Toronto-Dominion Bank

TSX:TD

Earnings Call Transcript 2018-Q3

[Operator]

Good afternoon, ladies and gentlemen. Welcome to TD Bank Group's Q3 2018 Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Ms. Gillian Manning, Head of Investor Relations. Please go ahead.

[Gillian Manning, Vice President & Head of IR]

Thank you. Good afternoon and welcome to TD Bank Group's Third Quarter 2018 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 third 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 today to answer your questions 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 were applied in making these forward-looking statements. Any forward-looking statements contained in this presentation represent the views of management and are presented for the purpose of assisting the Bank's shareholders and analysts in understanding the Bank's financial position, objectives and priorities and anticipated financial performance. Forward-looking statements may not be appropriate for other purposes.I would also like to remind listeners that the Bank uses non-GAAP financial measures to arrive at adjusted results to assess each of its businesses and to measure overall bank performance. The Bank believes that adjusted results provide readers with a better understanding of how management views the Bank's performance. Bharat will be referring to adjusted results in his remarks. Additional information on items of note, the Bank's reported results and factors and assumptions related to forward-looking information are all available in our Q3 2018 report to shareholders. With that, let me turn the presentation over to Bharat.

[Bharat B. Masrani, Group President, CEO & Director]

Thank you, Gillian, and thank you, everyone, for joining us today. Q3 was another great quarter for TD. Earnings were $3.1 billion and EPS was a $1.66, up 10% from a strong Q3 a year ago. We delivered good organic growth as customers responded to the improvements we made to our products and platforms by bringing us more of their business and we accelerated investment to enrich the customer and employee experience, underpinned by a modern infrastructure that positions us for future growth and innovation. We are supported in this ambitious strategy by the strength of our balance sheet and our disciplined approach to capital allocation. This quarter, we completed the Normal Course Issuer Bid, we announced in Q2. Despite the repurchase of nearly 20 million common shares this quarter, our CET1 ratio ended Q3 little change at 11.7%, a testament to our ability to consistently generate capital and a measure of our flexibility to deploy and support of our growth strategies. Overall, I'm very pleased with our results that demonstrate the power of our model and our ability to execute with speed and impact, capitalizing on near-term opportunities to grow and take share, while advancing our longer-term strategic objectives. Let me share some highlights from each of our businesses. Canadian Retail performed very well in Q3. Earnings were up 7%, reflecting good revenue growth across our banking, wealth and insurance businesses. The results reflect the hard work our team has been doing to elevate our service proposition and the investments we continue to make, enabling our customers to engage with us when and how they want and to get the advice they need to feel confident in a changing world. Examples this quarter included adding to our mobile, mortgage, specialists, business banking, wealth advisory and phone channel teams to ensure we have the right people aligned with the conversation our customers want to have and better connecting these teams through our One TD strategy. The enhanced tools and resources for everyday needs, like the matchmaking mortgage concierge service we added to our banking app, which uses geolocation technology to connect customers to a mortgage specialist, another piece in our end-to-end homeowners' journey. And our advanced trading dashboard and income projection tools in TD Wealth, which enable clients to make more informed investment decisions and execute personalized trading strategies. We also continue to invest in longer-term strategic capability builds, like our announced acquisition of Greystone. We are very excited about this opportunity. Greystone's deep expertise in alternative assets and international equities enhances our already comprehensive suite of products for institutional and high net worth clients. It's a significant new growth lever for our private banking -- for our private bank, which has taken share for 6 consecutive years, and it adds manufacturing scale to TD Asset Management, which will become Canada's largest money manager when the transaction closes. We're also very pleased to have reached an agreement in principle with Air Canada, CIBC, Visa and Aimia for the acquisition of the Aeroplan loyalty business. While there is still work to be done, we believe that the transaction, if completed, will provide an opportunity for all Aeroplan Miles to transfer into Air Canada's new loyalty program when it launches, delivering convenience and value for millions of Canadians, including our TD Aeroplan customers. Turning to the U.S. Earnings in our U.S. Retail bank passed the USD 700 million threshold for the first time, driven by industry-leading volume growth, higher deposit margin and a lower tax rate. We continue to manage expenses effectively, delivering another quarter of positive operating leverage, while continuing to invest. And with the contribution from TD Ameritrade, more than doubling from a year ago, segment earnings rose 31% and segment return on equity exceeded 13%. Our U.S. Retail business is in an enviable position, delivering strong organic growth in a favorable operating environment, powered by a brand that is resonating with customers. This month, TD Auto Finance won its second annual J.D. Power award, ranking highest in dealer satisfaction among non-captive lenders for floor plan financing as we continue to compete and win by putting the customer first. And we are investing to deliver even more legendary experiences, launching new platforms for small business and commercial lending clients to complement the new retail lending system we introduced last quarter, improving our data infrastructure to provide more personalized advice and enhancing our apps and websites to support the strong takeup we are seeing of our digital offerings. Our Wholesale Bank earned $223 million this quarter with lower trading-related revenue offsetting higher advisory and lending fees. Our corporate and investment banking business had a very strong quarter with good M&A activity and our fixed income business recorded several milestone achievements. We remained active in the green bond space, acting as joint lead on Manulife's $600 million green bond and Ontario power generation's $450 million issue. TD Securities is one of 3 lead managers for Fannie Mae's issuance of securities using the new Secured Overnight Financing Rate, or SOFR, index the first major test of this alternative to U.S. dollar LIBOR. The U.S. $6 billion FRN marked the debut of what promises to be a significant market. It also earned TD a lead role on USD 1 billion transaction for the World Bank, which required derivative hedging, another first for TD and the market. And our Canadian fixed income business had its best-ever result in Greenwich Associates annual survey, tying for first in overall relationship quality and fixed income share. These accomplishments speak to the success of our Wholesale Banking strategy to offer innovative solutions to our wholesale clients globally and serve as a trusted partner. Overall, I feel very good about our performance at this stage of the year. Three quarters into fiscal 2018, earnings and EPS are up 14% and 16%, respectively, reflecting high levels of customer engagement and macro conditions that remain positive despite the headline risk. We are taking advantage of this momentum to invest in our broader strategic objectives. TD's employer brand continues to grow and we're attracting the best and the brightest to our ranks. This quarter, Layer 6, the world-renowned artificial intelligence company we acquired earlier this year won the prestigious 2018 RecSys Challenge organized by Spotify for the second year running, reinforcing our leadership in AI innovation and making TD the place to be for top AI talent. Our customers are telling us, they want us to know them better. Layer 6 is helping us do that like in our real estate secured lending business, where we are working to better leverage our existing data sets with their best-in-class machine learning, so we can add more value for customers. We celebrated our customers and the inspiring work they do on behalf of their communities. This year's Customer Appreciation Day, TD Thanks You, honored their passion and commitment. We looked at hundreds of remarkable stories from Canadian customers and selected 49 community heroes, donating up to $1 million in recognition of their efforts and helping promote their contributions across our digital channels. And we continue to strengthen our community connections. As part of our new Ready Commitment, we launched the TD Ready Challenge, an annual North American initiative that provides up to $10 million in grants to capitalize innovative solutions for a changing world. A springboard for social innovation, The Ready Challenge will help forge relationships and test solutions to emerging problems and social issues at scale. Over 200 organizations have applied for grants across our North American footprint, connecting us with hundreds of individuals and organizations with groundbreaking ideas. To wrap up, I would like to thank our 85,000 people for their hard work and dedication. TD is a purpose-driven organization, steadfast in our vision to build a better bank and united by our shared purpose to enrich the lives of our customers, colleagues and communities. Our people bring this purpose to life every day. They are the reason our customers entrust us with their business and the driving force behind our success. With that, I'll turn things over to Riaz.

