Exhibit 99.1

 

		TD Bank Group Reports Second Quarter 2019 Results Report to Shareholders • Three and Six months ended April 30, 2019

 

SECOND QUARTER FINANCIAL HIGHLIGHTS, compared with the second quarter last year:

•

Reported diluted earnings per share were $1.70, compared with $1.54.

•

Adjusted diluted earnings per share were $1.75, compared with $1.62.

•

Reported net income was $3,172 million, compared with $2,916 million.

•

Adjusted net income was $3,266 million, compared with $3,062 million.

YEAR-TO-DATE FINANCIAL HIGHLIGHTS, six months ended April 30, 2019, compared with the corresponding period last year:

•

Reported diluted earnings per share were $2.97, compared with $2.78.

•

Adjusted diluted earnings per share were $3.32, compared with $3.18.

•

Reported net income was $5,582 million, compared with $5,269 million.

•

Adjusted net income was $6,219 million, compared with $6,008 million.

SECOND QUARTER ADJUSTMENTS (ITEMS OF NOTE)

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

•

Amortization of intangibles of $78 million ($66 million after-tax or 3 cents per share), compared with $86 million ($73 million after-tax or 4 cents per share) in the second quarter last year.

•

Charges associated with the acquisition of Greystone of $30 million ($28 million after-tax or 2 cents per share).

TORONTO, May  23, 2019 – TD Bank Group ("TD" or the "Bank") today announced its financial results for the second quarter ended April 30, 2019. Second quarter reported earnings were $3.2 billion, up 9%, and adjusted earnings were $3.3 billion, up 7%, compared with the same quarter last year.

"TD achieved record earnings this quarter, reflecting continued year-over-year revenue growth in our retail businesses in Canada and the U.S., and stronger quarter-over-quarter results in our wholesale business," said Bharat Masrani, Group President and Chief Executive Officer, TD Bank Group. "We made strong progress in the quarter, adding new capabilities, strengthening our business, and advancing our strategic priorities as we continue to build the bank of the future."

Canadian Retail

Canadian Retail reported net income of $1,849 million and adjusted net income of $1,877 million, an increase of 1% and 2%, respectively, compared with the same quarter last year. Revenue grew by 8% reflecting increased volumes, higher margins, and more assets under management in its wealth businesses. Canadian Retail is already showing results from its "Future Ready" strategy and received the "Highest in Customer Satisfaction among the Big Five Retail Banks", according to the J.D. Power 2019 Canada Retail Banking Satisfaction Study ¹ .

U.S. Retail

U.S. Retail reported and adjusted net income was $1,263 million (US$948 million), an increase of 29% (23% in U.S. dollars) on a reported basis and 20% (15% in U.S. dollars) on an adjusted basis, compared with the same quarter last year. TD Ameritrade contributed $258 million (US$195 million) in reported and adjusted earnings to the segment, an increase of 93% (82% in U.S. dollars) and 32% (27% in U.S. dollars), respectively, in the same quarter last year.

The U.S. Retail Bank, which excludes the Bank's investment in TD Ameritrade, reported net income of $1,005 million (US$753 million), up 19% (14% in U.S. dollars) on a reported basis and up 17% (12% in U.S. dollars) on an adjusted basis, from the same period last year. Earnings growth reflects higher deposit margins and increased loan and deposit volumes. U.S. Retail continued to invest in its digital platform and deliver industry-leading customer experiences, receiving the "Highest in Customer Satisfaction with Retail Banking in Southeast", according to the J.D. Power 2019 U.S. Retail Banking Satisfaction Study ² .

Wholesale

Wholesale Banking saw a strong improvement over the first quarter of 2019, with net income of $221 million this quarter, reflecting higher trading-related revenue, advisory and underwriting fees from improved market conditions and increased client activity compared to the prior quarter. Compared to the second quarter last year, net income was $46 million lower, reflecting higher non-interest expenses, partially offset by lower provision for credit losses. The Wholesale Bank continues to invest in the global expansion of its U.S. dollar strategy.

Capital

TD's Common Equity Tier 1 Capital ratio on a Basel III fully phased-in basis was 12.0%.

 

 

1	TD Canada Trust received the highest score among the big five banks in the J.D. Power 2019 Canada Retail Banking Satisfaction Study of customers' satisfaction with their primary bank. Visit jdpower.com/awards.

