The Toronto-Dominion Bank (NYSE:TD) Q3 2023 Earnings Call Transcript

The Toronto-Dominion Bank (NYSE:TD) Q3 2023 Earnings Call Transcript August 24, 2023

The Toronto-Dominion Bank beats earnings expectations. Reported EPS is $1.99, expectations were $1.52.

Operator: Good afternoon, everyone. Welcome to the TD Bank Group Q3 2023 Earnings Conference Call. I would now like to turn the meeting over to Ms. Brooke Hales. Please go ahead, Ms. Hales.

Brooke Hales: Thank you, operator. Good afternoon, and welcome to TD Bank Group’s third quarter 2023 investor presentation. Many of us are joining today’s meeting from lands across North America. North America is known as Turtle Islands by many indigenous communities. I am currently situated in Toronto. As such, I would like to begin today’s meeting by acknowledging that I am on the traditional territory of many nations, including the Mississaugas of the Credit, the Anishnabeg, the Chippewa, the Haudenosaunee, and the Wendat Peoples, and is now home to many diverse nations, Métis, and Inuit Peoples. We also acknowledge that Toronto is covered by Treaty 13 signed with the Mississaugas of the Credit and the Williams Treaties signed with multiple Mississaugas and Chippewa bands.

We will begin today’s presentation with remarks from Bharat Masrani, the Bank’s CEO. 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 pre-qualified analysts and investors on the phone. Also present today to answer your questions are Michael Rhodes, Group Head, Canadian Personal Banking; Barbara Hooper, 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 2023 Report to Shareholders.

With that, let me turn the presentation over to Bharat.

Bharat Masrani: Thank you, Brooke, and thank you everyone for joining us today. Before I begin, our thoughts are with the communities and colleagues impacted by the devastating wildfires in British Columbia and the Northwest Territories. TD is supporting relief efforts, and we are ready to assist those in need. I would also like to add my thanks to the emergency responders and the many volunteers supporting those who are impacted. Moving to our results, Q3 was a good quarter for TD. Earnings were $3.7 billion, and EPS was $1.99. Revenue grew 12% year-over-year, primarily driven by margin expansion in our retail businesses. PCLs were higher, reflecting credit normalization and expenses increased, driven by the inclusion of TD Cowen, investments in colleagues and business growth and the impact of foreign exchange.

PTPP was up 7% year-over-year as TD’s diversified business model continues to deliver. The Bank’s CET1 ratio was 15.2%, reflecting organic capital generation and the impact of over 14 million common shares bought back during the quarter. Subject to market conditions, we expect to complete our previously announced 30 million common share buyback by early September. And today we announced our intention to repurchase up to an additional 90 million common shares for cancellation, subject to regulatory approvals over the next year. The Bank continues to invest to build new capabilities for our customers and shape the future of banking. TD was recently named the Best Consumer Digital Bank in Canada and recognized for the Best Transformation and Innovation in North America by Global Finance.

Let me now turn to each of our businesses and review some highlights from Q3. In our Canadian Personal and Commercial Banking segment, earnings were $1.7 billion with revenue growing the growth of 7%, PTPP growth of 9%, and significant positive operating leverage. The Personal Bank had strong everyday banking acquisition with new accounts up 26% year-over-year, driven by a record quarter for New to Canada accounts. To continue to support growth in the New to Canada segment, TD offers ATMs in a market-leading seven languages and enables customers to select their preferred language when booking appointments online. In core deposits, the Bank maintained industry-leading market share of almost 26%. In credit cards, we saw record spend with an all-time high in active accounts.