[Riaz E. Ahmed, Group Head & CFO]

Thank you, Bharat. Good afternoon, everybody. Please turn to Slide 5. This quarter, the Bank reported earnings of $3.1 billion and EPS of $1.65. Adjusted EPS was a $1.66, up 10% reflecting strong results in our Canadian and U.S. Retail businesses. Revenue increased 6%, reflecting higher margins, volumes and fee-based income in our Retail businesses. Credit losses were stable quarter-over-quarter and expenses were up 5%, consistent with our comment last quarter that we would continue to invest in our businesses, including adding to our sale, service and data and technology capabilities. Given the favorable operating environment and the strong revenue growth we've been generating and the benefits of U.S. tax reform, we expect approximately 5% expense growth and positive operating leverage for the full year. Please turn to Slide 6. The Canadian Retail segment's net income was $1.9 billion, up 7% year-over-year on good revenue growth, partially offset by higher insurance claims including CACs and higher expenses. Revenue increased 9%, reflecting higher loan and deposit volumes, margin expansion, growth in wealth assets and higher insurance revenues. Loans grew by 6% with increases in both personal and business volumes. Deposits increased by 4%, reflecting growth in business and personal deposits and wealth assets grew 9%. Margin was 2.93%, up 2 basis points quarter-over-quarter due to rising rates. Net interest margin is up 9 basis points year-over-year. Total PCL increased by 12% quarter-over-quarter. PCL impaired increased $7 million and PCL performing increased $20 million, both reflecting volume growth. Total PCL as an annualized percentage of credit volume was 24 basis points, up 1 basis point quarter-over-quarter. Expenses increased 8% year-over-year reflecting investments in client-facing advisors across all our businesses and higher spend on strategic initiatives such as end-to-end customer journeys and faster processing of customer transactions and increased marketing and promotion costs. Please turn to Slide 7. U.S. Retail net income was USD 877 million on a reported basis and USD 891 million on an adjusted basis, up 31% year-over-year. The U.S. Retail bank earnings rose 19% year-over-year. The strong results reflect 8% revenue growth on higher deposit margins, loan and deposit volume growth and the benefit of the Scottrade transaction as well as our lower corporate tax rate. Average loan volumes increased by 4%, reflecting growth in the personal and business customer segments. Deposit growth was 9%, including strong growth in core checking accounts of 8% and a 19% increase in sweep deposits from TD Ameritrade, due mainly to the Scottrade transaction. Net interest margin was 3.33%, up 10 basis points quarter-over-quarter, driven by higher deposit margins and positive balance sheet mix. The year-over-year net interest margin increased by 19 basis points.Total PCL increased 6% quarter-over-quarter. PCL performing increased USD 25 million, primarily reflecting a prior quarter benefit from lower commercial volume growth. PCL impaired decline USD 16 million, reflecting improved performance in the credit card and auto portfolios. The U.S. Retail net PCL ratio, including only the Bank's contractual portion of credit losses in the strategic cards portfolio was 46 basis points in the quarter, up 1 basis point from last quarter. Expenses increased 5% year-over-year, reflecting higher investments in business initiatives, business volume growth and higher employee-related costs, partially offset by productivity savings. The contribution from our investment in TD Ameritrade increased by 98% year-over-year on a reported basis and 114% adjusted for TD's share of the charges related to the Scottrade acquisition. Segment ROE was 13.1% on a reported basis and 13.3% on an adjusted basis, up 300 basis points from a year ago. Please turn to Slide 8. Net income for Wholesale was $223 million, down 24%, reflecting lower revenue and higher noninterest expenses, partially offset by a net recovery of PCL. Revenue decreased 12% on lower trading-related revenue, primarily due to revaluation of short-term trading deposits, as a result of improvement in our credit spreads, partially offset by higher advisory fees and corporate lending, reflecting strong underlying franchise performance. Total PCL was a net benefit of $14 million compared to PCL of $16 million in the prior quarter. PCL performing decreased by $38 million quarter-over-quarter, reflecting credit migration in the prior quarter and a current quarter benefit reflecting a reduction in Stage 2 volumes. Noninterest expenses rose 3%, reflecting continued investments in client-facing employees supporting the global expansion of Wholesale Banking U.S. dollar strategy, partially offset by lower variable compensation. Please turn to Slide 9. The Corporate segment reported a net loss of $113 million in the quarter. The lower loss was due to a loss on the sale of the direct investing business in Europe in the third quarter of last year and an income tax benefit resulting from the Bank's current quarter update of the impact of U.S. tax reform previously estimated during the first quarter of 2018. Net corporate expenses were higher primarily due to the positive impact of tax adjustments in the third quarter of last year and investments in -- and current investments in data and advanced analytic capabilities.Please turn to Slide 10. Our Common Equity Tier 1 ratio was 11.7% at the end of the third quarter, down 16 basis points from the second quarter. We had strong organic capital generation this quarter, which added 43 basis points to our capital position, which was mostly offset by the repurchase of approximately 20 million common shares. Our leverage ratio was 4.1%, and our liquidity coverage ratio was 127%. I will now turn the call over to Ajai.

