years. So that gas factor's already incorporated in that. But I'd say if you're asking what's driving it more than anything, given that the majority of our borrowers are weighted towards oil, I'd say it's more oil.

Quickly, over in domestic retail. The earnings growth has not been strong this year, certainly not this quarter. I'm focusing specifically on retail banking. There are some pretty good explanations for why, not the least of which is the higher taxes associated with mortgage insurance.

The question is once we look beyond this year and the obvious headwinds, does this strike you as the kind of business that can go back to growing at 5% or 4% like inflation-plus type growth? Or is that type of growth environment behind us now that the Canadian consumer is over-leveraged? What's your thinking there?

So we remain committed to the medium-term guidance we gave you in our Investor Day. I'd say for personal banking in particular, we have a number of opportunities that we outlined in Investor Day where we are under share with our primary customer base, that we are working hard to leverage. Unsecured lending, where we are growing disproportionately within our risk appetite, business credit card which we outlined again at the Investor Day and mutual funds would be an examples of that. So we feel quite confident that the business over the medium term would still be able to meet the kind of goals that we talked about before.

Those goals -- refresh my memory -- 5%-plus?

Yes.

And you referred to personal specifically. Commercial would be similar, I suppose?

Commercial would be similar.

Thank you.

Gabriel Dechaine, Canaccord Genuity.

Good afternoon. Just a follow-up on Darko's line of questioning, actually. You qualified the increases in the collectives as tied primarily to the oil and gas sector. We had another bank that took sectoral reserves for their oil and gas exposure. If this is so heavily dependent on the trends in that sector, why isn't it sectoral? What's the difference in perspective?

My view is the collective allowance methodology appropriately captures the risk in the portfolio. And with it, you don't need a sectoral, would be the short answer.

That's the way we looked at it. It's our methodology that's out there.

Are we splitting hairs here? Is it really that different?

I look at it, Gabriel, the under IFRS incurred but not identified is very defined concept that everybody uses. And then that's the framework that is used in the way we apply Generally Accepted Accounting Principles. If you want to interpret them as sectorals, well, sectorals are not really an accounting definition. Different people can look at it different ways, so I think it just depends on how you want to characterize what's sectoral. But IDNI's a clearly understood framework.

Okay. Turning to more of a growth outlook, during the crisis, TD stepped on the gas in commercial lending, specifically commercial real estate which is a sector that was falling out of favor. And that helped you go from number five market share to number two or three, depending on whose slides you're looking at, in commercial lending in Canada. Are you doing anything similar in the oil and gas sector? Maybe that's for Bob.

Yes, we have added to, specifically, to our US business. We acquired some loan assets off a bank who was exiting their North American business. It was primarily an investment grade loan book but gave us diversification into larger E&P, into midstream as well as into refining. We subsequently thereafter hired a group of people who had relationships with those companies.

It's been a meaningful addition to the US energy business. We see a good opportunity to grow that, to add both corporate relationships as well as to introduce products over time. We'll do it in a measured way and within our risk appetite.

We weren't particularly interested in adding to the non-investment grade part of that because we didn't really have -- or we don't really have -- as many products that we might offer to those types of clients. But we are building out our debt capital markets capabilities, our derivatives capabilities, our hedging capabilities in that market.

So we're looking at the US as a meaningful -- US dollar business -- as meaningful business opportunities for where we can grow, not just in the corporate space but also in the government and the agency space. As well as in the investment buy side real money space as well. All those are very good opportunities for us, so I think they are coming as a function of what's happening in the markets broadly.

Are these more -- Go ahead.

Just to add to that, generally, when the bank -- this is Bharat -- we've said that we have a growth Company. We have the capital, we support our clients and we want to grow our share where we've identified opportunities. And we will continue to do that. If the current situation presents those opportunities and if it's within our risk appetite, we'll aggressively pursue those. That's not only in oil and gas but in every market in which we operate.

