Toronto-Dominion Bank
TSX:TD
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Toronto-Dominion Bank
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Good afternoon, ladies and gentlemen. Welcome to the TD Bank Group Q2 2021 Earnings Conference Call. I would now like to turn the meeting over to Ms. Gillian Manning. Please go ahead, Ms. Manning.
Thank you, operator. Good afternoon, and welcome to TD Bank Group's Second Quarter 2021 investor presentation. 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. Ajai Bambawale, Chief Risk Officer, will then offer comments on credit quality, after which we will invite questions from prequalified analysts and investors on the phone. Also present to answer your questions today are Teri Currie, Group Head, Canadian Personal Banking; Greg Braca, President and CEO, TD Bank America's Most Convenient Bank; 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 are implied in making these forward-looking statements. Any forward-looking statements contained in this presentation represent the use 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 Q2 2021 report to shareholders. With that let me turn the presentation over to Bharat.
Thank you, Gillian, and thank you, everyone, for joining us today. Q2 was a strong quarter for TD as we continue to benefit from a recovering economy and rising consumer and business confidence. Earnings rose to $3.8 billion in EPS to $2.04, more than twice last year's levels as an improving outlook led us to release a portion of the performing allowances we built last year. Our wealth, insurance and wholesale businesses had another strong quarter as clients continue to bring us more of their business. And our personal and commercial banking businesses gained momentum as increased customer activity helped offset continued margin pressure from the low rate environment. Our CET1 ratio ended the quarter at 14.2%, reflecting these favorable trends. A year after the COVID-19 pandemic took hold in North America, it continues to have a significant impact on the economy and our financial results. Unprecedented fiscal and monetary support for households and businesses has led to a significant increase in cash balances, limiting borrowing needs, driving delinquency rates to historic lows and keeping RWA growth muted. We have navigated this complex environment well. Thanks to our diversified business model and the adaptability and resilience of our people. As I reflect on our performance over the last year, I'm most proud of them. Through this long period of upheaval, they have continued to deliver for our customers, communities and each other and live our shared commitments. As we look around today, we know the battle against COVID is not over. The devastation we are witnessing in India and Brazil is heart wrenching, and will have far-reaching consequences on those regions. But in North America, we see encouraging signs that the recovery is on solid ground and gathering momentum. The rapid start to vaccinations in the U.S. has permitted an easing of restrictions across much of our footprint and broadening vaccine availability in Canada should support similar trends here. TD will continue to play a key role in driving forward that recovery. As a purpose-driven organization, we know the bank thrives when our customers, colleagues and communities thrive. Our recoveries must go hand-in-hand. That was a core message of our 2020 ESG and TCFD reports, which we released this quarter. I invite you to read them and learn more about what we are doing to build a more inclusive and sustainable future. That includes our approach to achieving the goals of our climate action plan as the first Canadian Bank to set a net 0 target by 2050. We are accelerating our efforts and mobilized leaders and experts across the bank and are working closely with clients in multiple sectors to support their transition plans and create positive change. We also discussed our progress on inclusion and diversity. Over the past year, we have seen what inequality looks like across our communities in stark terms, in the black, Asian, indigenous and other communities. TD will never rest on our past success. We will work to increase our own representation and contribute to the fight against bias, discrimination and racism. And because we know what gets measured, gets done, our ESG report provides expanded and detailed reporting. So all stakeholders can track our progress. As I wrote in my CEO message, TD will meet the biggest challenges of our generation with determination and purpose. We will continue to invest in what matters and leverage our resources and the talent of our 90,000 colleagues around the world to help build the better bank. That better bank is powered by our proven business model and sustained and strengthened by the investments we continue to make in our businesses and operations. In this year of accelerated digital take up and changing customer needs, the capabilities and infrastructure we have put in place have enabled us to support a dramatic increase in adoption and engagement. We are winning with customers by delivering innovative solutions customized to their needs. This quarter, crossing the $10 million mark for mobile users across our North American footprint. Our Canadian banking app was honored by the business intelligence group for AI-powered insights developed by Layer 6 our in-house AI team. In the U.S., we were recognized by Celent for a partnership on a virtual assistant that provided advice and support to customers digitally at the height of the lockdown. And we continue to maintain a strong pace of innovation as the #1 financial institution patent filer in Canada. These accomplishments have been matched by continued growth and strong customer acquisition in each of our businesses. Our Canadian Retail segment earned $2.2 billion this quarter, reflecting lower PCL, lower insurance claims and higher volumes and fee income. Activity accelerated in our banking businesses with continued strength in mortgage volumes and a pickup in credit card spend. We also extended our lead in personal deposits and continue to lead in payments, ranking #1 in Interac Flash and e-Transfer. We delivered record wealth earnings on a strong trading volumes and net asset growth and impressive insurance earnings, including substantial customer premium relief. We also achieved several milestones this quarter. In the business bank, TD Auto Finance ranked highest in dealer satisfaction among noncaptive retail lenders by J.D. Power for the fourth year in a row. Following TD Auto Finance U.S.' J.D. Power win last quarter. And just after quarter end, we closed the acquisition of Wells Fargo's Canadian Direct Equipment Finance business. In our wealth business, we launched the TD Wealth family office, a multidisciplinary group that will leverage our One TD model to deliver bespoke, advice and solutions for ultra-high net worth families and entrepreneurs. And TD Insurance continued to take market share rising to the #3 position for home and auto