[Ajai K. Bambawale, Group Head & Chief Risk Officer]

Thank you, Riaz, and good afternoon, everyone. Please turn to Slide 11. Credit quality remains strong in the third quarter across all business segments. Gross impaired loan formations were $1.18 billion or 18 basis points, stable quarter-over-quarter and year-over-year. Gross impaired loan formations were stable quarter-over-quarter and year-over-year for both the Canadian Retail and U.S. Retail segments. Consistent with recent quarters, there were no new formations in the Wholesale segment. Please turn to Slide 12. Gross impaired loans ended the quarter at $2.96 billion or 45 basis points, down 2 basis points quarter-over-quarter and down 4 basis points year-over-year with contribution from all segments. The U.S. Retail segment was the primary contributor to the Bank's $29 million quarter-over-quarter decrease in gross impaired loans, reflecting resolutions outpacing formations in the U.S. RESL and U.S. commercial portfolios, partially offset by the impact of foreign exchange. The Wholesale segment retained a 0 impaired loan balance quarter-over-quarter. Please turn to Slide 13. Recall that our presentation reports PCL ratios, both gross and net of the partner share of the U.S. strategic card credit losses. We remind you that the Bank's contractual portion of credit losses is reported in the U.S. Retail segment, whereas the partner share is reported in the Corporate segment. The Bank's provision for credit losses in the quarter were $567 million, or 35 basis points, stable quarter-over-quarter and up 2 basis points year-over-year, reflective of continued strong credit performance. Please turn to Slide 14. Quarter-over-quarter impaired PCL was stable for the Bank and the segments. Performing PCL was stable quarter-over-quarter for the Bank. The primary factors impacting the change in performing PCL at the segment level were volume growth attributable to the Canadian Retail segment, a prior quarter benefit in the U.S. Retail segment due to lower commercial volume growth and a provision for trade-related uncertainty. This was offset by reduced Stage 2 Wholesale segment volumes in the current quarter and a prior quarter Wholesale segment provision. In summary, credit quality continues to be strong across all the Bank's portfolios, and we remain well positioned for continued growth. With that, operator, we are now ready to begin the Q&A session.

[Operator]

[Operator Instructions] And we will hear first from Ebrahim Poonawala of Bank of America Merrill Lynch.

[Ebrahim Huseini Poonawala, Director]

I was wondering, Riaz or Teri, if you could talk about a deposit growth outlook in the U.S. When I look at your sort of breakdown between business and personal, we've seen personal growth in the deposits continue while the business deposits, and actually business loan growth, have leveled off. Now I was wondering if you can just speak to your outlook for balance sheet growth and as it does the margin outlook in the U.S. going into year-end and into next year?

[Gregory B. Braca, Group Head of U.S. Banking]

Ebrahim, this is Greg Braca with TD Bank in the U.S. And I think I should probably cover this question, if you don't mind. And I guess, I'd just start off by talking about volumes in general. And I might say that if you look over the last many quarters, we always have the lens of how we are performing against peers. And again with Q3, I'd say, we continue to be at the upper end or exceeding peer growth both in loans and deposits. So I'd put it with that context about where the market is and what the market has to offer. If I just stay with deposits, and we could break it into consumer, obviously, I'm not including any of the TDA sweeps or Scottrade deposits, I'm looking at the core bank growth. I'd also like to add a caveat around the way we would think about it is the quality of deposit growth, and we're actually quite pleased with 3% all-in deposit growth, given the fact that another hot subject lately with rising interest rates is around base and what we're paying. And we continue to see us at the bottom end of what banks are paying out in terms of REITs, and we're not paying up for hot money or time deposits or things like that, and I'll come back to that in a moment, yet we continue to outpace in terms of new households and absolute volumes and we're very pretty pleased with that. So I'd just stay there on the deposit side before I move to the loans, unless you want to cover anything more on the deposit side. And just one other anecdote before I move off deposits, and one of the other qualifiers I'd give you, for example, is that if you just look at our time deposits are relatively flat year-over-year or down, yet our checking account deposits that Riaz and Bharat called out, our actual noninterest bearing checking account volumes are up 8% year-over-year, and those are the sticky valuable sorts of deposits when I speak about quality. So let me just stop there on deposits, first.