But is this one in particular more of a one-off where you see good risk-adjusted spreads, maybe not as broad-based as the push we saw in commercial lending a few years back?

I would say we see good opportunities to pursue clients to where we could have good relationships with clients. From there, good business opportunities will result and we'll build a franchise, I think, that will reflect what we've already invested in the states and many of the other parts of our business.

Okay, and my last one, sneak it in there. I understand you're going through the AIRB transition in the US this year. Should I expect much out of that? I know in the past for Canadian banks, making that transition has resulted in a pretty noticeable improvement in capital ratios through RWA deflation. Should we expect a similar outcome, maybe a lighter version in the US this year?

It's Mark, I'll address that question. There's numerous applications that you can go through. There's AMA which is operational risk for the enterprise. And there's -- for the US it would be for the retail portfolio and for the non-retail portfolio. We're looking to implement two of those in the third quarter which is AMA operational risk for the enterprise and the retail for the US. The net impact combined is pretty flat. It's not much of an impact on CET1.

So your retail credit risk-weighted assets will go down but --

They'll go down and offset by an increase in the AMA. But the net impact is flat.

Okay, all right, well, wait and see for that, I guess. Thank you.

Peter Routledge, National Bank Financial.

Follow-up on the last one. If you got commercial, would you get some -- if you got commercial US loans on AIRB, would you get some RWA relief?

Peter, it's Mark. It's difficult. You don't know the terms of the approval. You have to work through the process. Clearly I don't think you see an increase but I really -- it's difficult to predict whether there would be any meaningful decrease.

Okay, thanks. And then, Bharat or Riaz, a question on capital more broadly. The Canadian banks seem to be settling in around 10% on CET1 and I presume they're able to do that because the regulator is happy with that level of capital. But I look globally and I understand TD is not systemically important on a global basis. But I see capital ratios at 12% and I see leverage ratios much higher than your 3.8%.

Why will that condition hold? The skeptic in me says at some point something's got to give and your capital ratios will have to trend up towards global norms. Why is that perception wrong?

Let me give it a shot and then perhaps ask Riaz to add. Peter, capital has to have some relationship with the risk and the balance sheet we run in the markets in which we operate. We look at TD's mix of businesses, I can talk more about TD, the type of businesses we do, the type of risks that we manage and the markets in which we operate. And I think when I look at that, I find from TD's perspective, very comfortable with the capital levels that we have.

Obviously there are banks out there, like you said, globally that are much higher. But I think it is important to see their specific business models, the mix they have, the type of risk they are carrying and the volatility that they are experiencing. And that probably explains some of those differences.

Now, is there a chance sometime down the road, that capital regimes will change? Yes, I think so. But I also feel that we are closer to the end rather than the beginning and there seems to be more certainly around what those capital requirements are. Yes, maybe there might be movement here or there but I see that as a minor event, not as a major event. Riaz, did you want to add anything to that?

I thought that was a spectacular answer. Nothing to add.

All right, good man. (laughter)

Okay, thank you very much.

Sohrab Movahedi, BMO Capital Markets.

Look at that, I requeued and I got back to me. Question, I just wanted to clarify. Teri, when you had the Investor Day, you talked about medium-term growth of plus 7%. Did you just say 5% or did you say 7% to an earlier question?

No, what I just said was I agreed to 5%-plus. (laughter)

But the Investor Day was at 7%-plus.

We haven't changed our prior guidance, or wealth and insurance as well, right? That's a Canadian retail number.

Okay, thank you.

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

Thank you, operator. And thanks, everyone, for joining us. I know its been a tough day for you folks because three banks have announced. And I assume that means a lot of work in one day. So really appreciate you're taking the time and great engagement with the questions that I heard.

I would just say, once again, pleased with our numbers. We continued to deliver growth. We are a growth Company. And I'd like to take this opportunity to thank my colleagues around the world, 80,000 strong, who delivered for the shareholders once again. So thanks for that and we will see you in the next 90 days, Thank you.