And we delivered strong growth in new accounts, up 35% year-over-year, driven by our diverse product lineup, key strategic partnerships and distinct loyalty offerings. This quarter, the Toronto Blue Jays unveil the new patch on their iconic jersey featuring the TD shield. This milestone reflects the strong relationship between TD and the Blue Jays, and further enhances the TD brand. In the coming months, we will build on this relationship by offering exclusive benefits to TD card holders to enhance the in-game experience. Moving to real estate secured lending, TD continued to execute against the strategies outlined at our recent Investor Day, taking share in a slower growth market and expanding our portfolio by over 4% year-over-year. And this quarter, TD was recognized by J.D. Power as highest in customer satisfaction for its Canadian mobile banking app, earning top marks for speed and content.

We are using data and AI-driven insights to better know our customers and enhance their experience. The Business Bank grew loans by 9% year-over-year and continues to accelerate growth by expanding specialization in key segments. In particular, we are adding to our team and capabilities in the technology and innovation sector. In the months ahead, we will continue to build out our venture strategy, augmenting the great progress already made by our existing team and enabling us to further meet the unique needs of technology entrepreneurs. Turning to the U.S., our U.S. Retail Bank delivered PTPP of US$1.2 billion, up 9% year-over-year, and earnings of US$890 million, down 3% year-over-year, reflecting higher PCLs driven by credit normalization.

Net credit margin was 3% this quarter. While NIM expanded 38 basis points year-over-year, it declined 25 basis points quarter-over-quarter, reflecting higher deposit cost and deposit migration to higher yielding and term products as seen across the industry and some timing effects given TD’s robust margin expansion earlier in the cycle. With the contribution from our investment in Schwab of US$142 million, segment earnings were US$1 billion. We saw strong loan growth again this quarter with personal loans and business loans, up 11% and 9%, respectively, year-over-year as TD added customers and took share despite a challenging operating environment. In Commercial Banking, we added leadership talent and continued to have strong momentum with the middle market and specialty lending sectors up 20% and 19% year-over-year respectively.

TD Auto Finance continued to innovate, offering real-time payments and expanded financing programs with dealer clients nationwide. We are proud that for the fourth year in a row, the business received the highest ranking in the J.D. Power U.S. Dealer Finance Satisfaction Study. We had strong customer acquisition in our U.S. bank card business with new accounts up 29% year-over-year as TD leverage a product suite that is resonating with customers to deepen relationships. Deposits remained resilient in a difficult environment, with spot balances up approximately 1% quarter-over-quarter. Earlier this month, TD Bank, America’s Most Convenient Bank announced a community reinvestment agreement developed in coordination with New Jersey Citizen Action and the Housing & Community Development Network of New Jersey.

TD has committed to invest more than US$2 billion over three years in affordable mortgage, community development, small business lending, and affordable consumer products and services across New Jersey, particularly in underserved communities. The U.S. Retail Bank now serves over 10 million customers, including those being served by three new stores in low and moderate income areas in Charlotte, North Carolina, and Tampa, Florida, reflective of TD’s commitment to reinvesting in communities. Turning to Wealth Management and Insurance, we earned $504 million this quarter with results impacted by severe weather related events. Revenue was up 1% year-over-year a strong insurance premium growth and the benefit of higher interest rates helped offset the impact of trading normalization.

TD Asset Management widened its lead as the number one institutional asset manager in Canada and leverage its broad product suite to grow ETF market share gaining momentum in a newer segment for the Bank. The Bank also gained market share in advice without TD Financial Planning business growing fastest among the big five banks over the past six months. Our One TD approach and accelerated distribution expansion enabled this strong growth with wealth planners embedded in the Bank’s branches across Canada. In TD Direct Investing, the Bank maintained its number one position across key performance categories, including total accounts, revenue, trades and AUA and saw record growth in share of gross new accounts as we move towards our target of adding over 300,000 new clients in the medium term as described at our recent Investor Day.