[Ebrahim Huseini Poonawala, Director]

No, so that's helpful. So it doesn't sound like, obviously, there is a lot of talk about deposit betas, as you mentioned, Greg. When we look at sort of the U.S. and with the fed rate hikes, doesn't sound like you're overly concerned around the deposit betas in the U.S. and your ability to actually generate core consumer deposits.

[Gregory B. Braca, Group Head of U.S. Banking]

I -- again, the concern -- no concern. I think that we always have concerns about how we continue to grow, but my answer would be, I think, we're in a terrific position to continue to take share, as we've said all along. And our focus is making sure that we grow good core households both on the commercial deposit side, treasury management and on the consumer side and that plan continues to pay off. So we feel good about that.

[Ebrahim Huseini Poonawala, Director]

Yes, I'm good on deposits. So, it's okay..

[Gregory B. Braca, Group Head of U.S. Banking]

If you want me to continue, on the loan side, the way I would describe it is that we've been talking about this now for 7, 8 quarters that as we came into our natural share of size in the commercial loan portfolio, particularly around our corporate banking business and other capabilities that eventually we'd begin to level off. And if you go back 7 or 8 quarters, we would have consistently, for a few years have double-digit commercial loan growth, sometimes in the mid-teens or higher. And obviously, driving a lot of that loan growth was in corporate and specialty banking and some of our auto businesses in TD Auto Finance. We've decidedly called out -- called that growth down over many quarters and you're seeing that play out in real time. And on the commercial side, first you're seeing a very fierce competitive market for drawn assets. And number two, many of our customers have lots of availability including outside of the bank market. The bond market is very receptive, commercial paper is back in vogue, and we're seeing customers using their own cash balances. But without that being said, we still are happy with the commercial loan growth we're seeing, because again it's about quality. We're not going deep down the curve and stretching for term or giving away pricing and obviously, we're very much focused on relationship. And on the retail side of it, I still think you'll see, obviously, I know it's in the material and the supp pack, cards growth has been good. We've leveled off in auto at just under 5%, and we feel good about the strategy around that. And then the entire industry, obviously, is seeing headwinds when it comes to home equity. And even though we're down 2% year-over-year, many of our competitors are down double digits with the refinance boom and rising interest rates. So again, I think we feel pretty good about this and we expect more growth ahead.

[Ebrahim Huseini Poonawala, Director]

Very comprehensive. And Riaz, how does this translate into the margin outlook? It was pretty good this quarter, how should we think about margin into this year? And for -- how is it impacted by future rate hikes?

[Riaz E. Ahmed, Group Head & CFO]

Yes, I think, Ebrahim, in the U.S. with -- I think, we still remain from a macro perspective very oriented towards an upward bias in margins. And as deposits continue to grow, particularly in the checking accounts, I think, that should be continuing to be providing good tailwinds to our margin growth.

[Ebrahim Huseini Poonawala, Director]

But just relative to kind of the margin expansion we saw this quarter, is that sustainable? Could it get better? Worse? Any thoughts?

[Riaz E. Ahmed, Group Head & CFO]

Well, I think in time we also have to keep our eye, Ebrahim, on the yield curve. And as you know, it's quite flat. So I think at some point, one should expect that the growth will be leveling off a little bit unless we also see yield curve starting to widen again.

[Operator]

And our next question comes from Meny Grauman of Cormark Securities.

[Meny Grauman, MD & Head of Institutional Equity Research]

Question on buybacks, big quarter for buybacks. I'm just wondering what the message in that -- in the buybacks this quarter was. Specifically, is there any read-through to M&A opportunities in the U.S. or lack thereof? And whether this size of buyback signals sort of a new approach to buybacks in terms of timing or in terms of size going forward?

[Bharat B. Masrani, Group President, CEO & Director]

Meny, this is Bharat. No, I don't think there is a difference in how we think about capital. Generally, as I've said many times, we look at the use of capital from a perspective of ensuring that we're allocating enough to our core strategies, using capital when required to fill out gaps or buying capabilities. I think Greystone is a good example of that, that was announced recently. We also want to make sure that if there are any regulatory uncertainties that we have enough flexibility to meet them and as well look for M&A opportunities. I think we've been consistent in saying in the U.S., we do have good opportunities. We have a growth platform and a brand and a business model that's really resonating as you've seen in our numbers. So if the right opportunity were to present itself that is strategic and makes financial sense, we will certainly look at it very seriously. In addition, in the U.S. given our loan deposit ratio, any asset-generating opportunity would be very interesting as well. So that's how we think about it. And when we go through that framework, if we still have lot of capital flexibility, we have never been shy of using that to buy back our shares. If there is a better use of capital by our shareholders, we will obviously think of that very seriously. So that's how you should think about as to why we announced the Q2 NCIB. And I would also add that in Q3, we completed that. We said we'll buy back 20 million shares, and we did buyback 20 million shares. So it's consistent with our approach and that's how you should look at it.