general insurance. Our U.S. Retail Bank delivered USD 853 million in net income this quarter, with another strong sequential recovery in earnings mainly on lower PCL. We recorded peer-leading consumer deposit volume growth as customers entrusted us with more of their savings. We saw a further increase in customer transaction activity with a return to near record levels of debit card spend and rising credit card transactions. We're also seeing good early take-up of our new double up credit card, one of the best cash back offerings on the market. We continue to support small business customers with PPP financing, ranking in the top 10 nationally as we originated some 45,000 PPP loans in the second round of the program and helped customers access over USD 1 billion in forgiveness under the program. Together with the USD 194 million contribution from our ownership stake in Schwab, U.S. Retail segment earnings exceeded USD 1 billion. Our wholesale bank earned $383 million, a good result with lower PCL, helping offset a normalization in trading activity from last year's elevated levels. This quarter, we continue to build our U.S. franchise with the announcement of our agreement to acquire Headlands Tech Global Markets expected to close in the second half of calendar 2021. The transaction will expand our capabilities in fixed income, electronic trading and accelerate TD Securities innovation and technology strategy. We were also proud to act as joint lead for the international finance facility for immunization companies, USD 750 million 5-year vaccine bonds, which will provide Gavi, the vaccine alliance with immediately available funding to support routine immunization in lower income countries, reaching nearly half the world's children. At the midpoint of fiscal 2021, TD Bank remains strong and our business is well positioned for the future. While the COVID related impacts we saw last year, including margin pressure from low rates, high savings rates, delaying loan growth and PCL will continue to affect year-over-year comparisons, we will maintain our disciplined approach to investing for the long term. It served us well through the pandemic. And as the recovery progresses, it will support our continued readiness to meet changing needs, adapt to shifting dynamics and build for growth. We are also supported by a very robust CET1 ratio, which affords us strategic flexibility to invest in our competitive position, to grow organically, to pursue acquisitions that add capabilities and to build our franchise to return capital to our shareholders when that becomes possible or a combination of those things. As always, we will use our capital responsibly and be thoughtful about making the right investments for the long term. Our investments also support how we operate the bank. As we plan for a future when more of us can return to TD premises, we know that flexibility will remain critical and that our people need the capabilities and infrastructure to continue to serve customers. Backed by a clear strategy and strong balance sheet, we look ahead with confidence. Our bank has proven resilient. Our brand is among the strongest in the industry, and our unique and inclusive culture remains a distinct competitive advantage. Our people bring that culture to life. And I'll finish by thanking them for their continued hard work and dedication. With that, I'll turn it over to Riaz.
Thank you, Bharat. Good afternoon, everyone. Please turn to Slide 8. This quarter, the bank reported earnings of $3.7 billion and EPS of $1.99, and adjusted earnings were $3.8 billion and adjusted EPS was $2.04. The revenue decreased 3%. We saw strong volume growth and higher fee income in our Retail segment, which this quarter more than offset lower margins. The downward pressure came from premium rebates for insurance customers, which I will discuss in a moment, lower wholesale revenue and the impact of foreign currency translation. Provisions for credit losses was a recovery of $377 million, lower by $690 million sequentially, reflecting a recovery in performing PCL and lower impaired PCL. Expenses increased 12% year-over-year, mainly reflecting an increase in the retailer program partner share of the net profits from the U.S. strategic cards portfolio, primarily on lower PCL. Absent the partner share, expenses increased 1% as higher employee-related expenses and U.S. store optimization costs were largely offset by foreign currency translation and lower legal provisions this quarter. Because of the large year-over-year change in PCL this quarter, the accounting for the U.S. strategic card portfolio program had a significant impact on expenses as well as total bank pretax pre-provision earnings and operating leverage. Slides 21 and 22 of this presentation show how we calculate PTPP and operating leverage at the total bank level, by removing this impact, along with the impact of foreign currency translation, which is also significant this quarter. These adjustments show that the total bank PTPP and operating leverage each declined approximately 3% year-over-year, which is mostly a reflection of lower revenue and higher expenses in wholesale. Please turn to Slide 9. Canadian Retail net income was $2.2 billion, up 86% or $1 billion year-over-year. On an adjusted basis, net income increased 82% year-over-year. Revenue increased 1%, higher transaction and fee-based revenue in the banking and wealth businesses and higher volumes were largely offset by lower margins and premium rebates for insurance customers, reflecting reduced driving activity. Average loan volumes rose 5%, reflecting growth in business and personal volumes. Average deposits rose 20%, reflecting double-digit growth in personal, business and wealth volumes. Wealth assets increased 21%, reflecting market appreciation and new asset growth. Margin was 2.61%, a decrease of 4 basis points from the prior quarter, reflecting changes in asset mix and the ongoing impact of the low interest rate environment. Total PCL was a recovery of $37 million, lower by $179 million sequentially, mainly reflecting a recovery in performing PCL. Total PCL as an annualized percentage of credit volume was negative 0.03%, a decline of 15 basis points quarter-over-quarter. Insurance claims decreased 34%, primarily reflecting lower current year claims, a decrease in the fair value of investments supporting claims liabilities and more favorable prior year's claim development. Reported expenses increased 4%, reflecting higher volume-driven and employee-related expenses, partially offset by prior charges related to Greystone. Adjusted expenses increased 5%. Please turn to Slide 10. U.S. Retail segment reported net income was approximately USD 1 billion, up USD 786 million. U.S. Retail Bank net income was USD 853 million, up USD 766 million, primarily reflecting lower PCL. Revenue increased 2%, reflecting volume growth, higher valuation of certain investments and fee income growth, partially offset by lower deposit margins. Average loan volumes increased 1% year-over-year and deposit