Toronto-Dominion Bank
TSX:TD
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Toronto-Dominion Bank
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Good afternoon, everyone, and welcome to the TD Bank Group Q3 2022 Earnings Conference Call. I would now like to turn the meeting over to Ms. Brooke Hales. Please go ahead, Ms. Hales.
Thank you, operator. Good afternoon, and welcome to TD Bank Group's Third Quarter 2022 Investor Presentation. We will begin today's presentation with remarks from Bharat Masrani, the bank's CEO, and after which Kelvin Tran, 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 Michael Rhodes, Group Head, Canadian Personal Banking; Paul Douglas, Group Head Canadian Business Banking; Raymond Chun, Group Head, Wealth Management and Insurance; Leo Salom, President and CEO, TD Bank America's most Convenient Bank; and Riaz Ahmed, 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 such as 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 use of non-GAAP and other financial measures, the bank's reported results and factors and assumptions related to forward-looking information are all available in our Q3 2022 report to shareholders.
With that, let me turn the presentation over to Bharat.
Thank you, Brooke, and thank you, everyone, for joining us today. Q3 was a good quarter for TD.
Earnings increased 5% to $3.8 billion, and EPS rose 6% to $2.09. Revenue grew 8% year-over-year reflecting increased customer activity and the benefits of our deposit-rich franchise. Credit quality remains sound, and we continue to build the bank of the future with investments in frontline colleagues and data and mobile capabilities.
The bank's common equity Tier 1 ratio ended the quarter at 14.9%, reflecting robust organic capital generation and the activation of the DRIP discount last quarter. A long track record of delivering consistent earnings growth has positioned TD to close 2 strategic acquisitions: First Horizon and Cowen, while remaining strongly capitalized.
We expect TD's common equity Tier 1 ratio to be comfortably above 11% post closing of both transactions. Overall, I'm pleased with our results this quarter that reflect the benefits of our diversified business mix and North American scale while maintaining our risk discipline.
Let me now turn to each of our businesses and review some highlights from Q3.
Our Canadian Retail segment earned $2.3 billion with record revenue of $7 billion in the quarter. The Personal Bank performed well. We saw industry-leading market share gains on non-term deposits, contributing to 8% growth in personal deposits year-over-year. In our real estate secured lending business, volumes were up 3% from Q2, a second quarter of very good sequential loan growth, demonstrating momentum from our investments across frontline sales channels, operations and account management.
We remain confident in the quality and mix of our real estate secured lending book supported by prudent underwriting practices. Our cards business continued its strong run with loan volume up 10% year-over-year on record spend. Last quarter, we spoke about the next evolution of work or new for short. The new model enables us to deliver innovations faster, deploy technology more efficiently and continue to meet and exceed the rapidly evolving expectations of our customers.
The Canadian Personal Bank delivered several key initiatives this quarter, leveraging the new model, including migrating its flagship mobile application entirely to the public cloud, enabling our teams to drive customer-centric innovations at the speed of the market.
The next evolution of work also powered enhancements for our new to Canada customers, where we delivered our strongest quarter to date in new account acquisition. In Business Banking, TD again achieved double-digit loan growth, driven by strength across Canada and verticals, including commercial real estate, agriculture, middle market, dealer financing and small business banking, demonstrating our commitment to grow with our clients over the long term.
In our wealth business, TD Asset Management, already the #1 Canadian institutional asset manager grew its market share and remain focused on delivering for its clients with 90% of managed funds AUM ranked in the first or second quartile in 3-year performance, and TD Direct Investing was recognized as the #1 online broker in Canada in MoneySense Magazine's 2022 review.
In our insurance business, we opened a 24th location of our best-in-class auto centers, further extending our ability to provide superior customer experiences through a one-stop shop while managing claims costs in the face of inflationary pressures.
Turning to the U.S. Our U.S. Retail Bank had record earnings of USD 913 million for the quarter. Commercial loan volumes, excluding PPP runoff, accelerated their momentum, increasing 3% quarter-over-quarter, reflecting growth in middle market and specialty lending. We saw a robust personal loan growth of 8% year-over-year, driven by increased customer activity and moderating paydowns. Retail deposits also grew 8% year-over-year as customers continue to entrust TD Bank, America's most Convenient Bank with their business.
To further enhance the customer experience, this quarter, the U.S. Retail Bank launched TD workshop which combines a fully functional store with space designate design for researching, collaborating and bringing the community together. The information collected at TD workshop will help inform how TD evolves its interaction, store formats and the financial services offered to our customers.
Our retail card services business established financing partnerships with home furnishings brand, RH formerly restoration hardware and Jewellery retailer Blue Nile to launch private label credit card programs. In addition, for the third year in a row, TD Auto Finance received the highest ranking in the J.D. Power U.S. Dealer Finance Satisfaction Study. With the contribution from our investment in Schwab of USD 226 million, segment earnings were USD 1.1 billion this quarter.
Before we leave the U.S. Retail segment, I want to provide an update on our acquisition of First Horizon. We were pleased that our commitment to the communities we serve was reflected in the support we heard for the transaction at the joint public meeting held by the Federal Reserve and the OCC on August 18.
We are excited about the benefits that our combined banks will deliver for all of our stakeholders and continue to expect the transaction to close in the first fiscal quarter of 2023.
Turning to our Wholesale Banking business. Net income for the quarter was $271 million, a decrease of 18% compared to the third quarter last year, reflecting continued investments in our U.S. dollar strategy, including the hiring of banking, sales and trading and technology professionals. Revenue was roughly flat year-over-year as the impact of weaker underwriting environment was offset by strength in other parts of our business, including higher trading and net interest income, again, reflecting the benefits of our diversified business model.
This quarter, TD Securities was named the Canadian FX service quality leader for corporates in 2022 by the coalition Greenwich Study for the third consecutive year as the wholesale bank continues to lead in the Canadian market.
As I said on our call earlier this month, the acquisition of Cowen will build TD Security's strong foundation. This combination will further accelerate our growth in the U.S. and position TD Securities as an integrated North American dealer with global reach. We're incredibly excited about this opportunity, and we have heard from many TD securities and Cowen clients and colleagues that they are equally excited about the combined offering, added scale and capabilities.