Finally, as a result of recent and continuing severe weather related events, I would like to thank all our insurance colleagues for their tremendous efforts, including advice and support provided through the TD Insurance Mobile Response Unit across affected communities. In Wholesale Banking, net income was $377 million, driven by record revenue of $1.6 billion, which includes our first full quarter of TD Cowen. We saw strong trading revenues and good underwriting and advisory activity. We are excited about our progress, deepening the integration of TD Securities and TD Cowen, enhancing our ability to serve existing clients and win new clients together, reflecting our leadership in the healthcare sector and strength in equity capital markets execution.

This quarter, TD Cowen acted as Joint Bookrunner on Acceleron’s US$621 million initial public offering, the largest biotech IPO in calendar 2023 to date. And this quarter a U.S. debt capital markets business nearly doubled both in terms of number of bookrunner roles and volume underwritten compared to the same quarter last year. These strong results reflect TD’s investment in client relationships as part of our U.S. dollar strategy. As we enter the final quarter of the year, we continue to navigate a complex and dynamic environment and deliver for all of our stakeholders. Last month, TD was proud to be recognized by the Euromoney Awards of Excellence 2023 as North America’s Best Bank for Corporate Responsibility. The Bank received this award based on its demonstrated commitment to an inclusive and sustainable future.

As I’ve shared in the past, inclusion is embedded in TD’s culture. TD Bank, America’s Most Convenient Bank, was recently awarded the top score of 100 in the 2023 Disability Equality Index, a national workplace disability inclusion assessment tool, for the ninth consecutive year. And the Bank was again recognized as a certified great place to work in both Canada and the U.S. As ever, TD remains committed to strengthening the communities in which we operate. Recently, together with the AFOA Canada, a not-for-profit led by indigenous peoples, the Bank announced the first cohort of recipients of the TD Scholarship for Indigenous Peoples, which provides financial support to indigenous students for post-secondary education. Every day, our TD bankers live our purpose to enrich the lives of our customers, communities, and colleagues.

I will close by thanking each of them for their efforts. I’m confident that together we will deliver a strong finish to the year. With that, I’ll turn things over to Kelvin.

Kelvin Tran: Thank you, Barrett. Good afternoon, everyone. Please turn to slide 10. For Q3, the Bank reported earnings of $3 billion and earnings per share of $1.57, down 8% and 10%, respectively. Adjusted earnings were $3.7 billion and adjusted earnings per share was $1.99, down 2% and 5%, respectively. Reported revenue increased 17% and adjusted revenue increased 12%, reflecting margin growth in the Personal and Commercial Banking businesses. Provision for credit losses was $766 million, compared with $351 million in the third quarter last year. Reported expenses increased 24%, primarily reflecting higher employee related expenses, the payment related to the termination of the First Horizon transaction, higher acquisition and integration related charges, including winddown costs of the terminated First Horizon transaction and higher spend supporting business growth.

Adjusted expenses increased 15%. On our Q4 ’22 earnings call, we noted that we expected adjusted expense growth excluding FX to moderate in fiscal 2023 on a quarter-over-quarter basis. TD has focused on productivity and managed expenses efficiently in this environment. As a result, the Bank delivered moderate adjusted expense growth quarter-over-quarter, excluding TD Cowen recorded in the Wholesale Banking segment and litigation expenses of approximately $125 million or $0.05 per share recorded in the Corporate segment. Absent the retailer partners, net share of the profits from the U.S. strategic card portfolio, adjusted expenses increased 15.4% ex FX. Reported total Bank PTPP was up 7.6% year-over-year. Consistent with prior quarters, slide 25 shows how we calculate adjusted 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.

Adjusted total Bank PTPP was up 6.9% after these modifications. Please turn to slide 11. Canadian Personal and Commercial Banking net income for the quarter was $1.7 billion, down 1% year-over-year. The business delivered strong PTPP growth, up 9% year-over-year. Revenue increased 7%, reflecting volume growth and higher margins, partially offset by a prior year adjustment recorded in other income. Average loan volumes rose 6%, reflecting 5% growth in personal volumes and 9% growth in business volume. Average deposits rose 1%, reflecting 6% growth in personal deposits, partially offset by a 6% decline in business deposits. Net interest margin was 2.74%, flat quarter-over-quarter. This quarter we saw strong loan growth, which resulted in the shift in balance sheet mix that was offset by higher deposit margin.