volumes, excluding sweep deposits, were up 28%, including 37% growth in core consumer checking. Sweep deposits were up 18%. Net interest margin was 2.15%, down 9 basis points sequentially, reflecting balance sheet mix. Total PCL, including only the bank's share of PCLs for the strategic cards portfolio was a recovery of USD 173 million, lower by USD 276 million compared with the prior quarter reflecting lower impaired PCL and a recovery in performing PCL. The U.S. Retail net PCL ratio was negative 0.41%, down 66 basis points from last quarter. Expenses increased 4%, primarily reflecting USD 49 million in-store optimization costs and higher employee-related expenses, partially offset by legal provisions. Contribution from TD's investment in Schwab was USD 194 million. As a reminder, amortization of acquired intangibles and an acquisition of the integration-related charges associated with Schwab's acquisition of TD Ameritrade are reported in the corporate segment. See Slide 27 for further details. Please turn to Slide 11. Wholesale net income was $383 million, an increase of 83%, reflecting lower PCL, partially offset by lower revenue and higher expenses. Revenue was $1.2 billion, down 8%, primarily reflecting lower trading-related revenue and lower debt underwriting, partially offset by higher advisory fees. PCL was lower by $83 million sequentially, primarily reflecting a recovery in performing PCL. And expenses were up 14%, primarily reflecting higher variable compensation. Please turn to Slide 12. The corporate segment reported a net loss of $186 million in the quarter compared with a net loss of $202 million in the second quarter last year. The year-over-year decrease reflects a higher contribution from treasury and balance sheet management activities and lower net corporate expenses, partially offset by acquisition and integration charges related to the Schwab transaction. Adjusted net loss for the quarter was $106 million compared with an adjusted net loss of $143 million in the second quarter of last year. Please turn to Slide 13. The CET1 ratio ended the quarter at 14.2%, up 63 basis points from Q1. We had strong organic capital generation this quarter, which added 47 basis points to CET1 capital. Actuarial gains on employee benefit plans added another 17 basis points. Risk-weighted assets decreased by approximately $12 billion in the quarter, on lower retail and commercial balances in U.S. Retail and FX, which the bank hedges. The impact of FX on our CET1 ratio was therefore muted. OSFI's transitional adjustments for ECL provisioning reduced our CET1 ratio by 7 basis points this quarter. The leverage ratio was 4.6% this quarter, and the LCR ratio was 128%, both well above regulatory minimums. I will now turn the call over to Ajai.
Thank you, Riaz, and good afternoon, everyone. Please turn to Slide 14. Gross impaired loan formations were 14 basis points, remaining at cyclically low levels, reflecting the impact of support programs, customer resilience, and the continued economic recovery. Please turn to Slide 15. Gross impaired loans were $2.8 billion, decreasing $254 million quarter-over-quarter primarily related to resolutions outpacing formations in the Canadian and U.S. consumer lending portfolios and the impact of foreign exchange. Please turn to Slide 16. Recall that our presentation reports PCL ratios, both gross and net of the partner share of U.S. strategic card PCLs. We remind you that PCLs recorded in the corporate segment are fully absorbed by our partners and do not impact the bank's net income. This quarter, the bank recorded a gross PCL recovery of $373 million, reflecting a performance allowance release, partially offset by cyclically low impaired provisions. Please turn to Slide 17. The Bank's impaired PCL was $385 million, continuing at low levels and decreasing $84 million quarter-over-quarter. The decrease was primarily reflected in the U.S. consumer lending portfolios. Performing PCL was a recovery of $758 million, lower by $605 million quarter-over-quarter, largely due to allowance releases across all segments. Please turn to Slide 18. The allowance for credit losses decreased $968 million to $8 billion quarter-over-quarter, reflecting a performing allowance release, largely related to the improvement in our economic outlook and consumer credit attributes and a $289 million impact of foreign exchange. Now to summarize the quarter. Bank-led deferral and ongoing government support programs have had the desired effect of helping our customers and reducing initial expectations for credit losses. As reflected in our allowance release this quarter as well as cyclically low gross impaired loan formations and gross impaired loans. Credit results may continue to vary by quarter as there is a wide range of possible outcomes. The uncertainty associated with the ultimate credit impact remains elevated, but has reduced over time. As a result, PCLs may continue to be relatively low through the remainder of 2021. To conclude, we remain well positioned to manage through the balance of the pandemic, given we are adequately provisioned. We have a strong capital position, and we have a business that is broadly diversified across products and geographies. With that operator, we are now ready to begin the Q&A session.
[Operator Instructions] The first question is from Ebrahim Poonawala from Bank of America Securities.
I guess, maybe just to start out Riaz, maybe at the consolidated level. Just talk to us in terms of when you see NII stabilizing or actually growing or have you already hit that point? Where you think NII bottomed out this quarter? And what's your outlook barring, obviously, rate hikes for the margin, both in Canada and the U.S.?
Thank you, Ebrahim. Look, I think that when you look at the whole question of margins and the quarter-over-quarter comparison, I think we're -- it feels like we still have some moderated downward pressure from LPs being particularly tight because of the amount of cash that is overall in the system. And -- but however, the level of interest rates is definitely starting to show some upward momentum. So in addition to that, I think asset mix is an important factor. I mean, obviously, as our deposit growth continues and more customers are trusting us with their deposits, we're still at an all-time low interest rates. And therefore, that is also a headline impact on net interest margin. And card balances have been coming down, as you know, but we're very encouraged to see card spending starting to return very smartly and as liquidity in the system wanes, we expect to see some of the card balances as well as loan growth remaining. So we remain quite optimistic that as the economy is starting to open here and economic activities taking on momentum that we are very well geared to upward interest rate. So as you know, we've disclosed our NII sensitivity in the MD&A but I should also tell you that 25 basis points increase in short-term rates would mean CAD 275 million to NII as well as USD 220 million in the U.S. segment.