[Meny Grauman, MD & Head of Institutional Equity Research]

And then just wanted to see if you could provide any more details on the Aimia transaction, specifically related to your specific share of the purchase price impact on capital and sort of how this transaction impacts TD.

[Theresa L. Currie, Group Head of Canadian Personal Banking]

It's Teri Curie. I'll take the question. Obviously, we're really pleased that we're in this phase of an agreement in principle with the consortium and with Aimia. And if the deal is concluded, then we feel this is a great -- as Bharat said in his remarks, a great thing for Canadians and in particular our TD Aeroplan cardholders. As this is an ongoing negotiation, we wouldn't be disclosing any further sort of financial deals around the transaction. But I can say in -- if you think about this in the context of our overall card strategy, we really feel great that in addition to our very robust cards line-up and our other travel offering of first class travel rewards, we believe we've got really a credit card for all Canadian consumers. So our cash back cards are performing particularly well, better than our business case. As the new part of the offering, we've continued to reposition the credit card lineup and our retail sales are performing well in the Visa lineup relative to the Visa average. We've been repositioning the MBNA business and improving the profitability of that business, and we were pleased from a card's volume perspective that we had announced the sale of our Retail Card Services business, about $250 million in balances, and we were flat in terms of volumes this quarter. So a lot of things going well across and with the conclusion of the Aeroplan transaction, I'd say, we'll have an embarrassment of riches across our credit card portfolio and offerings.

[Meny Grauman, MD & Head of Institutional Equity Research]

That sounds pretty positive. And just a follow-up...

[Riaz E. Ahmed, Group Head & CFO]

Meny, Meny, Meny, we'll stay with our protocol of 2 questions, if you could realign. Because last time, we ran out of time.

[Operator]

At so at this time, we'll go to a question from Gabriel Dechaine of National Bank.

[Gabriel Dechaine, Analyst]

Yes, so this M&A topic is going to probably keep coming up if the buybacks aren't there and you got a very strong capital position. I'm sure as -- Bharat, between the U.S. regional banking and supporting Ameritrade where there may be consolidation opportunities there, do you have a bias in either direction? Let's say, you're in the office one day and you got 2 phone calls, 1 from a U.S. regional bank place and Tim Hockey is calling you for help on a deal, which one do you answer?

[Bharat B. Masrani, Group President, CEO & Director]

Well, if both deals are great for TD, we'll answer both calls and that's how we would look at it. We've been -- Gabriel, we've been pretty consistent as to how we look at things, I think we've been saying what our framework is for a while and that's how we've applied it. And where it's appropriate, we are not shy to use our capital to further our strategies and make sure that we're getting adequate returns. And I think our record speaks for itself that when appropriate, we'll aggressively use our capital. And to date, it has worked out pretty well.

[Gabriel Dechaine, Analyst]

You mentioned having a lot of deposits in the U.S. and looking more maybe for asset-gathering capabilities, but if you were involved in a broker -- online broker transaction and probably end up with lot more deposits, is that an impediment? Or do you not care?

[Bharat B. Masrani, Group President, CEO & Director]

I mean, every deal hard to talk about something that's not out there. Hypothetical situations are always difficult to assess because you can fool yourself in thinking there is one part of that is better than the other part. But in acquisition, those are guardrails that we've set for ourselves. It doesn't mean if there is a compelling opportunity, we would not look beyond the guardrail because sometimes opportunities present themselves, which were not expected. So that's how we would look at it.

[Operator]

And we will hear next from Robert Sedran of CBIC (sic) [ CIBC ] Capital Markets.

[Robert Sedran, MD & Head of Research]

Just wanted to come back to the trading revenue decline. Riaz, I -- if I understood the answer correctly, it seems like largely an accounting issue. If you could perhaps explain a little more of what's going on in that front? And also give a sense of -- I know you probably don't want to give exactly the number that had an impact this quarter, but approximately how much of the trading revenue decline was related to this issue, would be helpful.

[Riaz E. Ahmed, Group Head & CFO]

Yes, Robert. So we use a short-term funding, which you will see on our balance sheet has been classified as trading deposits to essentially fund our global short-term markets business. And we mark-to-market these trading deposits through P&L. So when our funding costs tighten, I want something that is actually good for the overall bank, it just turns out that using the mark-to-market methodology produces losses on those liabilities, which a phenomenon that you'd be well familiar in the U.S. banks, report it as a debit valuation adjustments. And generally when that happens, you would see correlated changes, whether they'd be gains or losses on the asset side. And this quarter in the way that the funding curves moved for us, it -- and we have a large book that is over $100 billion, it created a little bit of an outsized effect and we didn't see the correlated offset. So it is true in the sense that from an accounting perspective we mark-to-market these deposits and we -- their funding, which we pay out as they mature. So the tendency is for this to go back to par over time, but the mark-to-market makes it not linear return to par and it bounces around. So in terms of the delta to last year, last year we also had very good client activity in this book. So between the 2, we kind of -- you see the differential. If these kinds of -- given the size of the book and the bouncing around in funding costs, if that continues in a very -- and produces very volatile returns that are really more accounting, mark-to-market driven than anything else, there are accounting options where we may take that mark-to-market into OCI or essentially use accrual accounting. So we might look in time if appropriate to change the accounting method. But really from an underlying franchise perspective, as we called out earlier, terrific advisory and corporate lending revenue, and I wouldn't consider this to be significant in our franchise map.

