Dominion Bank(TD) - 2024 Q3 - Quarterly Report

Management's Discussion and Analysis (MD&A) Financial Highlights TD Bank Group reported a Q3 2024 net loss of $181 million due to a $3.57 billion AML provision, while adjusted net income remained stable Q3 2024 vs. Q3 2023 Financial Highlights | Metric | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | Reported Diluted EPS | $(0.14) | $1.53 | | Adjusted Diluted EPS | $2.05 | $1.95 | | Reported Net Income (Loss) | $(181) million | $2,881 million | | Adjusted Net Income | $3,646 million | $3,649 million | Year-to-Date (9 Months) 2024 vs. 2023 Financial Highlights | Metric | YTD 2024 | YTD 2023 | | :--- | :--- | :--- | | Reported Diluted EPS | $2.76 | $4.04 | | Adjusted Diluted EPS | $6.09 | $6.09 | | Reported Net Income | $5,207 million | $7,768 million | | Adjusted Net Income | $11,072 million | $11,510 million | - The third quarter reported earnings included a significant provision of $3,566 million ($2.04 per share) for investigations related to the Bank's AML program[2] Significant and Subsequent Events The Bank is addressing U.S. AML investigations, concluded a $110 million restructuring program, and sold 40.5 million Schwab shares for $3.4 billion post-quarter - The Bank is undertaking a multi-year remediation of its U.S. AML Program, involving investments in leadership, procedures, data, and technology[12] - Restructuring charges of $110 million were incurred in Q3 2024, primarily for employee severance and real estate optimization, and the program has now concluded[13] - Subsequent to the quarter's end, on August 21, 2024, the Bank sold 40.5 million shares of Schwab common stock for approximately $3.4 billion, reducing its ownership from 12.3% to 10.1%[13] How We Performed The Bank uses non-GAAP 'adjusted' results to show underlying performance, detailing its Schwab investment and presenting ROE and ROTCE, with adjusted figures showing stability - The Bank utilizes non-GAAP financial measures, referred to as "adjusted" results, to assess performance by removing "items of note" that management believes are not indicative of underlying business performance[16] Q3 2024 Performance Ratios (Reported vs. Adjusted) | Ratio | Reported | Adjusted | | :--- | :--- | :--- | | Return on Common Equity (ROE) | (1.0)% | 14.1% | | Return on Tangible Common Equity (ROTCE) | (1.0)% | 18.8% | - The Bank accounts for its investment in The Charles Schwab Corporation using the equity method, with earnings reported on a one-month lag[18] Financial Results Overview The reported net loss was driven by the AML provision, while adjusted net income was flat YoY, with revenue growth offset by higher PCL, insurance expenses, and non-interest expenses Net Income Q3 2024 reported net loss was $181 million due to the AML provision, a sharp decline from Q3 2023, while adjusted net income remained stable at $3,646 million - Q3 2024 reported net loss was $181 million, compared with net income of $2,881 million in Q3 2023, and adjusted net income was relatively flat at $3,646 million[29] - The decrease in reported net income was primarily driven by the U.S. Retail segment, which saw a decline of $3,580 million[29] Net Interest Income Net interest income (NII) for Q3 2024 increased by 4% year-over-year to $7,579 million, driven by volume growth and higher deposit margins in Canadian P&C Banking and higher loan volumes in U.S. Retail - Reported net interest income for Q3 2024 was $7,579 million, an increase of 4% compared to Q3 2023, mainly due to volume growth and higher deposit margins in Canadian Personal and Commercial Banking[31] Non-Interest Income Reported non-interest income for Q3 2024 saw a significant increase of 17% year-over-year, reaching $6,597 million, fueled by higher trading-related revenue, lending revenue, advisory and underwriting fees in Wholesale Banking, and increased insurance premiums - Reported non-interest income for Q3 2024 increased by 17% YoY to $6,597 million, driven by strong performance in Wholesale Banking and higher insurance premiums[34] Provision for Credit Losses (PCL) The Provision for Credit Losses (PCL) for Q3 2024 was $1,072 million, an increase of $306 million from Q3 2023, reflecting credit migration in consumer and wholesale lending portfolios, with PCL as an annualized percentage of credit volume at 0.46% Provision for Credit Losses (in millions) | Period | PCL - Impaired (Stage 3) | PCL - Performing (Stage 1 & 2) | Total PCL | | :--- | :--- | :--- | :--- | | Q3 2024 | $920 | $152 | $1,072 | | Q3 2023 | $663 | $103 | $766 | Non-Interest Expenses and Efficiency Ratio Reported non-interest expenses surged 50% to $11.01 billion