We are delighted with the enthusiastic support for this strategic transaction and have already started work on our integration plans ahead of the anticipated closing in the first calendar quarter of 2023.
Three quarters into fiscal 2022, we have made significant strategic progress and seeing positive momentum in our businesses. As we enter the final quarter of the year, we continue to navigate heightened uncertainty and a volatile environment. We will maintain our prudent approach and focus on building our business for the future and delivering long-term value for our shareholders.
United by our purpose to enrich the lives of our customers, colleagues and communities. That purpose comes to life in our business and in how we engage with all of our stakeholders. We continue to strengthen our brand as an employer of choice, attracting fantastic talent to the bank.
This quarter, TD Bank, America's most Convenient Bank was recognized by Forbes as one of America's best employers for women. And in partnership with the Black Professionals in tech network, TD recently announced the launch of Obsidi Academy and Engineering Boot Camp for black individuals to help them build careers in technology. We will hire program graduates and cohorts over the next 3 years.
We have also committed to organizations working here and overseas to assist refugees to help them settle in Canada. In addition to this financial commitment, TD is hiring arising Ukrainians for roles at the bank, helping to provide meaningful employment and stability upon arrival in Canada. TD colleagues are committed to the communities in which we live and work.
Recently, our digital and research teams volunteered their skills in customer experience and design to help the WellSpring Cancer Support Foundation create a virtual platform for families dealing with cancer. TDS supported Wellspring for 30 years and now we are helping guide them through their digital transformation.
TD Securities underwriting Hope campaign is another long-standing example of our commitment, celebrating its 25th anniversary this year. Colleagues raised almost $2 million in support of children's charities in June, bringing the total raise since inception to nearly $25 million. At TD, we are privileged to serve more than 27 million customers around the globe.
This month, we launched TD Thanks You, our signature annual North American program that recognizes and celebrates TD customers, spotlighting their contributions and helping them continue to make an impact. I encourage you to follow these inspiring stories online.
To wrap up, I would like to thank all of our TD bankers who are living our shared commitments every day. I'm very proud of what we have accomplished together, and I look forward to a strong finish to the year.
With that, I'll turn things over to Kelvin.
Thank you, Bharat. Good afternoon, everyone. Please turn to Slide 11. This quarter, the bank reported earnings of $3.2 billion and earnings per share of $1.75, both down 9%. Reported earnings include the net loss from mitigation of interest rate volatility to closing capital on First Horizon acquisition. Adjusted earnings were $3.8 billion and adjusted EPS was $2.09, up 5% and 6%, respectively. Reported and adjusted revenue increased 2% and 8% year-over-year, respectively, reflecting margin and volume growth in the Personal and Commercial Banking businesses.
Reported revenue also includes the net loss from mitigation of interest rate volatility to closing capital on First Horizon acquisition. Provision for credit losses was $351 million. Reported expenses increased 9% year-over-year, reflecting higher employee-related expenses and higher spend supporting business growth. Adjusted expenses increased 8%. Absent the retailer partners net share of the profits from the U.S. strategic card portfolio, adjusted expense growth was 9.9% year-over-year or 8.7% ex FX.
Consistent with prior quarters, Slide 26 shows how we calculate total bank PTPP and operating leverage removing the impact of the U.S. strategic card portfolio, along with the impact of foreign currency translation and the insurance fair value charge. Reported total bank PTPP was down 5% year-over-year before these modifications and adjusted PTPP was up 6% after this modification.
Please turn to Slide 12. Canadian Retail net income for the quarter was $2.3 billion, up 6% year-over-year. Revenue increased 7%, reflecting volume and margin growth, higher fee-based revenue in the banking business and higher insurance volumes partially offset by lower transaction and fee-based revenue in the wealth business. Average loan volumes rose 9%, reflecting 8% growth in personal volumes and 15% growth in business volume. Average deposits rose 7%, reflecting 8% growth in personal deposits, 4% growth in business deposits and 8% growth in wealth deposits. Wealth assets decreased 3%, reflecting market depreciation, partially offset by net asset growth.
Net interest margin was 2.7%, up 8 basis points compared to the prior quarter, primarily due to higher deposit margins, reflecting the rising interest rate environment, partially offset by lower loan margins. Total PCL of $170 million increased $110 million sequentially. Total PCL as an annualized percentage of credit volume was 0.13%, up 8 basis points sequentially.
Insurance claims decreased 1% year-over-year, reflecting favorable prior year claims development and the impact of a higher discount rate, which resulted in a similar decrease in fair value of investments supporting claims liabilities reported in noninterest income partially offset by higher current year claims. Noninterest expenses increased 8% year-over-year, reflecting higher spend supporting business growth, including technology and employee-related expenses.
Please turn to Slide 13. U.S. retail segment reported net income for the quarter was USD 1.1 billion, up 7% year-over-year. Adjusted net income was USD 1.1 billion, up 8% year-over-year.
U.S. Retail Bank reported net income was USD 898 million, up 1% and reflecting higher revenue, partially offset by higher PCL and noninterest expenses. U.S. Retail Bank adjusted net income was USD 913 million, up 2%. Revenue increased 11% year-over-year, reflecting higher deposit margins and volumes, partially offset by lower income from PPP and lower loan margin. Average loan volumes were flat year-over-year, reflecting an 8% increase in personal loans and a 7% decline in business loans.
Business loans increased 2%, excluding PPP loans due to strong origination, new customer growth, higher commercial line utilization and increased customer activity. Average deposit volumes include -- excluding sweep deposits, were up 5% year-over-year. Personal deposits were up 8% and business deposits were up 2%. Sweep deposits declined 2%.
Net interest margin was 2.62%, up 41 basis points sequentially and as higher deposit margins, reflecting the rising interest rate environment and positive balance sheet mix were partially offset by lower PPP loan forgiveness and lower loan margins.
On Slide 30, we've continued our disclosure on the impact of the PPP program. This quarter, PPP revenue contributed approximately USD 16 million to net interest income and 2 basis points to NIM. Total PCL was USD 83 million, an increase of $98 million sequentially. The U.S. retail net PCL ratio, including only the bank's share of PCL for the U.S. strategic cards portfolio, as an annualized percentage of credit volume was 0.2%, higher by 24 basis points sequentially.