[Robert Sedran, MD & Head of Research]

And if it's mark-to-market revenue or an impact of mark-to-market, would you expect in subsequent quarters to see it reverse? Or would you expect to see this is just -- like would -- should we see this coming back in subsequent quarters, I guess, is what I'm wondering?

[Riaz E. Ahmed, Group Head & CFO]

Yes, I think when you mark-to-market a single deposit like that, I mean, you -- if it was a single deposit, you would see obvious effects of it returning, but when there is a portfolio that has been built over 4, 5 years and deposits are continuing to mature and the portfolio is growing, you don't see it in such a linear way, because some part of your deposits may have gains and some part of it may have losses. So I think it's not a linear play out, but effectively those deposits mature and they get paid out at par. So overall, everything goes back to par.

[Operator]

And our next question comes from Scott Chan of Canaccord Genuity.

[Scott Chan]

If I had to pick on something on the U.S. side, it's the AUM. If I look year-over-year, it's down 5% and obviously, we've had a significant tailwind in equity markets, specifically, the U.S. And you commented that your net outflows, but I was wondering if you could just expand on that a little bit further. Is it more industry? Or is it more kind of TD focus that is impacting that?

[Gregory B. Braca, Group Head of U.S. Banking]

Yes. So I guess, I'd cover it in a couple of ways. First, I'd just stay on the institutional side, we are seeing the phenomenon that continues to play out from active to passive. And in addition, as we called out, I think, in late '16 and some of the carryover balances were in '17, and we did exit a sub advisory relationship on the institutional side that continued to play out and some of those balances remained on '17. What I would generally say, as you know and as you've been following us, the largest story in our mind is how we continue to build out the wealth management business and that becomes a very big part and will become a bigger part of our retail strategy going forward. So I'd say on the institutional side, much of the answer I'd give you is the active to passive narrative.

[Scott Chan]

And on the retail side, has it been positive? Or negative or?

[Gregory B. Braca, Group Head of U.S. Banking]

Sure. So it's actually been a very positive story. And over the last 3 to 4 years, we've spent a lot of time and energy building out our private banking space for higher net worth individuals as well as a mass affluent strategy as we continue to partner with TD Ameritrade. And that is something that if you just go back 5, 6 years ago, we're far from had a robust place in the wealth and private banking space, and this is something we're very much interested in spending time and energy on in the coming years.

[Operator]

And our next question comes from Darko Mihelic of RBC Capital Markets.

[Darko Mihelic, Financials Analyst]

I just wanted to return to the trading-related hits in the quarter. And Riaz, I just wanted to understand it a bit better, because it does seem outsized and you didn't give us a number. But it does seems like the -- I mean, overall your trading is down about $200 million quarter-over-quarter and that seems fairly outsized. And I guess, the reason or my question is we didn't really see much in terms of a change for Canadian bank credit spreads. And to further emphasize the point, when we look at the other banks that use the fair value to profit and loss, I mean, we can see their marks on -- in their OCI and none of the banks have very big marks in the quarter. So we're -- I'm just curious if you can drill into, was it something very specific to TD that would have caused this big change? Or am I overplaying the size of the hit to trading?

[Riaz E. Ahmed, Group Head & CFO]

No, I think, 2 things. One is in terms of giving you a relative perspective, Darko, I won't be in a position to comment on how other banks do their mark-to-market and how the various factors of the yield curve, short-term, long-term play into the various banks' positioning of their balance sheet in the trading space. I do think that, I can safely tell you that in terms of gains or losses that we've experienced on a quarter-to-quarter basis over time, this was one of the largest and therefore, appropriate to call out. And then as I said earlier, I think there's also a fairly attractive quarter that we had in the third quarter last year when we had a good set of client-driven activities that help us there. So I do see -- as I said, it may be that it's kind of unique to what we do, and as I -- but we'd look into that a little bit over time as we explore what -- whether it's appropriate to make any changes in the way that we account for this.

[Darko Mihelic, Financials Analyst]

And it was your credit spreads, right, that cause -- I mean, TD's own credit risk? It was your credit spreads that change in the core of that?

[Riaz E. Ahmed, Group Head & CFO]

Yes, it is our own funding cost. And as I said earlier, you have to look at the spreads and sometimes how you also position things relative to LIBOR, OIS, et cetera. So big picture I'd say, funding cost and yes, driven by our narrowing of our -- tightening of our own funding cost including credit spreads.

[Darko Mihelic, Financials Analyst]

Okay. And then for Bob Dorrance then, this is the third quarter in a row where we've seen you guys calling out higher expenses in your business, and we do see a lot more full-time equivalent staff. So it looks like you are growing out the U.S. dollar strategy. Can you maybe outline for us what you've done there? And what should we be expecting from the Wholesale Banking segment next year? Presumably, all these -- all this expense and people that you've added, should have some sort of an impact. So can you talk to what our expectation should be for Wholesale next year?