As we look forward to Q4, while many factors can impact margins, we expect net interest margin to bounce around and remain influenced by similar drivers as those we saw this quarter. Total PCL of $379 million increased $132 million sequentially. Total PCL as an annualized percentage of credit volume was 0.28%, up 9 basis points sequentially. Non-interest expenses increased 5% year-over-year, reflecting higher spend, supporting business growth including technology and higher employee-related expenses. Please turn to slide 12. U.S. Retail segment reported net income for the quarter was US$984 million, down 12% year-over-year. Adjusted net income was US$1 billion, down 9% year-over-year. U.S. Retail Bank reported net income was US$842 million, down 6% and includes acquisition and integration related charges for the terminated First Horizon transaction.

U.S. Retail Bank adjusted net income was US$890 million, down 3%, reflecting higher non-interest expenses and PCL, partially offset by higher revenue. The business delivered strong PTPP growth, up 9% year-over-year. Revenue increased 10% year-over-year, reflecting higher deposit margin and loan volumes and fee income growth from increased customer activity, partially offset by lower deposit volumes, loan margins and overdraft fees. Average loan volumes increased 10% year-over-year. Personal loans increased 11%, reflecting good originations and slower payment rates across portfolios. Business loans increased 9%, reflecting good originations from new customer growth and slower payment rates, partially offset by decline in PTPP loans volumes. Average deposit volume excluding sweep deposits were down 5% year-over-year.

Personal deposits were down 5% and business deposits declined 6% and sweep deposits declined 28%. Net interest margin was 3% this quarter. While net interest margin expanded 38 basis points year-over-year, it declined 25 basis points quarter-over-quarter, reflecting higher deposit costs and deposit mix shift, given competitive market dynamics in the U.S. As I’ve mentioned in previous quarters, many factors can impact margins including the path of short-term rates, tractor on and off rates and competitive market dynamics. While margins this quarter gave back some of our record expansion in previous quarters, we expect NIM to stabilize in Q4. Total PCL was US$185 million, an increase of US$45 million sequentially. U.S. retail net PCL ratio including only the Bank’s share of PCL in the U.S. strategic cards portfolio as an annualized percentage of credit volume was 0.41%, higher by 8 basis points sequentially.

Reported expenses increased 13%, reflecting higher employee related expenses, acquisition and integration related charges for the terminated First Horizon transaction and higher business investments. Adjusted expenses increased 10%. The contribution from TD’s investment in Schwab was US$142 million, down 37% from a year ago, reflecting lower net interest income, lower bank deposit fees, and trading revenue and higher expenses partially offset by an increase in asset management fees. Please turn to slide 13. Wealth Management and Insurance net income for the quarter was $504 million, down 12% year-over-year. Revenue increased 1%, reflecting high insurance volumes, fee-based revenue and wealth and investment income in insurance, partially offset by a decrease in the fair value of investment supporting claims liabilities, which resulted in a similar decrease in insurance claims and lower transaction revenue in wealth.

Insurance claims increased 11% year-over-year, reflecting more severe weather related events, increased driving activity and claims severity, partially offset by the impact of changes in the discount rate, which resulted in a similar decrease in the fair value of investments, supporting claims liabilities reported in non-interest income. Non-interest expenses increased 2% year-over-year, reflecting higher spend supporting business growth including technology costs and employee related expenses. Asset under management increased 3% year-over-year reflecting market appreciation, partially offset by mutual fund redemptions and assets under administration increased 6% year-over-year reflecting market appreciation and net asset growth. Please turn to slide 14.