Got it. And just on a very separate note. In terms of capital, obviously, means you have a monster capital build over 14% CET1. Bharat, just talk to us, if you could elaborate on the comments you made at the AGM around your openness towards M&A? We've talked a lot about M&A over the last few years. Try to give us a sense of what is it that you're going after in terms of -- as far as inorganic capital deployment is concerned, either in terms of the type of asset that you're looking or are there new markets or new geographies that you could consider in the U.S. and relative to your existing footprint?
Yes. So the story has not changed, Ebrahim. It has been a consistent story. That from a capital deployment perspective, acquisitions is an important part of that. And we've said that we will not be shy to do a bank deal. It could be in the southeast of the U.S. or any part of our footprint. We have said that we would look for asset generating type of businesses as well. We like certain spaces, and we've talked about it. And so we continue to monitor the situation. The U.S. is very fluid. There are some deals that have gotten done. But for us, our approach has been consistent. We have said any potential deal as to make strategic sense. It has to make financial sense. It has to make sense with respect to our risk appetite and cultural. And so as long as we can meet those thresholds, then, of course, we would look at anything very seriously. We do have the flexibility. But we are not forced to do anything that is out there because we are not strategically challenged. We have a scale business in the U.S. that continues to grow and as Riaz mentioned, and I said in my remarks earlier on, we have a growing franchise. We are taking share in the markets that we are in. But should a compelling opportunity present itself. We do have the flexibility to look at it very seriously. And if it makes sense for us, then obviously, we would go ahead with the transaction. So nothing has changed Ebrahim, but you should expect us to be consistent with our approach going forward.
The next question is from Meny Grauman from Scotia Capital.
Bharat, given your interest in M&A, does that mean that you will carry more excess capital going forward even through a recovery than you would normally? How do you think about excess capital in relation to your M&A aspirations?
Well, we have always maintained good capital levels. That's been a tradition at TD. You look at historical levels, we've always had good capital levels. And I think the part that gets underestimated with respect to our diversified business mix, proven business model is that we do generate capital on a regular basis as well. So I don't think you should take my comments or the circumstances we are in as a departure from what our normal capital deployment framework is. And I'll remind you that framework consists of -- we always want to make sure that we have adequate capital to invest in the strategies that we have laid out. We always want to make sure that we have flexibility around capability builds, either organically or inorganically. We always look at from an M&A perspective, if something compelling is going to be emerging in the markets in which we operate. We want to have some flexibility. And then we've also been consistently saying, if we exhaust all those requirements and if we still have excess capital, we will not be shy to return that to our shareholders. So I think nothing has changed through this to suggest that we will change our framework in any way.
The next question is from Paul Holden from CIBC.
So first, I wanted to ask a point of clarification on the additional interest rate sensitivity you provided the 275 in Canada, plus 225 in the U.S., so 500 total. Is that something you'd expect to accrue in a very short order? Is that something that would accrue over multiple quarters and multiple years, as that 25 basis points works its way into margins?
I think, Paul, for that -- those particular numbers are on the basis of an immediate 25 basis points rise in the central bank rates and therefore, would accrue almost immediately. And then the NIIs sensitivity table that is in the MD&A that talks to 100 basis points, that would take into account the data considerations as well as tractoring considerations over time. But this amount, CAD 540-odd million would be immediate.
Got it. And then the 1 additional question I had is with respect to U.S. auto loan growth. And I guess particular to this quarter, I was expecting a little bit more, given the volume of car sales as well as some of the auto loan growth we saw from U.S. comp. So wondering why it wasn't better in the quarter and sort of maybe also an update that would tie to that loan segment as well.
Paul, so it's Greg, and thanks for the question. I would just say that this is a business that we're pretty mature in and we've been managing this for a number of years. And we've said that it's not just about the growth of the business for us. It's also about the margin of the business, and it's about the quality of the growth. And as you can imagine, over the last year, we wanted to be obviously particularly careful during the pandemic about how we were going to grow it, and we were going to grow it smartly. And obviously, we'll also not just with an eye on margins, but with an eye on credit quality. As things are forming up -- firming up, including used car prices, stability in the consumer market from a credit and a liquidity standpoint, obviously this is a space and a lot of consumer asset classes that are quite favorable. But we've also seen that margins have been holding up quite strong as well. And if this level of new car, but also used car sales continue, we could see a little bit more moderation of increased growth. But the other thing I juxtaposed that against is we're also seeing record paydowns across all consumer categories. So even these are term loan facilities over anywhere from 48 to 72 months. We're seeing some of these schedules paid down quicker than normal, given the excess cash that's in the market. So I think there's a number of factors going on, including excess consumer liquidity, they're applying to debt, and certainly, our mix of the business between prime, super prime and some near prime that we do. And quite frankly, we like the margins for the volume that we're taking on right now.
The next question is from Scott Chan from Canaccord Genuity.
Maybe just sticking on the U.S. side with housing. And I noticed the residential mortgages and HELOCs were down quarter-over-quarter. And we all know the story in Canada, where it was up sequentially for TD as well. Maybe give an update on maybe the housing market in the U.S. If it's slowing a little bit more in Canada and how that is affecting kind of those 2 TD buckets?