due to the AML provision, while adjusted expenses rose 7% to $7.21 billion, impacting efficiency ratios - Reported non-interest expenses increased by 50% YoY to $11.0 billion, mainly due to the AML provision, while adjusted non-interest expenses rose 7% to $7.2 billion[40] Efficiency Ratio Comparison | Ratio | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | Reported Efficiency Ratio | 77.7% | 57.0% | | Adjusted Efficiency Ratio (net of ISE) | 57.3% | 57.2% | How Our Businesses Performed This section details segment performance: Canadian P&C achieved record income, U.S. Retail reported a net loss due to AML, Wealth Management saw record revenue offset by claims, and Wholesale Banking grew revenue Canadian Personal and Commercial Banking The Canadian Personal and Commercial Banking segment achieved a record quarter, with net income increasing 13% year-over-year to $1,872 million, driven by a 9% rise in revenue to $5,003 million, fueled by strong volume growth and higher deposit margins, improving the efficiency ratio to 39.3% Canadian P&C Banking - Q3 2024 Financials (vs. Q3 2023) | Metric | Q3 2024 | Q3 2023 | Change | | :--- | :--- | :--- | :--- | | Net Income | $1,872M | $1,655M | +13% | | Total Revenue | $5,003M | $4,570M | +9% | | PCL | $435M | $379M | +15% | | Efficiency Ratio | 39.3% | 41.5% | -2.2 p.p. | U.S. Retail U.S. Retail reported a net loss of $2.28 billion due to the AML provision, a reversal from prior year, while adjusted net income decreased 6% to $1.29 billion U.S. Retail - Q3 2024 Financials (vs. Q3 2023) | Metric (CAD) | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | Reported Net Income (Loss) | $(2,275)M | $1,305M | | Adjusted Net Income | $1,291M | $1,368M | | Share of net income from Schwab | $178M | $191M | - The U.S. Retail Bank (excluding Schwab) reported a net loss of $2,453 million, primarily reflecting the impact of the provision for investigations related to the Bank's AML program[51] Wealth Management and Insurance Wealth Management and Insurance net income was relatively flat year-over-year at $430 million, achieving record revenue of $3,349 million (up 13%), offset by a 20% increase in insurance service expenses to $1,669 million due to increased claims severity and severe weather events Wealth Management & Insurance - Q3 2024 Financials (vs. Q3 2023) | Metric | Q3 2024 | Q3 2023 | Change | | :--- | :--- | :--- | :--- | | Net Income | $430M | $431M | ~0% | | Total Revenue | $3,349M | $2,958M | +13% | | Insurance Service Expenses | $1,669M | $1,386M | +20% | Wholesale Banking Wholesale Banking reported a 17% increase in net income to $317 million for the quarter, with revenue growing 14% to $1,795 million due to higher trading-related revenue, lending revenue, and advisory and underwriting fees, partially offset by higher PCL and non-interest expenses, resulting in flat adjusted net income year-over-year at $377 million Wholesale Banking - Q3 2024 Financials (vs. Q3 2023) | Metric | Q3 2024 | Q3 2023 | Change | | :--- | :--- | :--- | :--- | | Reported Net Income | $317M | $272M | +17% | | Adjusted Net Income | $377M | $377M | 0% | | Total Revenue | $1,795M | $1,568M | +14% | Corporate The Corporate segment's reported net loss narrowed to $525 million from $782 million in Q3 2023, mainly due to a prior-year payment related to the terminated First Horizon transaction, while the adjusted net loss widened to $324 million from $182 million, reflecting higher investments in risk and control infrastructure Corporate Segment Net Loss (in millions) | Metric | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | Reported Net Loss | $(525) | $(782) | | Adjusted Net Loss | $(324) | $(182) | Balance Sheet Review Total assets increased to $1.97 trillion, driven by higher loans and trading assets, while total liabilities rose to $1.86 trillion, mainly due to increased deposits Selected Balance Sheet Items (vs. Oct 31, 2023) | Item | July 31, 2024 | Oct 31, 2023 | | :--- | :--- | :--- | | Total Assets | $1,967.2B | $1,955.1B | | Loans, net of allowance | $938.3B | $895.9B | | Total Deposits | $1,220.6B | $1,198.2B | | Total Equity | $111.6B | $112.1B | Credit Portfolio Quality Credit quality normalized with gross impaired loans increasing 40% to $4.17 billion, and total ACL rising to $8.84 billion to reflect current credit conditions and volume growth - Gross impaired loans increased by 40% YoY to $4,170 million as of July 31, 2024, reflecting formations outpacing resolutions in commercial and consumer lending portfolios[64] Allowance for Credit Losses (ACL) | Date | Stage 1 & 2 Allowance (Performing) | Stage 3 Allowance (Impaired) | Total ACL | | :--- | :--- | :--- | :--- | | July 