TD Bank Group Reports Fourth Quarter and Fiscal 2022 Results

FOURTH QUARTER FINANCIAL HIGHLIGHTS, compared with the fourth quarter last year:

• Reported diluted earnings per share were $3.62 compared with $2.04.
• Adjusted diluted earnings per share were $2.18, compared with $2.09.
• Reported net income was $6,671 million, compared with $3,781 million.
• Adjusted net income was $4,065 million, compared with $3,866 million.

FULL YEAR FINANCIAL HIGHLIGHTS, compared with last year:

• Reported diluted earnings per share were $9.47, compared with $7.72.
• Adjusted diluted earnings per share were $8.36, compared with $7.91.
• Reported net income was $17,429 million, compared with $14,298 million.
• Adjusted net income was $15,425 million, compared with $14,649 million.

FOURTH QUARTER ADJUSTMENTS (ITEMS OF NOTE)

The fourth quarter reported earnings figures included the following items of note:

• Amortization of intangibles of $57 million ($51 million after-tax or 3 cents per share), compared with $74 million ($65 million after-tax or 4 cents per share) in the fourth quarter last year.
• Acquisition and integration charges related to the Schwab transaction of $18 million ($16 million after-tax or 1 cent per share), compared with $22 million ($20 million after-tax or 1 cent per share) in the fourth quarter last year.
• Acquisition and integration-related charges for pending acquisitions of $85 million ($65 million after-tax or 3 cents per share).
• Mitigation of interest rate volatility to closing capital on First Horizon acquisition, net gain of $2,319 million ($1,741 million after-tax or 96 cents per share).
• Gain on sale of Schwab shares of $997 million ($997 million after-tax or 55 cents per share).

TORONTO, Dec. 1, 2022 /CNW/ - TD Bank Group ("TD" or the "Bank") today announced its financial results for the fourth quarter ended October 31, 2022. Reported earnings were $6.7 billion, up 76% compared with the fourth quarter last year, and adjusted earnings were $4.1 billion, up 5%.

"I'm extremely pleased with our earnings performance this quarter, which capped off a strong year demonstrating the benefit of our diversified business model and prudent risk and financial management," said Bharat Masrani, President and CEO, TD Bank Group. "The strength and resilience of our franchise enabled the Bank to invest in our business and deliver for our shareholders."

Canadian Personal and Commercial Banking delivered a strong quarter with record earnings from continued growth momentum

Canadian Personal and Commercial Banking finished the year in a position of strength with net income of $1,694 million, an increase of 11% compared with the fourth quarter last year reflecting higher margins and strong volume growth. Revenue growth of 16% resulted in a fourth consecutive quarter of record revenue.

The strong momentum in Canadian Personal and Commercial Banking was supported by continued strength in customer acquisition and higher customer activity. The Personal Bank launched a banking package specifically created for International Students – a first among Canadian peers – contributing to record New to Canada growth. TD Canada Trust was ranked "Highest in Customer Satisfaction in Small Business Banking¹" by J.D. Power, reflecting the trusted relationships built with our customers.

The U.S. Retail Bank delivered strong results supported by broad-based growth in its businesses

U.S. Retail reported net income for the quarter was $1,539 million (US$1,163 million), an increase of 12% (7% in U.S. dollars) compared with the fourth quarter last year. On an adjusted basis, net income for the quarter was $1,590 million (US$1,200 million), an increase of 16% (10% in U.S. dollars). Reported net income included acquisition and integration-related charges for the First Horizon acquisition of $67 million (US$50 million) or $51 million (US$37 million) after-tax. The Bank's investment in The Charles Schwab Corporation (Schwab) contributed $310 million (US$237 million) in earnings, an increase of 26% (22% in U.S. dollars) compared with the fourth quarter last year.

The U.S. Retail Bank, which excludes the Bank's investment in Schwab, reported net income of $1,229 million (US$926 million), an increase of 9% (3% in U.S. dollars) from the fourth quarter last year. On an adjusted basis, net income was a record $1,280 million (US$963 million).