Sure. So Scott, it's Greg, and thanks for the question. First, I'd start with home equity that you've seen this trend going back over the last really 1.5 years, 2 years, about pressure on home equity balances given the ultra-low rates that we've been in for a while now. And quite frankly, even though we're down, which we don't like to see on a quarter-over-quarter or year-over-year basis, we're actually down a lot less than a lot of our U.S. peers, if you look at their home equity numbers. We continue to originate home equity and this is a space, depending on where interest rates and market demand lies. We will be interested in continuing to first stabilize and then grow it. But I would just say that the -- across the entire industry, people have been retiring home equity in favor of refinanced out the fixed mortgages and fixed-term for extended period of time given where rates are. On the mortgage front, what I would say is, yes, over the last couple of quarters, there's been very, very strong growth, although had led up a bit as you got into the second half of Q2 because it was just running so hot from a refinance standpoint really since 2020 and rates going so low. So we're seeing a lot of the volume now on the purchase side, and we're still seeing refinances getting done, but it's really moved to more of a purchase market and that split between conforming and jumbo mortgages. So a little bit of a cooling on the refinance side as this has gone on for quite a while since last year. But again, year-over-year, up 4%. And this also, I should note, includes us increasingly engaging in the conforming and for sale business, and you're seeing that in our fee income lines as well as we're originating more than we have historically in the conforming for sale business. So a little bit of a shift in our mix as well as not just jumbo for our own balance sheet, but also conforming business that we would sell off to Fannie and Freddie.
The next question is from Sohrab Movahedi.
Just wanted to go to Teri very quickly. Within the Canadian Personal and Commercial banking segmentary, I think you provide disclosure that wealth earnings were about $490 million this quarter. Can you tell me how much of that was discount brokerage, please?
So I don't think we provide that level of detail. But as you noted, we do disclose the discount, the DI results and the wealth results. What I would just point out, since you've given the platform, is it was a very strong quarter for wealth overall with record trade volumes, record account openings, strong market levels and strong net asset growth. And also the work across our businesses through One TD despite lockdowns, we're seeing the activity in terms of referrals across our businesses back to pre-pandemic levels. So some really strong momentum to build upon as we go forward.
But no disclosure on the dollar value associated with discount brokerage?
Not as a part of the wealth business, no.
The next question is from Nigel D'Souza from Veritas Investment Research.
I wanted to touch on deposits. From my understanding, carrying excess deposits on your balance sheet weighs on your margins. But when I look at it on a quarter-over-quarter basis at the bank level, it looks like deposits actually declined. I was wondering if you could provide an update on your outlook for the deposit runoff? Do you expect to retain a lot of the excess deposits you're currently carrying? Or have you seen a runoff or withdrawals of those deposits pick up as the economy reopens?
So maybe we go U.S. and Canada separately Riaz that would make sense because you come back with a consolidated. So maybe, Teri, if you want to start first and talk about Canada?
For sure. Thanks, Bharat. And thanks for the question, Nigel. So in terms of overall deposit growth in Canada, obviously, both sequentially and year-over-year, we continued to grow our lead in deposits in Canada. We continue also to lead in money movement, both Interac, e-Transfer and Flash, as Bharat mentioned in his remarks, as well as leading in global transfer remittance type payment capability. We're also seeing debit -- Visa debit volumes grow significantly through the pandemic. So we're feeling very comfortable on across our businesses in Canadian Retail, that the core deposit growth and customer acquisition continues to be an important factor for us moving forward. On your question around retention of balances, I think knowing what we know today, we wouldn't see a large runoff in 2021 as we project forward. And in fact, we're having great success in putting those deposits at work for our customers. Our mutual fund net sales results in the quarter were the strongest we've seen since 2017 as an example. And so having really good success in terms of helping our customers who may be a segment of stay at home savers who hadn't anticipated having the liquidity that they have today is now getting the advice they need from us to help make that investment or goal planning for themselves for the longer term. So that's how we think about it in Canada, maybe I'll turn it over to Greg.
Yes, Nigel. Thanks for the question. Maybe I would just first clarify that if you look at back out sweeps deposits for a minute and just look at the core business of consumer and business deposits. If you look at a year-over-year basis, consumer deposits are up 23% on a very large base year-over-year, quite strong. Business deposits are up 33% year-over-year, quite strong. If you look at a quarter-over-quarter sequentially, personal deposits are still up from Q1 to Q2, up over 6%, another $7 billion came in from Q1 to Q2 and business deposits up nearly 3% at around $2.8 billion Q-over-Q, Q1 over Q2. So still quite strong growth. And my comment would be on this is that, yes, we would have expected some smoothing out, given the strong pace of growth over this past year. But between government stimulus on PPP or the Paycheck Protection Program on the business side, continue to fund more accounts, customers were still raising cash and you saw quite robust balance sheets on the business side. On the consumer side, obviously, you had the $1.9 trillion stimulus on top of the $900 million stimulus at the end of '20. So accounts continue to be flush on the consumer side. We would expect some normalization at some point depending on the shape of any additional government or support programs out there. But what I would say is that as the economy begins to open up and some of this gets to be spent, as we're seeing real time, we're also seeing a record or near record volumes in terms of debit and credit card and interchange and things like that beginning to ramp up over the last couple of months. Eventually, this will turn into additional fees for the bank and lending opportunities as cash balances get spent down. But for right now, we're actually quite happy because we continue to open accounts, attract new households. And certainly, it's the quality of the deposits that matter, too. It's not like we're paying up or these are coming into high rate accounts. I mean these are coming into very low rate or no rate accounts. And they are core checking accounts for new households or added balances to existing checking households. So just to give you a little color on that.