[Robert E. Dorrance, Group Head of Wholesale Banking]

I think, all other things being equal, Darko, assuming that we have a favorable environment, we should see continued growth, because as you point out, we are investing in the U.S. dollar business across the board and that investment is in terms of both front office people as well as front to back, because where growth comes, the necessity to invest end-to-end. We are adding on the corporate investment banking side, we're basically adding corporate bankers as we broaden out the areas of focus. Traditionally, we had been fairly narrowly focused in energy and media and telecom, and we're broadening out the sectors there of the market that we are covering. And we're also deepening and adding client relationships in the 2 previous sectors, in energy and in media and telecom. So it's investment of people. More recently as those strategies are resulting in more clients and also better tiering in the relationships that we want, we have been adding investment banking people. Focus there has been more on the M&A side. Specifically this year, we've added meaningfully in both the energy side in Houston as well as the utility side in New York. We're adding M&A people as well in media and telecom. The other corporate sides are a little earlier in the game, so we want to build up our relationships there before we would add investment banking. But we're also adding people in the markets and capital markets side of the business in order to support the investment in corporate and in real money clients. So those are -- we're adding new product areas. We've talked about prime services before and that's starting to get some traction and we're looking for healthy growth in that in 2019. We continue to add to the real money business, to the institutional side as we onboard more large clients there. And again, the necessity to develop and broaden product there is paramount as well. So we've been building out our MBS business. We've been building out our asset securitization trading businesses. We've added people, both sales trader and origination in the corporate spaces as well in U.S. dollars. So all parts are growing. It is an investment, cognizant of that, and we're doing it eyes wide open, expecting that we'll earn sufficient returns for the bank over a reasonable period of time. And I'd say as well, Darko, is that some parts of the journey are a little bit more mature and already are generating returns and cash flows to continue to invest and some parts are still early on in the journey, but it's a significant opportunity for TD Securities in U.S. dollars, especially -- you asked whether we can work with U.S. partners,. The growth that the U.S. bank has, the funding, the rating, the brand, et cetera, I think all lead to the view that we have a very good competitive advantages as long as we can work well together and add the right people within the risk appetite of where we want to be.

[Operator]

And we will hear next from the line of Sumit Malhotra with Scotia Capital.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

First is for Riaz on the CET1 ratio. In speaking with some of your counterparts over the last couple of weeks, we've heard about the potential impact on capital from RWA changes to counterparty and securitization measures. Do you have any update for us on what that might mean for your capital in 2019?

[Riaz E. Ahmed, Group Head & CFO]

Yes. I think, Sumit, as we go into the new securitization framework and the counter -- and the changes to the counterparty credit risk, I expect a rather minimal change for us, maybe order of magnitude 10 to 15 basis points.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

Okay. So if I look at your number today 11.7%, just under that. So if I wanted to do a pro forma, we would take about 20 basis points for these changes as well as the Greystone deal, is that accurate?

[Riaz E. Ahmed, Group Head & CFO]

Yes. Including Greystone, yes.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

Okay. And the second one is for Teri. Probably of all the banks I cover, the one we've had the least questions about core funding and specifically strength of the deposit franchise is TD. But when I look at your consumer deposits in Canada, year-over-year that balance is a slow 2% or 3% level of growth. I bring this up, maybe more specifically, since many of your peers are talking about how consumer deposit growth has become a key focus point for them, and we're hearing about bonus campaigns on interest rates, $300 if you open a checking account. When you hear about these kinds of promotions in the market, what is the competitive response, if any, for TD? And is this a reason that you feel your deposit growth has been decelerating of late?

[Theresa L. Currie, Group Head of Canadian Personal Banking]

So what I would say is we feel great about our core checking acquisition. We continue to outacquire relative to the other competitors in the marketplace. And the way that we see that is in our personal nonterm deposit share, where we have a significant #1 market share position. And so what you're seeing in the sort of consumer deposit overall is the impact of term deposits, where we have seen more competitive pricing and in particular outside of kind of the core players. And so if I sort of lever off of what Greg was talking about earlier in the U.S. context, I'd say that we continue to have relationship pricing, if you will, for franchise customers and continue to ensure that we're competing rationally on pricing across our deposit business. But certainly, when we look at the performance of our business relative to our ongoing acquisition or the new-to-bank customer growth, we feel great and continue to feel like we're leading in that space.

[Operator]

And our next question comes from Sohrab Movahedi with BMO Capital Markets.

[Sohrab Movahedi, Analyst]

Riaz, the trading deposits, which you kind of called out as kind of the culprit, if you will, for the trading mishap this quarter. It looks like it was kind of -- it really started picking up those balances on your balance sheet anyway starting in Q3 '17. So is this -- are you now where you think this business is going to be? Or do you think you're going to be growing this business? So will this -- these balances are going to be kind of going up from here, number one? And then number two, is this kind of credit spread tightening? Is it basically taking away some, arguably elevated, let's say, mark-to-market gains in prior quarters from the same credit spreads?

[Robert E. Dorrance, Group Head of Wholesale Banking]

I'd say that on the volume side, Sohrab, we would -- to some extent, the short term part of the balance sheet is a culmination of what we use to grow franchise businesses. Some of it is created by the excess leverage that TD Bank has, in general, as a bank. And that leverage we would invest if we saw opportunity on a normalized basis for profitable ROA and ROE investments. Really, I think, the -- just to reinforce what Riaz said, there's typically a correlation between returns on the asset side relative to what we're paying for funding. In the case of some of these relationships, there were differences in the quarter that were sufficient to make this meaningful. I would stress as well, that it was one part. Yes, it was one part of why trading revenue was down year-over-year. Another part as Riaz mentioned, is that we did have a particularly strong quarter in Q3 of '17 related to some meaningful client trades that we had. That did not recur. So it's fair to say that absence this mark-to-market, the trading revenue particularly on interest and credit would have been down anyway. It just exaggerated it in a meaningful way or a meaningful way enough that it was important. I think we felt that you should know about it. As to whether we're going to continue to grow the business, it really is driven by the profitability and -- of what's available in the marketplace. And in general, we earn attractive returns for shareholders in this business.