The U.S. Retail Bank was pleased to announce extended partnership agreements with Nordstrom through 2026 and Target Corporation through 2030. In addition, the Bank continued to modernize its distribution network with enhanced capabilities in sales and advice, including converting select retail stores to wealth advice centres, while expanding its presence in North Carolina and South Florida, including plans to open 15 new stores in Charlotte by 2025.

TD Bank, America's Most Convenient Bank^® (TD AMCB), ranked No. 1 in its footprint by total number of approved U.S. Small Business Administration (SBA) loan units for the sixth consecutive year and ranked #2 National SBA Lender in 2022.

Wealth Management and Insurance delivered solid performance in the fourth quarter amid challenging market conditions

Wealth Management and Insurance net income was $516 million, a decrease of 15% compared with the fourth quarter last year. Insurance claims and related expenses rose 11%, reflecting increased driving activity and more severe weather-related events. This quarter's results highlighted the benefits of the segment's diversified business model as higher net interest income and insurance revenue largely offset the impact of market volatility and trading normalization.

Wealth Management and Insurance continued to deliver high quality advice and innovative financial products to help customers navigate the challenging economic environment. Wealth Management expanded its advisor base to better service mass affluent and high net worth client segments. TD Asset Management launched new investment solutions, including a carbon credit ETF and a multi-asset solution with exposure to alternative investments to enhance diversification for retail and institutional clients. TD Insurance continued its digital transformation, with over 20% of new sales this quarter completed digitally.

Solid Wholesale Banking performance reflects strength of diversified business model

Wholesale Banking reported net income for the quarter was $261 million, a decrease of 38%, compared with the fourth quarter last year. On an adjusted basis, net income was $275 million, a decrease of 35%. Revenue was up 1%, as a challenging underwriting environment was offset by higher deposit, lending, and trading-related revenues, reflecting the strength of Wholesale Banking's diversified business model.

This quarter, TD Securities launched a Carbon Advisory business within the ESG Solutions group, bolstering the team's capabilities to support clients' transitions to a low-carbon economy. As part of this effort, TD Securities announced a $10 million investment into the Boreal Wildlands Carbon Project – the largest single private conservation project ever undertaken in Canada – further demonstrating the Bank's commitment to supporting the growth and development of the voluntary carbon markets.

Capital

TD's Common Equity Tier 1 Capital ratio was 16.2%.

Conclusion

For the year ahead, there are both tailwinds (including the interest rate environment and the anticipated closing of the announced acquisitions) and headwinds (including geopolitical tensions, the complex operating environment, and the potential for an economic slowdown). On balance, unless macroeconomic conditions were to shift dramatically, TD expects to meet or exceed its medium-term adjusted EPS growth target range of 7-10% in fiscal 2023.

"We enter 2023 from a position of strength, with growing businesses and a powerful purpose-driven brand. While there will be macroeconomic and geopolitical challenges in the year ahead, the progress we made in 2022 gives me great confidence in our future success," added Masrani.

"I would like to thank our colleagues around the world for living the TD brand and for their unwavering commitment to enriching the lives of our customers and our communities," concluded Masrani.

The foregoing contains forward-looking statements. Please refer to the "Caution Regarding Forward-Looking Statements".

This document was reviewed by the Bank's Audit Committee and was approved by the Bank's Board of Directors, on the Audit Committee's recommendation, prior to its release.

SIGNIFICANT EVENTS AND PENDING ACQUISITIONS

Acquisition of Cowen Inc.

On August 2, 2022, the Bank and Cowen Inc. ("Cowen") announced a definitive agreement for TD to acquire Cowen in an all-cash transaction valued at US$1.3 billion, or US$39.00 for each share of Cowen common stock. The Bank is currently planning to close the transaction in the first calendar quarter of 2023, subject to customary closing conditions, including approvals from certain U.S., Canadian, and foreign regulatory authorities. Regulatory approvals are not within the Bank's control. The results of the acquired business will be consolidated by the Bank from the closing date and reported in the Wholesale Banking segment. Based on the estimated financial performance and balance sheets of the Bank and Cowen, including transaction-related impacts, the Bank expects that its Common Equity Tier 1 (CET1) Capital ratio will be comfortably above 11% upon the closing of the Cowen acquisition, pro forma for the closing of the Bank's acquisition of First Horizon Corporation ("First Horizon").