Nigel, this is Bharat. Just to add, I mean TD has traditionally been strong in the deposit business, particularly checking. You should expect us to continue having that strength through any cycle. And we consider that business to be core to our model in a sense that it provides us with the key relationship from which we can deepen that relationship. So the numbers can go up and down, as you heard from Teri and, Greg, that they do go up and down, and there's puts and takes, fee income goes up and deposits go down a bit. So that, given our diversified model, you should see that strength ongoing. But just want to leave you a message that this is a core strength of the bank. We like our strength in this area, and you should expect us to continue having that strength going forward.
That's a very detailed and helpful response. And if I could just quickly touch on the expense side. It looks like your expenses are running a bit elevated. And I was wondering if there's any factors you would point to for that. You mentioned real estate optimization in the past. And it looks like your other expenses are running a little bit elevated, but is anything specific that's causing expenses to run a little higher than you anticipated? And do you see expenses trending lower? Or what's your outlook on the expense side?
I think, Nigel, the main thing on expenses I called out in my remarks, would have to do around the share of the retailers, share of their net profits in the strategic card portfolio, which makes it look particularly elevated. And then other than that, at the top of the house, expenses would have grown 1%. And I would say to you that there are not any particular trends to call out there other than to just say that we continued this year to see higher employee-related expenses. But -- and of course, the foreign currency translation had an impact as well. But if you look at the noninterest expense lines that I set out in the sub pack, you'll see that there are some fluctuations from quarter-to-quarter, but overall trends seem to be fairly stable, and we're making the investments that we need to make to continue to grow the business.
The next question is from Gabriel Dechaine from National Bank Financial.
I just want to ask about the Canadian Banking segment. I look at it on the P&C basis from your appendix and easier to compare. Kind of a swing here of pretax pre-provision profit growth that's been down on a year-over-year basis. However, it looks like we're entering the back half where the comps are looking pretty easy. I'm just wondering what your view is on that, whether we can resume positive growth in that segment in Q3 and Q4 on that PTPP basis?
So Gabe, it's Teri. I think I'll take the question. I think -- so as you've mentioned, we would have had actually positive PTPP if you take out the insurance customer remediation at the Canadian Retail level this quarter year-over-year. And then at the P&C segment level, I think to the conversation we've been having certainly, notwithstanding strong volume growth and increases that we have seen and anticipating customer activity. We do think there'll be margin pressure through the balance of '21 as assets repriced kind of the conversation Riaz had earlier. Having said that, if I look out further and think about economies reopening and how we're positioned and some of the factors we've been talking about there is the potential for the interest rate increases and that sensitivity that has been mentioned earlier. We will, over time, potentially see the on off rates of the tractor repricing start to become more favorable. We're well positioned. We've seen the credit card spend in Canada in Q2, actually above retail sales were above Q2 of 2019. And that's in an environment where travel spend is down 80% in the industry and recreation and entertainment is down 40%. So with our breadth of credit card offerings, we feel very comfortable that we're well positioned as that activity comes forward. We've continued to show strength in real estate secured lending at 3 best origination quarters back-to-back ever. And the One TD strength that we've talked about and the mutual fund sales that I mentioned earlier, where we're seeing the cash being activated to help customers invest for the long term. But if I put all that together, I feel like we're very well positioned for our customers to meet their needs going forward. And over time, that should improve the trend to PTPP.
Like timing-wise, I mean, I'm not -- there's a lot of moving pieces in there. And it sounded like the margin pressures are still going to be weighing down on Q3 to Q4 and sufficiently enough that we're still going to have negative growth? Is that ...
I think there are a lot of moving parts, and so it's very hard to call, which is why I tried to give you color. I do think that we will see the margin compression for the balance of '21 as assets reprice all other things being equal.
Okay. And then just a capital question for Bharat. I mean, I'm not the M&A question, whatever the answer is there. It's been a consistent one. So I don't want to go down that path again. But I do want to ask about the options that are at your disposal if and when OSFI removes the distribution restrictions. Is an acquisition mutually exclusive from stuff like an accelerated buyback program or a big dividend increase? That's kind of the expectation. Some other banks are setting that once those restrictions are removed, maybe more so on the dividend front, we could be bigger than -- bigger than normal -- larger-than-normal increases because it's a sort of cap to the payout ratio. I'm just wondering how you foresee things shaping up?
And Gabe, it's hard to give you precise answers on something that may or may not happen in the near-term or whatever. But the way I've laid out the framework that we've used and that has been there for many, many years, does not change. If we don't have use for that capital, as I laid out earlier, then we are not shy in returning capital to our shareholders. And we've done it previously, and we will do it again if circumstances warrant. There are -- yes, the levels are, as you said, pretty lofty. And so all those vehicles are available to us. And we will look at what makes sense from an ongoing basis, expectations wise, what our sense might be of the earnings potential in the future, et cetera. So all those inputs would be considered. But like I said, the framework has not changed, and I don't see it changing again.
I guess you kind of touched upon that. The numbers are so large that you could do a bit of everything, acquisitions, buyback, demand increase and, of course, organic growth?
Yes. Like it's hard to pin down a specific formula here for you because there isn't one. And all those options are available to us as they are to others. And you would expect us to be prudent and use those options that make sense for the bank over the long term.
The next question is from Darko Mihelic from RBC Capital Markets.
A question centers around Canada P&C as well. I just wanted to drill into the premium rebates. Despite the premium rebates, insurance put up very good earnings. So maybe you can talk a little bit about how you're measuring -- I mean, are you excluding the claims from the expense part when you're doing pretax pre-provision and operating leverage? And is the premium rebate is that like a one-off just this quarter? Or do you anticipate that there's more of that to bleed into Q3?