Wholesale Banking reported net income for the quarter was $272 million, relatively flat compared with the third quarter last year, reflecting higher non-interest expenses, largely offset by higher revenues. Adjusted net income was $377 million, up 39% year-over-year. Revenue including TD Cowen was $1.6 billion, up 46% year-over-year. Higher revenue primarily reflects higher equity commissions, underwriting fees, trading related revenue, global transaction banking revenue, and loan underwriting commitment markdowns in the prior year. PCL for the quarter was $25 million, an increase of $13 million from the prior quarter. Reported expenses increased 80% and include acquisition and integration related charges for Cowen. Adjusted expenses increased 60%, reflecting the inclusion of TD Cowen, investments in Wholesale Banking, U.S. dollar strategy, including the hiring of banking, sales and trading and technology professionals, and the impact of foreign exchange translation.

Please turn to slide 15. The Corporate segment reported a net loss of $782 million in the quarter, compared with a reported net loss of $752 million in the third quarter last year. The year-over-year increase primarily reflects higher net corporate expenses, reflecting litigation expenses during the quarter, partially offset by higher revenue from treasury and balance sheet management activities. Adjusted net loss for the quarter was $182 million compared with an adjusted net loss of $175 million in the third quarter last year. Please turn to slide 16. The common equity tier 1 ratio ended the quarter at 15.2%, down 13 basis points sequentially. Internal capital generation added 31 basis points to CET1 this quarter. This was partially offset by an increase in RWA excluding the impact of FX and TD Cowen integration, which decreased CET1 by 20 basis points.

We repurchased 14.25 million common shares under our share buyback program this quarter, which reduced CET1 by 21 basis points. The impact related to the terminated First Horizon transaction, which includes a net loss from the mitigation of interest rate volatility to closing capital, the termination payment, the FX hedge, and acquisition and integration related charges including current period winddown costs decreased CET1 by 11 basis points. Impact associated with the integration of TD Cowen, largely the migration of certain acquired portfolios from standardized to internal models partially offset by integration expenses increased CET1 by 11 basis points. RWA included the impact of FX and the Cowen integration decreased 0.8% quarter-over-quarter, reflecting lower market risk and credit risk RWA partially offset by an increase in operational risk RWA.

Credit risk RWA decreased $1.4 billion or 0.3% as growth due to higher business volumes was more than offset by the impact of foreign exchange. Market risk RWA decreased $4.9 billion or 22% reflected the migration of certain acquired portfolios from standardized to internal models and a decrease in interest rate exposures. The leverage ratio was 4.6% this quarter and the LCR ratio was 133%, both well above published regulatory minimums. As you know, the First Horizon transaction was terminated on May 4th during Q3. Similar to last quarter, we have included slide 27 in this presentation to summarize the financial impacts from the termination. And with that Ajai over to you.

Ajai Bambawale: Thank you, Kelvin, and good afternoon, everyone. Please turn to slide 17. Gross impaired loan formations increased by 4 basis points to 18 basis points quarter-over-quarter, driven by the commercial and wholesale lending portfolios and some further normalization of credit performance in the consumer lending portfolios. Please turn to slide 18. Gross impaired loans were 33 basis points with an increase of 3 basis points quarter-over-quarter, largely recorded in the commercial and wholesale lending portfolios, driven by a handful of loans across a number of industries. Please turn to slide 19. 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 U.S. card PCLs recorded in the Corporate segment are fully absorbed by our partners and do not impact the Bank’s net income.

The Bank’s provision for credit losses increased 7 basis points quarter-over-quarter to 35 basis points. The increase is largely reflected in the Canadian Personal and Commercial Banking and U.S. Retail segments. Please turn to slide 20. The Bank’s impaired PCL was $663 million, an increase of $112 million quarter-over-quarter, largely recorded in the Canadian and U.S. commercial lending portfolios across a number of industries. The Bank’s current quarter impaired PCL rate remained well below 2019 levels. Performing PCL was $103 million with the quarter-over-quarter increase of $55 million, driven by the Canadian consumer lending portfolios. Please turn to slide 21. The allowance for credit losses increased by $127 million quarter-over-quarter, due to credit migration in the commercial and wholesale lending portfolios.