Sale of Schwab Common Shares

On August 1, 2022, in order to provide the capital required for the acquisition of Cowen, the Bank sold 28.4 million non-voting common shares of The Charles Schwab Corporation ("Schwab") at a price of US$66.53 per share for proceeds of $2.5 billion (US$1.9 billion). Approximately 15 million shares were sold to Schwab pursuant to a repurchase agreement at a price equal to the price obtained in the sale of 13.4 million shares sold to a broker dealer pursuant to Rule 144 of the Securities Act of 1933. All shares sold automatically converted into shares of Schwab voting common stock and the shares acquired by Schwab are no longer outstanding. The sales reduced the Bank's ownership interest in Schwab from approximately 13.4% to 12.0%. The Bank recognized $997 million as other income (net of $368 million loss from accumulated other comprehensive income (AOCI) reclassified to earnings), in the fourth quarter of fiscal 2022.

Acquisition of First Horizon Corporation

On February 28, 2022, the Bank and First Horizon announced a definitive agreement for the Bank to acquire First Horizon in an all-cash transaction valued at US$13.4 billion, or US$25.00 for each common share of First Horizon. In connection with this transaction, the Bank has invested US$494 million in non-voting First Horizon preferred stock (convertible in certain circumstances into up to 4.9% of First Horizon's common stock). The Bank is currently planning to close the transaction in the first half of fiscal 2023, subject to customary closing conditions, including approvals from U.S. and Canadian regulatory authorities. Regulatory approvals are not within the Bank's control. The results of the acquired business will be consolidated by the Bank from the closing date and reported in the U.S. Retail segment.

First Horizon shareholders will receive, at closing, an additional US$0.65 per share on an annualized basis for the period from November 27, 2022 through the day immediately prior to the closing. Either party will have the right to terminate the agreement if the transaction has not closed by February 27, 2023 (the "outside date"), subject to the right of either party (under certain conditions) to extend the outside date to May 27, 2023.

During the year, the Bank implemented a strategy to mitigate interest rate volatility to capital on closing of the acquisition.

The fair value of First Horizon's fixed rate financial assets and liabilities and certain intangible assets are sensitive to interest rate changes. The fair value of net assets will determine the amount of goodwill to be recognized on closing of the acquisition. Increases in goodwill and intangibles will negatively impact capital ratios because they are deducted from capital under OSFI Basel III rules. In order to mitigate this volatility to closing capital, the Bank de-designated certain interest rate swaps hedging fixed income investments in fair value hedge accounting relationships.

After the de-designation, mark-to-market gains (losses) on these swaps are recognized in earnings, without any corresponding offset from the previously hedged investments. Such gains (losses) will mitigate the capital impact from changes in the amount of goodwill recognized on closing of the acquisition. The de-designation also triggered the amortization of the investments' basis adjustment to net interest income over the remaining expected life of the investments.

For the year ended October 31, 2022, the Bank reported $1,487 million in non-interest income related to the mark-to-market on the swaps, and $154 million in net interest income related to the basis adjustment amortization. In addition, for the year ended October 31, 2022, the Bank reported $121 million in non-interest income related to the net interest earned on the swaps since the de-designation of the hedge accounting relationships.

HOW WE PERFORMED

Economic Summary and Outlook

The outlook for the global economy for the next two years was downgraded relative to the prior quarter. In Europe, an energy crisis continues to impact household finances and weigh on industrial output. China is reckoning with the fallout of its real estate slowdown and strict COVID-19 controls. In North America, COVID-19 is causing fewer supply chain disruptions, but the legacy of high domestic inflation and tight labour markets has led to central banks raising policy rates at the fastest pace in roughly four decades. This has significantly weakened the economic growth prospects over the next twelve to twenty-four months.

The U.S. economy expanded by 2.6% annualized in the third calendar quarter of 2022, after having contracted in the first half of the year. However, this was largely due to a surge in exports relative to imports. In contrast, domestic demand grew by a soft 0.5%. Consumer spending growth decelerated to 1.4% relative to the prior calendar quarter of 2.0%, as inflation continued to weigh on the purchasing power of households, which are also normalizing spending away from goods after a surge during the pandemic. The ongoing downturn in housing also weighed on the economy in the third calendar quarter, subtracting 1.4 percentage points from growth.