Thanks for the question, Darko. It's Teri. So maybe on the premium rebate, so it was $165 million this quarter. And we have had an earlier rebate that had been in our results in the prior period. And the basis for doing this is obviously activity being lowest during the pandemic. And so given the uncertainty around how things will move forward, it's hard to say whether there will be another period where more customer remediation might make sense. But we'll obviously pay close attention to how the situation is evolving. The number -- when I talked about Canadian Retail PTPP, if you excluded that remediation, you would get to a positive year-over-year results for Q2 for Canadian Retail. And then in terms of the performance of the business, feeling really good about how that business is performing. Both written premiums would have been up double digits again, if you exclude the remediation. If the sales are strong, retention is strong. The digital capabilities that we have in that business really are distinctive in terms of the general insurance business, our auto claims. Collision centers across the country, provide a much better experience for TD customers if they become in need of repairs for their vehicle due to an accident. And just overall, seeing good growth in the life and health business -- life, in particular, the direct life business. So I would say hard to say whether we'll have more remediation to follow, but very strong core business, and we've been investing in that business over time to really be a premier direct insurance business in Canada.
And just to be clear, on the expense side because -- and I appreciate Riaz's answer to the previous question on at the top of the house, expenses are well controlled. But in your division for your segment, sorry, Teri, we do see pretty good expense growth. And even though I appreciate that, excluding the premium rebate, you would have positive operating leverage. It still does seem outsized in terms of expense growth relative to what other banks are putting up. So is there 1 or 2 specific initiatives that you're spending on that might ease off as we get into the back half of the year or into next year?
So maybe just to be clear, the PTPP was positive for Canadian Retail, excluding the customer remediation, I didn't comment on operating leverage, just to be clear. On the expense story overall, I think, Riaz had mentioned sort of prudent expense management over the full year for the top of the house, so I would say that would be the same commentary from my perspective on the Canadian Retail business. When you look at Q2 year-over-year, and Riaz mentioned this as well, employee-related expense growth. If you look back to Q2 sort of last year and in particular, employee incentive complement Q2 this year, those 2 would be going in different directions. So that would be 1 item for year-over-year. And then volume-driven expenses with the strong business activity. And if I look quarter-over-quarter, it was a pretty modest sequential expense increase for Canadian Retail. I think -- and Riaz said that when we look at the business overall, we're making the investments we need to grow the business, to create efficiencies, to generate cost savings over time as well as customer efficiencies and capabilities and colleague efficiencies. And I think we're doing that in a way that also allows us over a full year period to manage expenses prudently.
The next question is from Mike Rizvanovic from Crédit Suisse.
A couple of quick ones for Greg. Wondering if you can comment on the IDA agreement and the impact of the balance is starting to come off in the back half of this year. Can you quantify that for us, at least ballpark?
Greg, would you like me to take that?
You can, Riaz, please.
Mike, it's Riaz. As you know, under the agreement that we have with Schwab that they're able to reduce the balances that they have on deposit with us by $10 billion a year, starting on July 1. And then any excess that went from the date we closed up until June 30. So just to give you a hypothetical example, if sweep balance at closing were $145 billion they can take them down to $135 billion at July 1, starting from whatever the current position is and then $10 billion a year after that.
Okay. So just to get a sense of the magnitude. I know you haven't disclosed the spread that TD has earned previously on those balances. But can I look at something like the U.S. call reports, just to get some color on what type of security you might be holding from those deposits?
Yes. I think, generally, as you know, we absent the sweep deposits, our loans and deposits are fairly balanced. So I think your approach will give you a decent view into the liquidity premiums that are available for the kinds of securities that we purchase.
Okay. And then just quickly on the PPP loans. Wondering if you can give us an update on maybe what's been accrued and what's left to be accrued magnitude wise? Just it would be helpful to sort of look at it from the perspective of your NII in the U.S. going forward?
So Mike, happy to answer it. And PPP has been a very successful program. In the first round, we put on over $8 billion worth of PPP loans for 85,000 small business customers. And in the second round, we put on approximately $4 billion net, roughly $3.6 billion, $3.7 billion extra outstanding for another 46,000, 47,000 customers. So you can get the average size of round 2 of each 1 of those loans is something just shy of $80,000, obviously, very, very small business to the majority. So if you put those together, it's obviously over $12 billion between round one, which was really second and the third quarter of last year and then round 2, which just completed or is in the process of being completed right now a little over $12 billion. And the way we would think about it is through the end of the second quarter, we probably have forgiven something in the order of 20% of that exposure. And half of that would have been -- those fees would have been accrued into NII during prior quarters, and the other half of that 20% would have been in the second quarter just completed. So the way I think about it is we still got 80% more to go to accrue of those fees over obviously the next year or 2.
And is that relatively straight-line over the next 6 to 8 quarters?
It depends on the forgiveness program because the way they've done this is first, if loans aren't forgiven or if a customer doesn't seek -- they have to actually apply for forgiveness, it would just accrue over the remaining 4.5 years or whatever is left on the term of the loan, we would take it into income. But I would suspect the vast majority would seek some sort of forgiveness and apply through it and then once those loans are forgiven, they would immediately accrue, and we would think over the next several quarters, the majority of that would come into income.
The next question is from Doug Young from Desjardins Capital Markets.
I'll try to keep this quick. Just on the expense side in wholesale, just trying to get an understanding, mix was up 14% year-over-year. Revenue is down 8%. So I mean what drove that discrepancy? Is there something unusual in there, additional staffing costs? And is this a new run rate to think about?