Reported expenses increased 8% year-over-year, reflecting higher employee-related expenses and business investments, and acquisition and integration-related charges for the First Horizon acquisition, partially offset by productivity savings. Adjusted expenses were up 6% year-over-year. The contribution from TD's investment in Schwab was USD 226 million, up 40% from a year ago, reflecting higher net interest income, partially offset by lower trading revenue.
Please turn to Slide 14. Wholesale Bank net income for the quarter was $271 million, a decrease of 18% year-over-year, reflecting higher noninterest expenses and PCL. Revenue was $1.1 billion, down 1% year-over-year reflecting lower underwriting fees and markdowns in certain loan underwriting commitments from widening credit spreads, partially offset by higher trading-related and global transaction banking revenue. PCL for the quarter was $25 million compared with the recovery of $9 million in the prior quarter.
Expenses increased 9% year-over-year primarily reflecting the continued investments in Wholesale Banking U.S. dollar growth strategy, including the hiring of banking, sales and trading and technology professionals partially offset by lower variable compensation.
Please turn to Slide 15. The corporate segment reported a net loss of $752 million in the quarter compared with reported net loss of $205 million in the third quarter last year. The year-over-year increase primarily reflects the net loss from mitigation of interest rate volatility to closing capital on First Horizon acquisition, higher net corporate expenses and a lower contribution from other items. Adjusted net loss for the quarter was $175 million compared with an adjusted net loss of $122 million in the third quarter last year.
Please turn to Slide 16. The common equity Tier 1 ratio ended the quarter at 14.9%, up 22 basis points sequentially. We had strong organic capital generation this quarter, which added 42 basis points to CET1 capital excluding the net loss from the mitigation of interest rate volatility to closing capital on the First Horizon acquisition, which decreased CET1 by 10 basis points.
We also saw a 12 basis point increase in CET1 related to the issuance of common shares under our dividend reinvestment plan. These additions were partially offset by an increase in RWA. RWA increased 1.4% quarter-over-quarter, reflecting higher credit risk and market risk RWA. Credit risk RWA increased $5.1 billion or 1%, mainly reflecting higher volumes in all of our businesses, partially offset by a decrease in equities. Market risk RWA increased $1.1 billion or 5%, reflecting widening credit spreads. The leverage ratio was 4.3% this quarter and the LCR ratio was 121%, both well above the regulatory minimum.
Please turn to Slide 17. As we mentioned on our call relating to the Cowen acquisition earlier this month, as part of our ongoing capital management activities. And in light of heightened volatility in interest rate, reduction in our net interest income sensitivity with rising rates and continued uncertainty in the macroeconomic environment, during the third quarter, we established a strategy to mitigate the CET1 ratio impact of further rate changes on goodwill in connection with the First Horizon acquisition. The bank already has a large portfolio of U.S. investment securities, many of which are hedged using interest rate swaps. As a result, TD was able to implement a strategy to mitigate interest rate volatility without entering into any new transaction. Now as interest rate change, certain interest rate swaps, which were de-designated from their previous hedge accounting relationships against TD's existing U.S. investments will mark-to-market through P&L, and mitigate the capital volatility due to interest rate changes and goodwill amount for the First Horizon acquisition.
We recorded an item of note of $505 million after tax which primarily reflected the mark-to-market loss of these swaps as of July 31. If quarter end was yesterday, given the change in rates, you will no longer see a loss, but actually a gain. So that shows the extent of interest rate volatility during this time. The sensitivity will also change over time as a result of a number of factors, including First Horizon's interest rate risk management and balance sheet composition, as well as macroeconomic factors like the degree of the rate change and the shape of the interest rate curve. Based on changes in interest rates, we expect that the amount allocated to goodwill and intangibles, will increase by USD 1.5 billion upon close.
I will now turn the call over to Ajai.
Thank you, Kelvin, and good afternoon, everyone. Please turn to Slide 18. Gross impaired loan formations were 12 basis points, stable quarter-over-quarter.
Please turn to Slide 19. Gross impaired loans decreased 2 basis points quarter-over-quarter to a new cyclical low of 28 basis points, reflecting reductions in both the Canadian and U.S. Retail segments.
Please turn to Slide 20. Recall that our presentation reports PCL ratios both gross and net of the partner share of the U.S. strategic card PCLs. We remind you that PCL is recorded in the corporate segment are fully absorbed by our partners and do not impact the bank's net income. The bank's PCL was $351 million or 17 basis points, increasing $324 million quarter-over-quarter, largely related to a prior quarter performing allowance release, coupled with nominal performing provisions in the current quarter.
Please turn to Slide 21. The bank's impaired PCL was $340 million, increasing by $26 million quarter-over-quarter, driven by a modest increase in the U.S. consumer lending portfolios. Overall, impaired provisions remained at cyclically low levels. Performing PCL was $11 million compared to a recovery of $287 million last quarter. The current quarter performing provision reflects a nominal increase to the allowance for credit losses.
Please turn to Slide 22. The allowance for credit losses was stable quarter-over-quarter at $6.9 billion as the impact from deterioration in our economic forecast was largely offset by the release of overlays previously set aside for economic uncertainty. The bank's allowance coverage remains elevated to account for ongoing uncertainty that could affect the economic trajectory and credit performance.
In summary, the bank continued to exhibit strong credit performance this quarter as evidenced by continued low gross impaired loan formations, gross impaired loans and PCLs. While these key credit metrics are at or near cyclical low levels, economic risks remain elevated, reflective of persistent inflation and rising interest rates and the increasing risk of a recession. TD, however, remains well positioned 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] First question is from Ebrahim Poonawala from Bank of America.
I guess maybe just to start out, Kelvin, if you can just follow up, I just want to make sure we understand you correctly on the interest rate swaps. So you had existing swaps against the fixed income book, you redesignated them towards the goodwill to mitigate that impact. Where does that leave the fixed income book? Do we see AOCI hit type that, that impacts capital or no?
No. So the fixed income is not going through AOCI and does not impact capital. So you don't mark-to-market the fixed income.
And is that because the fixed income is held in health maturity?
Yes, absolutely correct. Correct.