As the lagged effect of interest rate increases is expected to continue to feed through the economy in 2023, it should lead to some cooling in the job market, where the unemployment rate was 3.7% in October, near a cyclical low. Consumer Price Index (CPI) inflation has shown modest signs of cooling, but at 7.7% year-over-year in October, it is still close to 40-year highs. Slower global growth and a high U.S. dollar are expected to help goods inflation ease, while services inflation is likely to prove more persistent.

The Federal Reserve continued its aggressive pace of rate increases, with a fourth 75 basis points (bps) hike in early November. TD Economics expects further interest rate hikes will take the Federal Funds rate to a range of 4.50-5.00% in calendar 2023. This historically large increase in interest rates raises the risk that the economy will slow more quickly and trigger an outright recession. Financial markets have reflected this risk with the yield curve inverting.

The Canadian economy has begun to slow after growing at a very healthy pace in the first half of the year. The interest-rate sensitive housing market was the first area of the economy to respond to the Bank of Canada's rapid increase in the policy rate. As of October, home sales were down 40% from the peak in February of this year. Housing demand is expected to cool further as higher interest rates continue to weigh on affordability. Canadian inflation has begun to decelerate but remained high at 6.9% year-over-year in October. The labour market has also remained quite strong through October, although TD Economics expects job market conditions to ease in the coming quarters, in line with weaker demand in the broader economy.

The Bank of Canada raised its overnight interest rate by 50 bps in October, to 3.75%.TD Economics expects further increases in the overnight rate to a range of 4.25-4.50% in calendar 2023. With interest rates expected to increase to a lesser degree in Canada than in the United States, the Canadian dollar may reach a low of 70 U.S. cents in the first half of calendar 2023.

HOW THE BANK REPORTS

The Bank prepares its Consolidated Financial Statements in accordance with IFRS, the current GAAP, and refers to results prepared in accordance with IFRS as "reported" results.

Non-GAAP and Other Financial Measures

In addition to reported results, the Bank also presents certain financial measures, including non-GAAP financial measures that are historical, non-GAAP ratios, supplementary financial measures and capital management measures, to assess its results. Non-GAAP financial measures, such as "adjusted" results, are utilized to assess the Bank's businesses and to measure the Bank's overall performance. To arrive at adjusted results, the Bank adjusts for "items of note", from reported results. Items of note are items which management does not believe are indicative of underlying business performance and are disclosed in Table 3. Non-GAAP ratios include a non-GAAP financial measure as one or more of its components. Examples of non-GAAP ratios include adjusted basic and diluted earnings per share (EPS), adjusted dividend payout ratio, adjusted efficiency ratio, and adjusted effective income tax rate. The Bank believes that non-GAAP financial measures and non-GAAP ratios provide the reader with a better understanding of how management views the Bank's performance. Non-GAAP financial measures and non-GAAP ratios used in this document are not defined terms under IFRS and, therefore, may not be comparable to similar terms used by other issuers. Supplementary financial measures depict the Bank's financial performance and position, and capital management measures depict the Bank's capital position, and both are explained in this document where they first appear.

U.S. Strategic Cards

The Bank's U.S. strategic cards portfolio is comprised of agreements with certain U.S. retailers pursuant to which TD is the U.S. issuer of private label and co-branded consumer credit cards to their U.S. customers. Under the terms of the individual agreements, the Bank and the retailers share in the profits generated by the relevant portfolios after credit losses. Under IFRS, TD is required to present the gross amount of revenue and provisions for credit losses (PCL) related to these portfolios in the Bank's Consolidated Statement of Income. At the segment level, the retailer program partners' share of revenues and credit losses is presented in the Corporate segment, with an offsetting amount (representing the partners' net share) recorded in Non-interest expenses, resulting in no impact to Corporate's reported Net income (loss). The Net income (loss) included in the U.S. Retail segment includes only the portion of revenue and credit losses attributable to TD under the agreements.