I think -- Doug, it's Bob. The majority of the increase year-over-year was in the variable comp line. As you would recall, last -- the second quarter of 2020 was a very challenging quarter. It's when we took to the vast majority of the PCL accrual that impacted comp accrual. And so year-over-year, it looks high, but ex that, expenses are well controlled. So I wouldn't say this is a new run rate, no.
Okay. And then just lastly, I think we've heard this from other banks, too, and I think from yourselves as well. There's a view that with credit card balances obviously being down maybe they stabilize and maybe they come back and that would be positive for many reasons, including NIMs. What's the risk that credit card balances don't come back? There's been a new adoption of things like buy and pay later, which is starting to ramp up quite quickly. Just curious your thoughts on that?
It's Teri.
Go ahead, Teri.
This is Teri. So in Canada, my sense is that's not what we would anticipate happening. And we've actually, in the last period, we saw sort of a flattening of loan balances sort of month-over-month through the quarter, which we haven't actually seen. We have been seeing a decline previous to that. And so I feel like as we've got pent-up demand around travel, recreation and entertainment, as I've mentioned earlier, I think our -- and those are higher ticket items. Our expectation is that we would start to see -- it's more a timing issue from our perspective than whether or not at this point.
The next question is from Mario Mendonca from TD Securities.
Riaz this might be most appropriate for you. In the past, the banks pointed to the 5-year Bank of Canada bond yield, there's a reasonable benchmark to use when gauging what could happen to the bank's margin in domestic retail? I guess the first part of my question is, is that still a reasonable -- would you still recommend that as something we could track to give us some indication of where the margin might head over time?
Yes. I think, Mario, in Canada, we use 5-year swap rate, not the bank of Canada yield, but the swap rate. And then in the U.S., it's a 7-year swap rate. So both of those still remain within the framework of how we manage our overall tractors.
Okay. So with that -- let me just run something by. So hypothetically, if we were to see the 5-year swap rate move materially higher. Again, this is very much hypothetical. But essentially, back where it was before this all happened. So if you buy the notion that inflation could put an upward pressure on rates, is there any sort of structural reason why TD's margins in the domestic retail and the U.S. Retail segment? Any structural reasons why we wouldn't get back to the levels we saw pre-crisis? And by that, I mean, materially higher than what we are today. The domestic retail margin, pre pandemic was like 284 basis points. And in the U.S. as you're well aware, it was a lot higher than where it is today. Are there structural reasons like changes in business mix or maybe extending latter the duration of lots? Some reason why we won't get back there?
No, Mario. There are no structural reasons which would cause that to not materialize. And as you know, in our net interest sensitivity measures. We do give you additional sensitivity that says if you see 100 basis points widening of margin, the impact on NII would be plus $2.1 billion. Yes, there are actually kinds of occasional trends about business mix changes or you might see certain liquidity requirements at certain times, or you may see that we've gathered so many more deposits over the course of the last 4 or 5 quarters that may make that jump around a little bit, but the fundamental sensitivity of the bank to interest rate upside remains very sound, and we remain very optimistic that those margins are coming back as rates rise.
And the last question is from Sohrab Movahedi from BMO Capital Markets.
I just wanted to come back to Teri, ask a little bit about the competitive dynamics that you may be seeing from nontraditional sources. Specifically Wealthsimple, the work that we do shows that you may be losing customers to them maybe 3x more than the next biggest Canadian competitor. Are you in a position to comment on how much transfers you're seeing in versus out of your bank to Wealthsimple?
Certainly not. I wouldn't be in the position to comment on that specifically. I think I'd come back to the fact that we're seeing Wealth account openings, asset levels, and trade volumes at record levels this quarter. And I think the comprehensive approach that we take to wealth inclusive of the direct capabilities that allow customers to build portfolios or make decisions on a self-service basis, but also the availability of advisers even in our direct investing business and the comprehensive education and training that we make available for customers really stands us out relative to the competition in this space. And I think we feel fully dressed to compete against all competitors, both traditional and nontraditional.
So you're not seeing any need to spend any more money to retain your discount brokerage customers?
We would, over time, continue to look at any competitive threats and what would be the appropriate way to respond. I think what we believe is that wealth isn't simple. There is a comprehensive sort of need and customers actually have exhibited this in our direct investing business. Pre-pandemic, we might have seen more of the account opening activity actually the -- through a referral from a branch, personal banking colleague. And through the pandemic, obviously, digital account openings have risen. What we also have seen is that those digital accounts actually have more activity and higher balances when we subsequently reach out specifically to customers with an adviser. And so this multichannel opportunity for our customers, the training and education that is second to none, the video library that is available to our customers, and I think, positions us to compete incredibly effectively. And so price isn't the only answer here.
Thank you. There are no more questions in the queue at this time. I would now like to turn the call to Mr. Bharat Masrani for closing remarks.
Thank you, operator, and thank you, everyone, for joining us. While it is premature to declare victory against the pandemic, given what we are seeing around the world. We are encouraged with the progress we've seen in North America, in various parts of our footprint. And as the economy recovers and we get to the other side of this, we feel very good with our diversified business model, the value proposition we provide. And of course, the famous legendary experiences that the bank is well-known for. So we feel that as the economy normalizes, TD strengths will come to fore and looking forward to good growth levels as we see that happening. I also want to take the opportunity to once again thank my 90,000 colleagues around the world. They've been the pillar, the anchor for the bank to manage through a very difficult period here, and they continue to deliver for our shareholders, for our customers, for our communities as well as for each other. So thank you for that. And folks, look forward to meeting some of you in person, hopefully, sooner than later. But at a minimum, we will be talking 90 days from now. Thank you very much.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.