Understood. Okay. So that's clear. And I guess 2 other questions. One, Bharat, just around the deal, you mentioned you went through the public earnings last week. It seems like you still feel comfortable in terms of the timing of the close. Is there any risk like in terms of deal delay and then the U.S. regulators have been fairly vocal in terms of thinking about liquidity requirements around PLAC within the U.S. subs for the regional banks. Just give us a sense of your comfort around that? Like do you see any changes you might need to do in terms of your funding to get through the deal over the finish line?
No. We don't, Ebrahim. Just to clarify, and maybe Leo will comment on the public meeting we just had because quite happy with how that turned out, consistent with TD's commitment to the communities in which we live and work. Just on your point, there is a lot of speculation on what might be the requirements to get approvals.
Our deal continues to progress in the normal course. There is nothing out there to suggest that, that is different this time around. A lot of discussions on TLAC, yes, without a doubt. But just to clarify that point and who knows what the ultimate requirement will be or will not be. TD, we've been compliant on mandated TLAC requirements since the date of inception of that requirement.
And as the G-SIB, TD's U.S. intermediate holding company is already subject to internal TLAC requirement with or without First Horizon with the compliance date of January 1, 2023, and we expect to meet that requirement on that day. I just wanted to clarify that because I know I heard this morning, there was a lot of discussion on what does this mean for TD? Well, I just told you the G-SIB, our intermediate holding company in the U.S. is subject to internal TLAC as of January, and we expect to meet it.
That's helpful. And just one last one, Kelvin. In terms of the NIM expansion, both in Canada and the U.S., should we expect a similar or greater expansion in the fourth quarter compared to what you saw in the third?
Yes. It's Kelvin. As you know, with the NIM, there are a lot of moving parts. But everything remaining equal, if the forward rates are realized, then we expect margin to continue to expand.
Next question is from Doug Young from Desjardins Capital Markets.
Just have a few hedge questions as well. Just the mechanics of the First Horizon hedge, is that similar to others and that you view swaps that obviously rise in value as interest rates increase and do you have a portfolio of match duration U.S. treasuries, do I have like the mechanics correct? Or is there a different structure you've used?
Yes. You have the structure correct. So the way I would look at it is that you could do this in 2 steps or you do it in one step. Two step would be you raised funding by the investment portfolio and then match it with a swap and then the swap mark-to-market would offset in opposite direction of the impact of goodwill. So you do it in 2 steps, right? Buy that mash portfolio and then having the swap mark-to-market. But because we already have a portfolio in place, we don't need to do the first step. We do the second one. So it will be the same. That's correct.
Okay. And then have you hedged more of the interest rate sensitivity for your U.S. business versus last quarter? And the reason I ask is -- or is -- has this hedge had any impact on your sensitivities? Because when I look at your interest rate sensitivities for the U.S. division, it looked like it has declined by a noteworthy amount as per your disclosed. That might be normal course? Or just wondering if there's anything else in there.
Yes. So it's more -- number one, it doesn't have an impact on business like this transaction that we just talked about, it does not. And it has to do with lower -- just like differences in data over time. So as you know, the sensitivity is the net of whatever you earn on rising rates, minus the way that you pass on to the customer. And with the rising rates, the next 100 basis point move, the beta increases. And so that's why the sensitivity is lower.
Okay. So there's no collection. And sorry, but this one, but can you talk a bit about why you put the hedge in place? Because obviously, when you announced the deal, you didn't -- I know you did the Cowen transaction subsequently to like I'm just curious as to your thought process as to what pushes you to move in this direction.
Yes, it's a great question. So first, as you recall, we have significant sensitivity to interest rates. So in a way, we have a natural offset, as rates rise, we will earn more through net interest income. But what we just talked about is actually relevant because as rates rise, the next 100 basis points, we would have -- we would be less sensitive. So if you think back into Q1, our NIS was $2 billion or 100 basis point move.
And when the first 100 basis points already move, the next 100 basis points would be lower. And then you see in Q2, it declined to $1.5 billion. And then rates rise again. So the next 100 basis point is lower. And so now the NIS is lower. So as rates continue to rise, the natural hedge of the net interest income sensitivity becomes less effective.
And then secondly, interest rate has been much more volatile since we made the announcement. And like what I just said earlier, just even between July 31 and yesterday, rates have moved so much that the swap was in a loss position to now a small gain. So the combination of those factors would lead us to put on this hedge.
Next question is from Gabriel Dechaine, National Bank Financial.
Just that slide showing the structure of the hedge there. It looked like when you put on the hedge, your -- the goodwill tied to the acquisition is up by $1.5 billion, that's just going to sit on the balance sheet and then probably around another 20 basis point capital hit from the acquisition. It's not classified as a credit mark or anything like that, it's just pure goodwill, right?
Yes. So rates have risen since we made the announcement. And so because of that, the fair value of the fixed rate loans have declined. And on an after-tax basis, we have to hold $1.5 billion more in capital. And that discount, you call it, is like a fair value mark. And that once the transaction closed, that fair value mac would come back into income over the life of the loans as higher net interest income.
Okay. So that $1.5 billion increase in goodwill will -- that's going to come back into income over time?
Correct. So that's what we said as a timing issue. So on closing, we have to hold more capital because of higher goodwill. But then we earn more earnings over time. And so we are building more -- so it all comes back as higher capital over time over the life of the loans.
Got it. So it's -- you get the 20 -- is it -- correct me if I'm wrong, it's about a 20 basis point on close, but then you are not back over, I don't know what the duration of the 2, 3 years, something like that?
Yes, it's a little bit higher than that, and the loans are about 4 to 5 years.
Got it. Okay. Just wondering, historically, you've been -- the tractors term has come up with TD and how you invest your liquidity. I'm wondering what you're doing these days with a flat or inverted yield curve depending on the day? Have you shortened duration of your liquidity management?
No. Materially, we haven't changed. I mean our strategy is still the same. We look at the permanence of the deposits. And as we feel comfortable with the terminals of the deposit, we would put the tractors on.
And then I'll just ask a broad question. We saw a lot of NIM expansion this quarter, obviously, in the U.S., Canada as well and top of the house. If you can give me a sense of -- is this -- is what we saw this quarter sustainable probably for Q4, but beyond that. And things I'm thinking of are obviously deposit betas, when can that start to eat into NIM expansion.