2	TD Bank, America's Most Convenient Bank ® , received the highest score in the Southeast region of the J.D. Power 2019 U.S. Retail Banking Satisfaction Study of customers' satisfaction with their own retail bank. Visit jdpower.com.

 

TD BANK GROUP • SECOND QUARTER 2019 • REPORT TO SHAREHOLDERS			Page 1

Innovation

"We continue to enhance our omni capabilities and deliver new experiences to meet the evolving needs of our customers," added Masrani. "In recent months, we successfully converted our U.S. small business customers to our new digital platform, and participated in the launch of Verified.Me, which offers new options and added convenience to millions of Canadians."

Conclusion

"I want to thank our more than 85,000 colleagues across the globe for their significant contributions to the Bank's performance this quarter. I also want to congratulate them for our recent J.D. Power wins, which are testaments to their hard work and dedication to our customers," concluded Masrani.

The foregoing contains forward-looking statements. Please refer to the "Caution Regarding Forward-Looking Statements" on page 4.

 

TD BANK GROUP • SECOND QUARTER 2019 • REPORT TO SHAREHOLDERS			Page 2

ENHANCED DISCLOSURE TASK FORCE

The Enhanced Disclosure Task Force (EDTF) was established by the Financial Stability Board in 2012 to identify fundamental disclosure principles, recommendations and leading practices to enhance risk disclosures of banks. The index below includes the recommendations (as published by the EDTF) and lists the location of the related EDTF disclosures presented in the second quarter 2019 Report to Shareholders (RTS), Supplemental Financial Information (SFI), or Supplemental Regulatory Disclosures (SRD). Information on TD's website, SFI, and SRD is not and should not be considered incorporated herein by reference into the second quarter 2019 RTS, Management's Discussion and Analysis, or the Interim Consolidated Financial Statements. Certain disclosure references have been made to the Bank's 2018 Annual Report.

 

Type of         Risk		Topic		EDTF Disclosure		Page
						RTS Second Quarter 2019		SFI Second Quarter 2019		SRD Second Quarter 2019		Annual Report 2018
General		1		Present all related risk information together in any particular report.		Refer to below for location of disclosures
		2		The bank's risk terminology and risk measures and present key parameter values used.								71-76,81,87, 89-91, 101-103
		3		Describe and discuss top and emerging risks.								67-71
		4		Outline plans to meet each new key regulatory ratio once applicable rules are finalized.		27, 40						62-63, 95-96, 98
Risk Governance and Risk Management and Business Model		5		Summarize the bank's risk management organization, processes, and key functions.								72-75
		6		Description of the bank's risk culture and procedures applied to support the culture.								71-72
		7		Description of key risks that arise from the bank's business models and activities.								61, 71, 76-103
		8		Description of stress testing within the bank's risk governance and capital frameworks.		31						60,75-76, 84,101
Capital Adequacy and Risk Weighted Assets		9		Pillar 1 capital requirements and the impact for global systemically important banks.		26-27, 74				1-3, 6		57-59, 63, 211
		10		Composition of capital and reconciliation of accounting balance sheet to the regulatory balance sheet.						1-3, 5		57
		11		Flow statement of the movements in regulatory capital.						4
		12		Discussion of capital planning within a more general discussion of management's strategic planning.								58-60, 101
		13		Analysis of how RWA relate to business activities and related risks.				4-7				60-61
		14		Analysis of capital requirements for each method used for calculating RWA.		31				10		77-79,81, 83-84
		15		Tabulate credit risk in the banking book for Basel asset classes and major portfolios.						21-28, 31-33
		16		Flow statement reconciling the movements of RWA by risk type.		27-28				11-12
		17		Discussion of Basel III back-testing requirements.						42		80, 84, 89
Liquidity		18		The bank's management of liquidity needs and liquidity reserves.		33-35, 37-38						91-93
Funding		19		Encumbered and unencumbered assets in a table by balance sheet category.		36						94,204
		20		Tabulate consolidated total assets, liabilities and off-balance sheet commitments by remaining contractual maturity at the balance sheet date.		40-42						98-100
		21		Discussion of the bank's funding sources and the bank's funding strategy.		36-37, 39-40						97-98
Market Risk		22		Linkage of market risk measures for trading and non-trading portfolio and balance sheet.		30						82
		23		Breakdown of significant trading and non-trading market risk factors.		30-33						82, 84-87
		24		Significant market risk measurement model limitations and validation procedures.		31						83-87, 89
		25		Primary risk management techniques beyond reported risk measures and parameters.		31						83-87
Credit Risk		26		Provide information that facilitates users' understanding of the bank's credit risk profile, including any significant credit risk concentrations.		22-25, 61-66		15-31		1-5, 10-11, 13-42		44-57, 76-81, 162-169, 178, 180-182, 209-210
		27		Description of the bank's policies for identifying impaired loans.		66						52,130-131,137-138,   168
		28		Reconciliation of the opening and closing balances of impaired loans in the period and the allowance for loan losses.		22, 63-66		19, 23-24				49, 165-167
		29		Analysis of the bank's counterparty credit risks that arise from derivative transactions.						29-30, 34-38		79-80, 147, 174-175,178, 180-182
		30		Discussion of credit risk mitigation, including collateral held for all sources of credit risk.								80, 134, 147
Other Risks		31		Description of 'other risk' types based on management's classifications and discuss how each one is identified, governed, measured, and managed.								87-90, 101-103
		32		Discuss publicly known risk events related to other risks.		72-73						70-71, 202-204