Investment in The Charles Schwab Corporation

On October 6, 2020, the Bank acquired an approximately 13.5% stake in Schwab following the completion of Schwab's acquisition of TD Ameritrade Holding Corporation ("TD Ameritrade") of which the Bank was a major shareholder (the "Schwab transaction"). On August 1, 2022, the Bank sold 28.4 million non-voting common shares of Schwab, which reduced the Bank's ownership interest in Schwab to approximately 12.0%. For further details, refer to Note 12 of the 2022 Consolidated Financial Statements. The Bank's share of Schwab's earnings is reported with a one-month lag, and the Bank started recording its share of Schwab's earnings on this basis in the first quarter of fiscal 2021. The U.S. Retail segment reflects the Bank's share of net income from its investment in Schwab. The Corporate segment net income (loss) includes amounts for amortization of acquired intangibles and the acquisition and integration charges related to the Schwab transaction.

On November 25, 2019, the Bank and Schwab entered into an insured deposit account agreement (the "Schwab IDA Agreement"), which became effective upon closing of the Schwab transaction and has an initial expiration date of July 1, 2031. Refer to the "Related Party Transactions" section in the 2022 MD&A for further details.

The following table provides the operating results on a reported basis for the Bank.

The following table provides a reconciliation between the Bank's adjusted and reported results.

RETURN ON COMMON EQUITY

The consolidated Bank ROE is calculated as reported net income available to common shareholders as a percentage of average common equity. The consolidated Bank adjusted ROE is calculated as adjusted net income available to common shareholders as a percentage of average common equity. Adjusted ROE is a non-GAAP ratio, and can be utilized in assessing the Bank's use of equity.

ROE for the business segments is calculated as the segment net income attributable to common shareholders as a percentage of average allocated capital. The Bank's methodology for allocating capital to its business segments is largely aligned with the common equity capital requirements under Basel III. Capital allocated to the business segments increased to 10.5% CET1 Capital effective the first quarter of 2022 compared with 9% in fiscal 2021.

RETURN ON TANGIBLE COMMON EQUITY

Tangible common equity (TCE) is calculated as common shareholders' equity less goodwill, imputed goodwill and intangibles on the investments in Schwab and other acquired intangible assets, net of related deferred tax liabilities. ROTCE is calculated as reported net income available to common shareholders after adjusting for the after-tax amortization of acquired intangibles, which are treated as an item of note, as a percentage of average TCE. Adjusted ROTCE is calculated using reported net income available to common shareholders, adjusted for all items of note, as a percentage of average TCE. TCE, ROTCE, and adjusted ROTCE can be utilized in assessing the Bank's use of equity. TCE is a non-GAAP financial measure, and ROTCE and adjusted ROTCE are non-GAAP ratios.

Impact of Foreign Exchange Rate on U.S. Retail Segment Translated Earnings

The following table reflects the estimated impact of foreign currency translation on key U.S. Retail segment income statement items. The impact is calculated as the difference in translated earnings using the average US to Canadian dollars exchange rates in the periods noted.

HOW OUR BUSINESSES PERFORMED

For management reporting purposes, commencing the fourth quarter of 2022, the Bank's operations and activities are organized around the following four key business segments: Canadian Personal and Commercial Banking, U.S. Retail, Wealth Management and Insurance, and Wholesale Banking. The Bank's other activities are grouped into the Corporate segment. The comparative period information has been adjusted to reflect the new segment alignment.

Results of each business segment reflect revenue, expenses, assets, and liabilities generated by the businesses in that segment. Where applicable, the Bank measures and evaluates the performance of each segment based on adjusted results and ROE, and for those segments the Bank indicates that the measure is adjusted. For further details, refer to Note 29 of the Bank's Consolidated Financial Statements for the year ended October 31, 2022.

PCL related to performing (Stage 1 and Stage 2) and impaired (Stage 3) financial assets, loan commitments, and financial guarantees is recorded within the respective segment.