But I also believe you raised a lot of wholesale funding this past quarter or in the current quarter, I forgot one. But would that be something that starts to weigh on the margin or dilute a little bit of what we saw this quarter and then over the next few? And why they do raise all that wholesale funding? Is it like pre-funding some First Horizon stuff? A lot of questions in there, sorry. It will be my line.
And a lot of questions for Kelvin. I want to make sure that somebody else gets to answer...
Let somebody else add there if you want.
Yes. So maybe I can just give my take and then I'll pass it on to Michael or Leo for any additional thoughts. As you know, we have a strong deposit franchise. And as expected, when you look at our net interest income sensitivity, with rising rates, we would -- our margin would expand.
As we discussed earlier, when rates rise, the next 100 basis points, you would expect beta to increase and therefore, you would have less of an expansion, but it's still expanding. So I think that's important to understand. Now at a certain point, it would be the beta with plateau, but we're not at that point yet. And I would say in the U.S. and Canada, the dynamics are a little bit different.
In the U.S., we have a lot of excess deposits. And so when we're growing loans, we don't need to add additional funding and you're replacing securities who are lower-yielding securities with higher using loans. So that's just the balance sheet mix would also add to your NIM expansion.
In Canada, we don't have excess deposits over loans. And so as we grow the [indiscernible] portfolio and other assets, then we would raise funding. And so we continue to look at our balance sheet, how is the best way to optimize the funding, whether it is through a wholesale funding or is it through our franchise. And that's something that we continuously evaluate. Michael, maybe I can pass it on to you to see whether you have anything to add, and then to, Leo.
Yes, Gabriel, maybe just 2 points. One, when it comes to our core depository accounts, we're seeing betas that are generally consistent with what we've seen before in the past and so nothing terribly different. A couple of things that I would just emphasize. One is, if you tasty look at our core checking account balances, these continue to grow, and our acquisition engine remains very, very strong.
So there's some mix shifts happening here and there, but we're actually still very pleased with what's happened with core checking accounts, both balances and new account acquisition, our new account acquisition is up nicely on a year-over-year basis and consistent with pre-pandemic levels.
The second item impacting NIM, and this one is a bit more subtle. You will have noticed that our card balances grew nicely on a year-over-year basis. We're up 10% or $1 billion sequentially, which is great. But are still revolving mix is still relatively low compared to historic standards. And so you're not seeing the income from those increased cards coming through NIM, but instead you're actually seeing it come through fee income.
Our fee income has been quite strong. It's a combination of the net spread on each transaction plus FX fees and a couple of other things. And so that's kind of how I paint the picture for the Canadian retail bank.
And maybe turning to the U.S., Gabriel. Obviously, a very good quarter from a NIM perspective. NIM came in at 2 62%, and that was up 46 basis points year-on-year. If you look at the drivers, obviously, higher deposit margins drove the bulk of it. But we also saw improvements as a result of balance sheet mix, higher asset growth and improved treasury investment returns. So it was a good solid quarter. To your point around sustainability, we haven't yet seen the full impact of the third quarter rate increase, and so that will flow through in the fourth quarter.
And likewise, to the point that Kelvin raised earlier, if forward rates do realize we'll see some sort of increase associated with that. So I would expect NIMs to continue to drift upwards as we look to the fourth quarter and early into next year. I do want to stress, though, Kelvin's point that we do expect net interest income sensitivity to wane a little bit. But we haven't seen any significant price sensitivity in the book yet.
Retail deposits on a quarter-on-quarter basis were essentially flat. But I do expect that we're going to see that just the amount of the increase we've seen in short-term rates will mean that we'll see some movement to either CDs or other money market solutions and/or other investment wealth products over time. So we're really pleased with the performance. I think our book is performing the way we would expect and the way you'd expect TD to perform in this environment. And I think we can sustain some of the NIM expansion that we've seen this quarter.
Next question is from Meny Grauman from Scotiabank.
I want to stick with margin and just focus in on the Canadian P&C margin, which for you was up 7 basis points sequentially. When I compare to the peer group so far, it's at the bottom end of the peer group, that's not a ranking, I would have expected, given your deposit balances. So Michael, you talked about business mix. Is that all it is? And furthermore, if I compare the sequential margin expansion in Q3, it was actually a little bit lower than what we saw in Q2. So I'm trying to figure out if there's anything offsetting some of that margin expansion that's maybe going to go away, anything beyond business mix here?
So I mean, look, I think it's a combination of business mix and Kelvin touched on earlier, it's growing at a faster rate than deposits. There's some competitive pricing dynamics that are at play, but I don't want to kind of overemphasize that one too, too much. I would go back to this dynamic on the card business where our card loans aren't attracting the same type of net interest income that you would normally get for that type of expansion. And that's very, very medi-type returns when you actually do get the revolving balances. But look, Leo wrapped up by saying we feel very good about where we are. I feel good about where we are in the Canadian personal side, but also I think it's going to play out well on a go-forward basis.
Just on the card side, the revolvers, do you have any sense like early in Q4, can you start to see those revolvers picking up? What's the time line that you're thinking from that perspective?
The dynamic we're seeing in our book and everyone's portfolio is probably going to be a little different. But we have a very heavy mix of transactors, particularly the affluent travel. And so we're seeing spend levels on a year-over-year basis, which are quite attractive. We're about 23% on a year-over-year basis for spend levels. And so we're still seeing consistent high transaction activity and less borrowing activity. And I don't think we've seen that shift happen yet.
Next question is from Paul Holden from CIBC.
A couple of questions for Riaz to start. I guess first one is with respect to the growth in the wholesale lending book. I believe the slide deck says it was up by 21% year-over-year. So really good growth there and highlighted growth, particularly in the U.S. So maybe you can talk a little bit about which sectors that's coming from? And if there is any sort of read-through in terms of lending capacity and appetite in terms of how it might flow through to the Cowen transaction when that does close?