The Canadian consumer lending portfolios reflective of some further normalization of credit performance coupled with an update to our interest rate outlook, and volume growth, partially offset by the impact of foreign exchange. The Bank’s allowance coverage remains elevated to account for ongoing uncertainty relating to the economic trajectory and credit performance. In summary, while the Bank has experienced some further normalization of credit performance across key credit metrics this quarter, credit performance remains strong. Accordingly, I continue to expect PCL in 2023 to be in the neighborhood of 35 basis points, which is at the low end of the guidance I provided at the start of the year. To conclude, TD 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.

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Q&A Session

Operator: Certainly. [Operator Instructions] The first question is from Meny Grauman with Scotiabank. Please go ahead.

Meny Grauman: Hi. Good afternoon. First question, Bharat, I’m just curious on your decision to increase your NCIB from 30 million to 90 million shares. Just curious, what we can read into that? Or should we read — what should we read into that in terms of expanding that buyback? So, curious on your thoughts there.

Bharat Masrani: No, when we — we’ve talked about the Bank’s capital deployment framework, we look at how much do we need to support all our strategies, look at what gaps we might have, where we have to make investments, to make sure we don’t have those gaps, et cetera, et cetera. You’ve heard me say that before. And then in the end, if we think that having been through all that, we would certainly look at capital actions such as buybacks. And by the way, Meny, it is 90 million, not 30 million. I think you mentioned 30 million. So in our view, based on the capital levels we have, given the framework that I just talked about, all that suggests that a buyback is appropriate at this time, and hence, we announced it.

Meny Grauman: I’m just curious in terms of expanding it to 90 million from 30 million. And what specifically changed over the past few months to give you more sightline to be able to increase that?

Bharat Masrani: Well, the 30 million, last quarter, when we announced that, I think I had said that we issued shares through the DRIP program to finance the acquisition. That has since been terminated. So it made sense to immediately go and return that to the shareholders since we were not pursuing that acquisition. Now, this particular one, expanding it is over the next one year. And we — as I said in my comments earlier, the 30 million program will likely — based on market conditions, things could change. But our expectation is that sometime in September, we will have completed that. And so, given the situation now, we think it’s appropriate to increase that by further 90 million.

Meny Grauman: I got it. And then, if I can just ask on the disclosure related to the inquiries from U.S. regulatory authorities and law enforcement, you highlight anticipated monetary and/or nonmonetary penalties. On the monetary side, just curious, what you’ve provisioned or have you provisioned anything for this potential monetary charge or anticipated monetary charge, I should say?

Bharat Masrani: As you know, I can’t comment on our ongoing discussions with our regulators. What I can say regarding the disclosure and as we’ve shared in the disclosure, we are pursuing efforts to enhance our U.S. AML compliance program. We have a strong and disciplined risk management culture and are focused on continuously improving our programs. So I just wanted to emphasize that, Meny. With respect to what amounts and all that, I really can’t comment on that because that I don’t think would be appropriate. And regarding our accounting policies, when it is appropriate, we will certainly let you know what it has cost or not cost us.

Operator: The next question is from Sohrab Movahedi with BMO Capital Markets. Please go ahead.

Sohrab Movahedi: Maybe just to pick up where Meny left off. What’s the management’s working assumption as to how long it may take to resolve the issues around compliance program with money laundering and the like?

Bharat Masrani: I don’t think, Sohrab, it’s appropriate for me to comment on our ongoing discussions with our regulators because that would be going into that territory if I started predicting things for you. So, I think best is what we’ve said in our disclosure that we are working hard to enhance our programs. That is the TD way. We learn new things from our ongoing internal monitoring and management and through engagement with various stakeholders, including our regulators, and look for opportunities to enhance our controls whenever that situation arises. And I think you know us well, as you’d expect from TD, we take this very seriously and make the appropriate investments and enhancements that fit our organization to manage the risk. And I’m really confident that in time, we will deliver the required enhancements. So, I think, best to leave it at that, Meny, and Sohrab.