[Operator]

And we will hear next from Nigel D'Souza of Veritas Investment Research.

[Nigel R. D'Souza, Investment Analyst]

I wanted to turn focus on to your real estate secured lending book. And when I look at year-over-year growth for that book, it's up -- it's a little over 5% in Q3 and that seems to be outpacing some of your peers as well. So I'm wondering what's driving that higher growth rate. Is that from you competing more in pricing particularly on the variable side? Could you provide some color on that growth?

[Theresa L. Currie, Group Head of Canadian Personal Banking]

Sure, It's Teri again. So in terms of the growth, we feel great about the growth of our proprietary real estate secured lending business. It's a business that we've been talking about over the last number of quarters and the investments we've been making in that business and we're seeing those investments pay off and that's really what's behind the growth. We have added mobile mortgage specialists, around 250, over these past number of quarters, that certainly is helping. We also have underwriting standards through the cycle. So we feel very comfortable with the risk of what we're putting in our books. We continue to have an embedded growth opportunity with the home equity line of credit product that I've talked about before. And so we're very comfortable that the business we're doing there is really amortizing HELOC business growth, and it's generally speaking to customers, who love us for their day-to-day banking and had borrowing elsewhere, and they're borrowing with us as part of that franchise relationship. We've continued to invest in our back-office operations over the last year and that's allowed us to ensure that the customer's most important question as to whether they can qualify for the loan is getting answered more quickly, which is driving originations as well. And then finally and importantly, we've been investing in our digital capabilities in this business and our end-to-end homeowner journey for real estate secured lending is contributing to more customers coming to us, finding us digitally and then pursuing their mortgage business with us. And then, I think, Bharat also mentioned, we're able to leverage the capabilities of Layer 6 to ensure that with the data that we have about our customers and with their consent that we're using that information to, again, more meaningfully make offers to them that are relevant in the moment.

[Nigel R. D'Souza, Investment Analyst]

Okay. And just a follow-up on the point you made on the amortizing HELOC book. When I look at those balances, they're up about 35% year-over-year in Q3. Now is that being driven entirely by the FlexLine offering? Or is there something else at play here that's helping you achieve that outsized growth?

[Theresa L. Currie, Group Head of Canadian Personal Banking]

So the amortizing HELOC would be the FlexLine growth for sure. And again, we've consistently been growing that as we improved the product going back a few years ago to really be a credible mortgage substitute for the right customers and a flexible and convenient offering.

[Operator]

And we'll hear from Mike Rizvanovic of Macquarie.

[Mehmed Rizvanovic, Analyst]

First quick question for Greg. Just want to go back to the U.S. margin and your sequential 10 basis point increase. Was that exclusively deposit margins? I'm just looking at your sequential change in your loan balances in the U.S.. It doesn't look like the business mix would have been favorable, at least from a margin perspective. Can you give us a little bit of breakdown on that 10 bps?

[Gregory B. Braca, Group Head of U.S. Banking]

Sure. So it was a bigger lift than we've seen in prior quarters, but I'd say it's a couple of things coming together. First, obviously absolute deposit rates. So it's deposit rates. It is a little bit of a mix of the business, and it would also be better returns on the investments in the investment portfolio as we reinvest at better long-term rates than they were coming off at. So it will be a combination of the investment, better deposits and the mix of the business.

[Mehmed Rizvanovic, Analyst]

Okay. And just quickly over to Teri on your residential mortgage book in Canada. I'm just looking at the difference between what we've seen in the insured book versus the uninsured. And the insured book clearly declining quite a bit. It's down double digits in the last 5 quarters on a year-over-year basis, whereas your uninsured portfolio is growing somewhere in the 15% to 17% range. Just wondering when you think about what's ahead for 2019, do you expect some sort of stability and moderation or less of a decline in the former and perhaps some moderation in the latter? What's your outlook overall? Or maybe for those 2 components separately?

[Theresa L. Currie, Group Head of Canadian Personal Banking]

So just given the market dynamic around insured mortgages and the competitiveness and funding cost issues around that piece, I think what we have seen we might continue to see, which is the continued sort of slight erosion in insured balances.

[Mehmed Rizvanovic, Analyst]

And on your uninsured?

[Theresa L. Currie, Group Head of Canadian Personal Banking]

And on the uninsured, I would expect us to continue to see increasing, an increased proportion.

[Mehmed Rizvanovic, Analyst]

But in that same sort of 15% to 17% range? Or is it realistic to think that, that should be coming off to some degree?

[Theresa L. Currie, Group Head of Canadian Personal Banking]

I think, it's hard to say for sure. But my sense would be it would moderate over time.

[Operator]

And thank you. At this time, I would like to turn the call back to Mr. Bharat Masrani for closing remarks.

[Bharat B. Masrani, Group President, CEO & Director]

Thank you, operator, and thanks to all of you for joining us this afternoon. As I said in my earlier remarks, very happy with how the quarter has turned out that is reflected in our numbers. And frankly, I feel great that the strategies we've outlined are being executed upon and the results are there for you to see. I would like to take this opportunity once again to thank our really dedicated and talented TD Bankers around the world, who continue to deliver for our shareholders. Thanks again for joining, and we'll see you next quarter.

[Operator]

And so ladies and gentlemen, that does conclude the call. We would like to thank everyone for your participation, and you may now disconnect.