Yes. Thanks for that, Paul. That growth, as you outlined, is principally in the U.S. than it is in areas where we have traditional strength in communication media technology, a fairly wide variety of diversified industries as well as in power and utility areas. And so it's actually been a fairly attractive area for us to just continue to increase. And our client base and deepen our client relationships as we just continue to pursue our long-held U.S. dollar strategy.
I think as we look forward to welcoming our colleagues from Cowen to the TD Securities family. As you know, their areas of strength are -- include health care wider sectors in the health care side, which will bolster onto our health care practice as well as on the technology side, and they have a fair bit of diversified coverage as well. So I think that there is a very good fit there and should bode well not only to continue to add to our client base, but also to serve them with a wider set of products and services.
Okay. Okay. And then Second question for Riaz. I mean it's also highlighted that you continue to make investments in that U.S. wholesale business with the hiring of banking, sales and trading, technology professionals. I'm just a little bit maybe surprised you're ramping up organically that aggressively ahead of the Cowen acquisition. Maybe you can kind of talk through the logic of that, the capacity to grow organically plus through the acquisition?
Yes. I think, Paul, you should really just sort of look at that more in timing context. I mean the growth in the U.S. dollar strategy started some 9 years ago and has been picking up momentum as we grew out the corporate lending and then the treasury products, fixed income commodities and currency side of the business.
And if you look at our FTEs, you'll see that in the last year, we added about 350 FTEs and they're fairly broadly across the platform in global markets and corporate and investment banking in technology and business operations. And so with the addition of 1,700 colleagues from Cowen and I expect that some of our organic additions will slow here a little bit in the next 2 years as we look at the integration. So it's mostly, I would say, Paul, in the timing of how the organic adds came together with the acquisition opportunity with.
Got it. Okay. Okay. That makes sense. And last one for me. just in terms of expenses. So when I look at that professional advisory and outside services line, was up 40% for the quarter and also roughly up 40% year-to-date. It's a pretty material number to, by my calculations for an extra $446 million of spend year-to-date. Maybe you can talk about some of the drivers of that, if there's a particular project that's being directed towards and maybe some of that M&A related, you can piece that out as well, if you can.
It's Kelvin. So like what we talked about in the past, is that the way we manage expenses is not quarter-to-quarter, but we have a few key principles, right, like businesses that are spent business spends that are just core that are operational imperatives that we would spend, then there are more of the longer-term investments, and then there are more of the discretionary piece. And using outside professional services, we enabled us to dial up and down those resources when we see the opportunity, and we're seeing good opportunities to invest in the technology.
And if you want some examples, we talked about that is like the replatforming the contact center and leveraging AI capabilities to better serve our customers on the insurance front. Also, we're looking at implementing the platform for our commercial banking business in Canada several years ago, we've done in the U.S. We're doing that in Canada. So these are really good opportunities for us to optimize our spend and at the same time, serving our customers. And in terms of the benefit, we see that real time and maybe I can just pass it on to Ray to just spend a few minutes on the contact center for insurance.
I mean, what we've done in the last quarter has actually launched the new state-of-the-art telephony system that will be leveraged across all of TD Bank, but we've started in TD Insurance. And we are launching new capabilities, things like, for example, using AI, being able to actually identify the client, what they hold using our data and getting that client to the right adviser with the right skills, the first time to actually be able to fulfill those capabilities.
Also, we're introducing now with the new platform, omnichannel capabilities, where we can help customers through that are starting digitally that actually then need assistance through a chat capability. And so in the buying moment, where it can actually help our clients. And when needed to, they can also then click to speak with a phone representative to support them through the process. These are all capabilities that we're starting with within TD Insurance, but will be expanded to across all of our contact centers across all of our businesses in the coming years. And so significant investment on behalf of TD, but the benefits will significantly -- will certainly pay off.
Next question is from Lemar Persaud from Cormac Securities.
Just before I start off here, I kind of dropped off a little bit during the Q&A. So if my questions have been asked and answered, feel free to let me know. So I just want to come back to the de-designation of the hedging. So I understand there's just no such thing as a free lunch. What did TD give up to reallocate these hedges to mitigating the impact of the interest rate changes on First Horizon? Does that mean you're now just going to [indiscernible] larger losses on the fixed income portfolio at maturity. Is that the right way to look at it?
No. So let me just go back and let's look at what we're hedging. So the risk that we're hedging is not an economic risk. It's a capital timing risk. If you recall, when you close on the transaction, the accounting rules require you to fair value the balance sheet of the target, in this case, First Horizon and allocate the purchase price to these assets and liabilities.
And if interest rate rises, you would have to mark these loans to a discount. And that difference would cause higher goodwill where you would have to hold capital. But that is just a timing issue. It's not like it's not a real loss because these loans, as you hold them to maturity, they would be accreting back to par.
So you earn that and as it gets earned through income, it flows through retained earnings, it becomes your book capital, so you earn that capital over time. So it's just the timing of you holding the capital on closing and you earn that back over 4 or 5 years.
And so because there's no economic risk, you would not want to just put a swap on because if you just put a swap on, you're now actually creating economic risk. And so what you're trying to do is find a match portfolio that already exists or you can build the match portfolio and enable the accounting -- timing of the accounting to help you offset that goodwill.
So that you -- if rates rise, you have a gain on the swap, which would give you capital to offset the goodwill hit, and then over time, that swap kind of unwind because you have a package, the whole cash flow, you still have that package there. You're not -- you don't have any changes to the cash flow, it's just the timing of the recognition of the P&L is different. You lost a lot there, but happy to take your questions off-line as well.
I think I understand it, but if I don't, I'll circle back on that one. And then on my next question, just switching gears here. Some pickup in business loan growth in the U.S. after a number of quarters that kind of softer results. Personal loan growth also looks pretty good sequentially. Can you talk to us about what's driving the turnaround this quarter. And looking ahead, would it be fair to suggest that TD could be closing the performance gap relative to your U.S. peers?
Thank you very much, Lemar for the question. Let me just break it down. Lending on the commercial side. Once again, we were pleased with the performance of the quarter on a quarter-on-quarter basis, commercial loans ex PPP were up 2.8%. And I'd say the mid-market trend that we saw last quarter continued. But this quarter, I'd say we saw broader participation. So we saw many more of our specialty businesses also seeing momentum, that being health care, our muni education, not-for-profit segments and we even saw a little bit more lift in our institutional CRE business. So it was a broader performance that actually led to that growth.