Sohrab Movahedi: Okay. Maybe just for a bit of additional clarity. When we look at, for example, the current quarter U.S. segment expense base, when we think about that relative to last quarter, some of the enhancements that you’re talking about, Bharat, I assume requires hiring some people and spending some money. Are we starting to see some of the likely expense implications of the enhancement program in the numbers right now, or is that still to come?

Bharat Masrani: I think that I’ll leave it to Leo to answer about the overall expenses in the U.S. But the only point I’d make is enhancing any of our businesses, controls is an ongoing exercise at TD. It is not that a particular event or — takes place, and that’s the only time we make those investments. So wanted to provide that overall context, but why don’t I leave it to Leo to talk about the expenses in the U.S.

Leo Salom: Maybe just to add a little bit. Our expenses for the quarter were up 9.8%. And largely on higher staffing costs and core investments in the franchise, I think I had mentioned last time we were together that we were quite purposeful in terms of increasing staff count in some of our frontline areas late last year. We’re recovering from the pandemic process. And so, that has — we’ve completed that process. Those teams are in place. We’re seeing the benefits of it in terms of overall customer experience in both our call centers and our branch network. We are also making significant investments in our core infrastructure. And to your point, governance and control is one of our important elements and pillars of our overall investment process. We are investing in a number of different areas to strengthen the foundation of our U.S. franchise. So we can continue to scale our franchise.

Sohrab Movahedi: Okay. So just one last question here then. Leo, are these investments — it didn’t sound necessarily these are revenue-enhancing investments?

Leo Salom: No, no, no, I wouldn’t say that. Sohrab, in fact, if you think of our portfolio, every year, we have a very disciplined process. We sit down and we look at the opportunities that we want to fund to be able to continue to transform the business. Obviously, first and foremost is ensuring that we’ve got a strong control platform to be able to operate. And so, those are the first things that we lean into to make sure that those investments are addressed, et cetera. But beyond that, obviously, we look at areas that will drive either new ventures or provide new features, functionality or address customer irritant areas to be able to continue to scale our operations. So, it is — I’d say it’s an and statement, not an or, and we’ll strike the right balance based on the needs of the business.

Operator: The next question is from Doug Young with Desjardin Capital Markets. Please go ahead.

Doug Young: Just wanted to dig into the RWA calculation. I just noticed that TD’s operational risk RWA is just — as a percent of total RWA is about 16%. That’s close to 4 percentage points higher than the other big 5 banks. And I just wanted to understand, is there a structural reason why that might be relative to peers? And how do I think or how should we think about this? And I know there’s been some litigation issues, there’s U.S. issues that we’ve been talking about. And as these things get settled, is there a quick path to a reversal, or is that something that just will remain elevated? Just wanted some color on that first.

Kelvin Tran: Yes. It’s Kelvin. I’ll take that. There’s no specific structural issue. But you’re right, like litigation would have an impact on it, because you do have to hold operational risk capital. And I believe that that stays with you for the next 10 years.

Doug Young: Okay. So there’s no quick reversal. This is something that does stick around for a while. Okay. And then, Kelvin, on the fundamental review of the trading book, I forget if you quantified what the implications of that would be when it gets implemented?

Kelvin Tran: Yes. We’re working through it. But as you know, with market risk, that changes from quarter-over-quarter depending on the market risk level, and you would have seen over the past year as market risk has drifted, RWA has drifted lower, that means the impact on the transition would be a little bit higher. But we’ll announce it when we’re ready to do so.

Doug Young: Okay. So, you’re not willing to count that. Okay.