Net interest income within Wholesale Banking is calculated on a taxable equivalent basis (TEB), which means that the value of non-taxable or tax-exempt income, including dividends, is adjusted to its equivalent before-tax value. Using TEB allows the Bank to measure income from all securities and loans consistently and makes for a more meaningful comparison of net interest income with similar institutions. The TEB increase to net interest income and provision for income taxes reflected in Wholesale Banking results is reversed in the Corporate segment. The TEB adjustment for the quarter was $36 million, compared with $36 million in the fourth quarter last year, and $41 million in the prior quarter.

Share of net income from investment in Schwab is reported in the U.S. Retail segment. Amounts for amortization of acquired intangibles and the acquisition and integration charges related to the Schwab transaction are recorded in the Corporate segment.

Quarterly comparison – Q4 2022 vs. Q4 2021

Canadian Personal and Commercial Banking net income for the quarter was $1,694 million, an increase of $165 million, or 11%, compared with the fourth quarter last year, reflecting higher revenue, partially offset by higher non-interest expenses and PCL. The annualized ROE for the quarter was 41.9%, compared with 46.4%, in the fourth quarter last year.

Revenue for the quarter was $4,454 million, an increase of $600 million, or 16%, compared with the fourth quarter last year.

Net interest income was $3,388 million, an increase of $525 million, or 18%, reflecting higher margins and volume growth. Average loan volumes increased $44 billion, or 9%, reflecting 8% growth in personal loans and 15% growth in business loans. Average deposit volumes increased $18 billion, or 4%, reflecting 8% growth in personal deposits and 2% decrease in business deposits. Net interest margin was 2.70%, an increase of 22 bps, primarily due to higher margins on deposits reflecting rising interest rates, partially offset by lower margin on loans, and changes in balance sheet mix.

Non-interest income was $1,066 million, an increase of $75 million, or 8%, reflecting increased client activity, including credit card-related and foreign exchange revenue.

PCL was $229 million, an increase of $176 million compared with the fourth quarter last year. PCL – impaired for the quarter was $184 million, an increase of $44 million, or 31%, reflecting some normalization of credit performance. PCL – performing was $45 million, compared with a recovery of $87 million in the prior year. The performing build this quarter reflects some normalization of credit performance, deterioration in the economic outlook, and volume growth. Total PCL as an annualized percentage of credit volume was 0.17%, an increase of 13 bps compared with the fourth quarter last year.

Non-interest expenses for the quarter were $1,921 million, an increase of $201 million, or 12%, compared with the fourth quarter last year, primarily reflecting higher spend supporting business growth, including technology and employee-related expenses.

The efficiency ratio for the quarter was 43.1%, compared with 44.6% in the fourth quarter last year.

Quarterly comparison – Q4 2022 vs. Q3 2022

Canadian Personal and Commercial Banking net income for the quarter was $1,694 million, an increase of $16 million, or 1%, compared with the prior quarter, reflecting revenue growth, partially offset by higher non-interest expenses and PCL. The annualized ROE for the quarter was 41.9%, compared with 42.3% in the prior quarter.

Revenue increased $194 million, or 5%, compared with the prior quarter. Net interest income increased $189 million, or 6%, reflecting higher margins and volume growth. Average loan volumes increased $9 billion, or 2%, reflecting 2% growth in personal loans and 3% growth in business loans. Average deposit volumes were relatively flat compared with the prior quarter, reflecting 2% growth in personal deposits and 2% decrease in business deposits. Net interest margin was 2.70%, an increase of 11 bps, due to higher margins on deposits reflecting rising interest rates, partially offset by lower margin on loans.

Non-interest income was relatively flat compared with the prior quarter.

PCL increased by $59 million compared with the prior quarter. PCL – impaired increased by $42 million, or 30%, reflecting some normalization of credit performance. PCL – performing was $45 million, an increase of $17 million. The performing build this quarter reflects some normalization of credit performance, deterioration in the economic outlook, and volume growth. Total PCL as an annualized percentage of credit volume was 0.17%, an increase of 4 bps.

Non-interest expenses increased $114 million, or 6%, compared with the prior quarter, primarily reflecting higher spend supporting business growth, including employee-related expenses, technology, and marketing costs.

The efficiency ratio for the quarter was 43.1%, compared with 42.4% in the prior quarter.