I'd say where we're still seeing a little bit of sluggishness is in that small business and community segment space, where originations were sound. They were good, but we're still seeing paydown activities a little bit more elevated and that suggests clients being a little bit more defensive given the uncertainty that's predicted in the marketplace. I also just want to spend a moment because it was not only the momentum that we saw, wasn't only on the commercial lending side, but we also saw it this quarter on the retail side. We had -- if you just look at the major product categories, mortgage lending -- mortgage balances overall were up 14%. We saw good cards activity.
Card sales were up 10%, resulting in a balance sheet growth of 7%. And even in the auto segment that had some significant challenges from a pricing standpoint over the past 4, 5 months. We've seen some stabilization on that pricing, and we still managed to see good portfolio growth at 5.8%. So net-net, I would say, was a good broad-based lending performance for the U.S. business. And at this point, I would say we do believe that's sustainable. We've got good momentum as we go into the fourth quarter.
Our next question is from Nigel D'Souza from Veritas Investment Research.
I wanted to circle back on your allowances this quarter, and you mentioned that lease have overly offset the situation in your macroeconomic outlook. I wonder if you could size the impact that it all relates [indiscernible] any sense of what your provision performing loans would have been if it wasn't for that overlay offset?
Yes. Let me sort of describe what's happening, and I'll just close to you what I can. So we were very thoughtful and deliberate in not sort of rushing to release our reserves because we did see the environment changing. So today, we find ourselves relatively well positioned already for a moderate recession. As you know, we're holding $1.6 billion in reserves over pre-COVID levels.
What occurred this quarter is that -- and you see from our base and our downside, there was quite a bit of change on the macro side. And I'll just describe it to you the pace of economic growth in the base case for Canada and the United States, it's lower. The employment growth numbers in '22 are lower. We actually show a higher unemployment in both countries in 2023. We've used higher interest rates, and you would have noticed a big change in housing, again, particularly Canada, but the United States as well.
And then if you look at our downside case, we are using a recessionary case now as the downside. So the macro drove an increase okay? But that uncertainty we had already built into our allowance process by putting in overlay. So we've actually just unwound those overlays. And today, if you look at our allowance, I'd say almost 90% of our allowance is modeled, okay? So that's what's occurred. And what's left in terms of judgmental overlays is very sort of small.
Right. So the way I would summarize that is and this is per the overlay that you had on turn related to COVID-19 that's now absorbed the uncertainty related to rising rates and inflation. So it would be fair to say that you're less likely to see substantial builds of performing -- provisions on performing loans given that you carried over that excess reserve pandemic?
That's a fair remark, yes. We don't expect -- we're very well reserved. We don't expect to be building any more reserves or any material amounts, but of course, a lot depends on what happens with the macro. The macro certainly deteriorates a lot, then we'll have to relook at it. But again, the key point is we didn't rush to release our reserves for good reason. We are well reserved we're well positioned for a moderate recession as a bank.
Okay. And quick clarification on the effect of First Horizon on this alone. I understand you have day one provision, but I guess you wouldn't have that overlay of those reserves that you have in the existing or [indiscernible] First Horizon but incrementally are we in for higher provisions on performing loan.
Yes. That will be a legal day 1 activity. There's no First Horizon reflected in these numbers. But at the appropriate time, we'll provide you more disclosure. I think we did we did indicate to you what sort of credit mark we took at the outset. So near the time, we will keep you informed.
Next question is from Joo Ho Kim from Credit Suisse.
Just wanted to go back to the U.S. business. We're hearing stories about U.S. housing market cooling off fairly quickly with some originations really coming under pressure. And when I look at your mortgage growth, certainly, I didn't see that way last quarter. While your mortgage [indiscernible] perhaps outperforming other geographies? And then what gives you the confidence that the growth from here to continue?
So let me break that down for you because it's both a matter of originations and significantly lower paydown activity. So on the origination front, 2 drivers are really driving some of the growth that we saw. One a new retail model that we put mortgage origination model that we put into the retail stores that basically provides almost a direct line back to our mortgage origination unit. It's providing the stores a great deal of support and allowing us to capture much more of that retail flow.
And secondly, we had good correspondent originations in the quarter, up significantly versus last year, high-quality, high net worth, mass affluent originations. And so that powered the growth in originations.
On the flip side, though, the real story is that we're seeing much lower paydown activity as clients -- as rates have risen, there's just much less refi demand. and that means more of what we're originating is actually contributing to actual balance growth.
And so those factors, I would say, as you look forward on the mortgage market, there's no question that we would expect some moderation in terms of mortgage activity, just given the increase in rates in the U.S. But I do think we've got some opportunities based on some of these commercial strategies we're putting in place to actually perform quite well and generate positive growth in the portfolio.
Great. And just last one for me. Just on expenses. When I look at it at the all-bank level, it was up about, I think, 9% this quarter, and I did hear the commentary about higher employee cost and tech expenses across the segment. So just wondering how you're thinking about the pace of investments in the near term, could be it either stabilize from here or accelerate and what that means for expense growth from your perspective as you look at.
It's Kelvin. I'll take that question. Yes. So we don't manage expenses quarter-to-quarter. We currently see really good opportunities to invest in our distribution channel and that's where you see FTE increasing in the contact center, supporting insurance and wealth. And then the other areas where we're investing is in technology and also in other frontline supporting client roles. And -- so I think that our focus is and our goal is to deliver positive operating leverage over the medium term. and we'll adjust as the environment change. But right now, we would continue to invest.
Our next question is from Darko Mihelic from RBC Capital Markets.
Just 2 quick questions. First, how should I think about -- or have you guys given any thought around the Credit Card Competition Act in the U.S. ?
I'll take this one. Darko, good to hear from you. As you know, Darko, let me just talk a little bit about our cards business for a moment in terms of the things that we're focused on. We've got a proprietary bank card business and a retail card services book, both of which are a major area of focus for us in terms of growth going forward. We feel quite comfortable with that business. We continue to think about expanded value proposition expansions to be able to support our growth in that segment. We also have 2 very important co-branded relationships which has been a source historically, a very good growth.