31, 2024 | $7,556M | $1,278M | $8,838M | | July 31, 2023 | $7,283M | $989M | $7,774M | Capital Position The Bank's capital remains robust with a CET1 ratio of 12.8%, despite a decrease from 15.2% due to AML provisions and repurchases of 13.3 million shares Key Capital Ratios | Ratio | July 31, 2024 | Oct 31, 2023 | July 31, 2023 | | :--- | :--- | :--- | :--- | | CET1 Capital Ratio | 12.8% | 14.4% | 15.2% | | Tier 1 Capital Ratio | 14.6% | 16.2% | 17.2% | | Total Capital Ratio | 16.3% | 18.1% | 19.6% | | Leverage Ratio | 4.1% | 4.4% | 4.6% | - The Bank repurchased 13.3 million common shares in Q3 2024 for a total of $1.0 billion under its NCIB program[76] Managing Risk The Bank manages various risks, with gross credit risk at $2.18 trillion, average one-day VaR at $32.7 million, and strong liquidity with LCR of 129% and NSFR of 115% Credit Risk Gross credit risk exposure, or Exposure at Default (EAD), stood at $2,178 billion as of July 31, 2024, a slight increase from $2,154 billion at October 31, 2023, with growth primarily in the retail portfolio Gross Credit Risk Exposure (EAD) | Portfolio | July 31, 2024 | Oct 31, 2023 | | :--- | :--- | :--- | | Retail | $818.8B | $792.6B | | Non-retail | $1,359.5B | $1,361.9B | | Total | $2,178.3B | $2,154.4B | Market Risk Average one-day VaR for Q3 2024 was $32.7 million, down from $42.0 million, reflecting changes in interest rate positions; a 100 bps rate increase would negatively impact EVE by $2.49 billion Average Total Value-at-Risk (one-day) | Period | Average VaR | | :--- | :--- | | Q3 2024 | $32.7M | | Q2 2024 | $27.9M | | Q3 2023 | $42.0M | - As of July 31, 2024, an immediate and sustained 100 bps increase in interest rates would have a negative impact on the Bank's EVE of $2,485 million and a positive impact on NII of $785 million[86] Liquidity Risk The Bank maintains strong liquidity with $521.8 billion in liquid assets, LCR of 129%, and NSFR of 115%, with diversified funding primarily from personal and commercial deposits - The Bank held $521.8 billion in unencumbered liquid assets as of July 31, 2024[90][91] Key Liquidity Ratios | Ratio | Q3 2024 (Average) | As of July 31, 2024 | | :--- | :--- | :--- | | Liquidity Coverage Ratio (LCR) | 129% | - | | Net Stable Funding Ratio (NSFR) | - | 115% | Securitization and Off-Balance Sheet Arrangements The Bank engages in securitization and off-balance sheet arrangements in the normal course of business, with no significant changes during the quarter, and its total potential exposure to loss through liquidity facilities for its Canadian multi-seller conduits was $15.7 billion, with a funded exposure of $13.8 billion as of July 31, 2024 - The Bank's total potential exposure to loss from liquidity facilities for its Canadian multi-seller conduits was $15.7 billion, with $13.8 billion funded as of quarter-end[110] Accounting Policies and Estimates The Bank adopted IFRS 17 for insurance contracts on November 1, 2023, restating comparative periods, and noted the cessation of CDOR on June 28, 2024, with no significant exposure - The Bank adopted IFRS 17 (Insurance Contracts) effective November 1, 2023, changing the accounting for insurance contract liabilities and revenue recognition[111][128] - As part of the interest rate benchmark reform, the Canadian Dollar Offered Rate (CDOR) ceased on June 28, 2024, and the Bank's exposure to financial instruments referencing CDOR is no longer significant[115][134] Interim Consolidated Financial Statements Notes to Interim Consolidated Financial Statements Notes detail IFRS 17 adoption, Schwab investment, Cowen acquisition, a further $3.57 billion AML provision (totaling over $4.1 billion), and segment results - The Bank adopted IFRS 17 (Insurance Contracts) on November 1, 2023, applying the full retrospective approach, which resulted in an after-tax increase to retained earnings of $112 million as of the transition date[128][130] - The Bank's investment in Schwab had a carrying value of $10.0 billion and a fair value of $20 billion as of July 31, 2024[167] - In Q3, the Bank took a further provision of $3.57 billion (US**$2.60 billion**) related to U.S. AML investigations, following an initial provision of $615 million in Q2 2024[196] Shareholder and Investor Information General Information This section provides shareholder contact details, information on the Q3 earnings call, and announces the next Annual Meeting on April 10, 2025, in Toronto - Contact information is provided for registered and beneficial shareholders through TSX Trust Company and Computershare[202] - The next Annual Meeting is scheduled for April 10, 2025, in Toronto, Ontario[202]