From an overall competitive position, I don't believe at this point that, that act is going to be a significant change to our existing cards base, but it's something that we continue to monitor and we'll certainly evaluate in terms of what the impact could be for fees and for other considerations.
Okay. And does it affect anything that you do with First Horizon at all either? Or like I realize it has nothing to do to target Nordstrom?
So Darko, very quickly on First Horizon, -- so First Horizon has about 1 million retail clients, but they have a very small cards book. So as we talked about, I think, last quarter, when we think about synergies, one of the obvious synergies for us on First Horizon is actually bringing our cards capability to bear the First Horizon. And that's going to be one of the things that we'll do early on in terms of the union between the 2 institutions. From our standpoint, we see that as a growth opportunity, we don't really see a great deal of headwind there.
Next question is from Mike Rizvanovic from KBW Research.
I want to go back to the margins in Canada. And to many's point, TD's lack of, I guess, outsized performance, which I think everyone was expecting this quarter relative to peers. And I'm just wondering, I think I heard Michael you used a term competitive dynamics and -- is this maybe related to the RESL portfolio? I know you've been losing market share for quite a while and then that sort of turned around last quarter. I'm guessing you might have continued that positive trend into Q3.
How much of a factor would that have been on the margins? And more importantly, what about going forward, if you do continue to push and try to sort of regain some of that lost market share in RESL, how does that impact your margin in Canada going forward?
Good question. And you are right to point out that we've had some recent trajectory without a doubt or momentum with our RESL business. In fact, if you look at our sequential growth in our mortgage business, mortgage and HELOC combined on a quarter-over-quarter basis, this last third quarter was the best we've had since 2010. And so we feel good about that trajectory.
I would tell you, we're not getting there by actually underpricing the market. And I feel very confident about that. We're getting there by actually just managing our customer relationships, better managing our operational processes more effectively. But it's not -- we're not winning through pricing and pricing under the market. That being the case, when the mortgage business is growing faster than our deposit business, that will have an impact on our overall reported NIM.
Okay. And then just a quick clarification on more of a numbers question. But when I look at a couple of your other peers who have a similar structure on the variable rate mortgage in Canada, they both reported 35-plus year amortization making up 20-plus percent of the portfolio as of Q3. And when I look at your disclosure, it still says basically 0. And I'm guessing you probably calculate that differently. I'm not sure how it could not gravitate up just given the -- just the size of the rate hikes and obviously, you'd be pushing that aim out for a lot of your recent originations. Any color you can offer on that?
Yes. So me I'll start out by describing how our product works and then how it gets reflected in the disclosures. And so our variable rate contracts require customers at renewal to maintain their original amortization schedule. And so if at some point, rates are going up and the amount of payment towards principal goes down, at renewal, you basically have to go and sort of catch up to the original schedule, and that generally means a higher payment for the consumer.
So Table 21 to the -- I think you're referring to the Table 21, the report to shareholder, reflects this dynamic. And that is that our variable rate contracts require customers to maintain the original amortization schedule.
Okay. So I guess that means when it comes to TD's trigger, you do actually push a higher payment. So it is a fixed payment, but if the interest portion exceeds the original payment then that small incremental gets added to the payments. You are -- I guess you're doing it incrementally as opposed to all at the end when it comes time for renewal. Is that a fair way to look at it?
Not exactly. The way to think about this is, if a customer hits the point where they're no longer amortizing the principle, we will reach out to the customer, and we'll give them options. And the options either increase your payment, do nothing, make a lump sum payment, things like that. If they do the nothing, then at that point, their amortization will be kind of off the original schedule.
And so when the loan comes up for renewal in a year or 2 years, 3 years, whenever it is, at that point, you have to look at the remaining amortization you'll have to -- will adjust the payment at that point to reflect the remaining amortization.
Our next question is from Scott Chan, Canaccord Genuity.
I'll leave the one this time. Switching over to asset management. In your opening remarks, you talked about 90% of your AUM and top 2 quartiles over the past 3 years, which is a lot higher, I think, the last time I ran with the industry. And Barry, you gave some points on retail and institutional. But I was wondering if you can elaborate on both those client platforms year-to-date and the potential outlook on the improved performance.
I think, Ray will provide good perspective on that. Ray?
Thanks for the question, Scott. I'd say maybe I'll start with just the mutual fund industry at large. And I think everybody has seen that there's been certainly net outflows from a mutual fund perspective.
And for the quarter, I think that's at $21 billion. And we're definitely seeing that money migrate to within our own house to various GICs terms and cash products due to the market volatility. And we've seen this in the past where people are rebalancing. And what's been great news for us is that from a year-to-date perspective, our clients are -- we've seen the largest positive net flow year-to-date in mutual fund sales amongst the big 5 banks.
And I think that's the credit to the performance that our clients are seeing in the mutual funds. And so over a 3-year performance it is at 90%. And over a 4-year performance, actually, the performance number is somewhere around 92%, 93%. So in volatile times, I think our clients are gravitating towards quality. And certainly, as the largest asset manager, they're seeing that quality.
On the institutional side, as all of you know, we are the #1 institutional asset manager, and we're continuing to actually take market share in that category. It's actually been a very strong year for TD Asset Management on the institutional side. We continue to see very strong positive inflows, and one of the main reasons for that is our acquisition that we did a few years ago of Greystone and the alternative investments are in favor. And certainly, we are seeing strong interest from the institutional clients for the alternative investments. And again, that is a strength for us in TD Asset Management. So I'd sort of say on both fronts, whether you're a retail investor or institutional investor, TD Asset management is performing well.
Thank you. We have no further questions registered at this time. So Mr. Masrani, I'll return you handing back over to you.
Thanks, operator, and thank you all for joining us today. Great questions, great engagement. I know Kelvin is going to take a lot of offline calls on working out the accounting around the First Horizon acquisition, which is terrific. And as you heard, there is no economic impact to the bank, and that is the key part, but I'm sure Kelvin will explain all the ins and outs on that for folks who need further clarification on that. once again, very happy with how the quarter has turned out and I'd like to take this opportunity to thank our bankers around the world. They do a great job for all of our stakeholders, including our shareholders. So thanks for that, and we will see you again 90 days from now. Thank you.
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