 

TD BANK GROUP • SECOND QUARTER 2019 • REPORT TO SHAREHOLDERS			Page 3

TABLE OF CONTENTS

 

 

 

MANAGEMENT ' S DISCUSSION AND ANALYSIS OF OPERATING PERFORMANCE

 

This MD&A is presented to enable readers to assess material changes in the financial condition and operating results of TD Bank Group ("TD" or the "Bank") for the three and six months ended April 30, 2019, compared with the corresponding periods shown. This MD&A should be read in conjunction with the Bank's unaudited Interim Consolidated Financial Statements and related Notes included in this Report to Shareholders and with the 2018 Consolidated Financial Statements and related Notes and 2018 MD&A. This MD&A is dated May 22, 2019. Unless otherwise indicated, all amounts are expressed in Canadian dollars and have been primarily derived from the Bank's 2018 Consolidated Financial Statements and related Notes or Interim Consolidated Financial Statements and related Notes, prepared in accordance with IFRS as issued by the IASB. Note that certain comparative amounts have been revised to conform with the presentation adopted in the current period. Additional information relating to the Bank, including the Bank's 2018 Annual Information Form, is available on the Bank's website at http://www.td.com , as well as on SEDAR at http://www.sedar.com and on the SEC's website at http://www.sec.gov (EDGAR filers section).

 

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.

 

TD BANK GROUP • SECOND QUARTER 2019 • REPORT TO SHAREHOLDERS			Page 4

TABLE 1:  FINANCIAL HIGHLIGHTS ¹

 

(millions of Canadian dollars, except as noted)			As at or for the three months ended												As at or for the six months ended
			April 30 2019				January 31 2019				April 30 2018				April 30 2019				April 30 2018
Results of operations
Total revenue		$	10,228			$	9,998			$	9,482			$	20,226			$	18,857
Provision for credit losses			633				850				556				1,483				1,249
Insurance claims and related expenses			668				702				558				1,370				1,133
Non-interest expenses – reported			5,248				5,855				4,837				11,103				9,698
Non-interest expenses – adjusted 2			5,163				5,161				4,759				10,324				9,552
Net income – reported			3,172				2,410				2,916				5,582				5,269
Net income – adjusted 2			3,266				2,953				3,062				6,219				6,008
Financial position (billions of Canadian dollars)
Total loans net of allowance for loan losses		$	663.6			$	648.5			$	622.0			$	663.6			$	622.0
Total assets			1,356.6				1,322.5				1,283.8				1,356.6				1,283.8
Total deposits			875.3				849.3				829.8				875.3				829.8
Total equity			84.9				81.7				76.7				84.9				76.7
Total Common Equity Tier 1 Capital risk-weighted assets 3			452.3				439.3				417.8				452.3				417.8
Financial ratios
Return on common equity – reported			16.5	%			12.2	%			16.8	%			14.3	%			14.9	%
Return on common equity – adjusted 4			17.0				15.0				17.6				16.0				17.1
Return on tangible common equity 4			23.4				17.5				24.4				20.4				21.8
Return on tangible common equity – adjusted 4			23.6				21.0				25.0				22.3				24.3
Efficiency ratio – reported			51.3				58.6				51.0				54.9				51.4
Efficiency ratio – adjusted 2			50.5				51.6				50.2				51.0				50.4
Provision for credit losses as a % of net average loans and acceptances 5			0.39				0.50				0.36				0.45				0.41
Common share information – reported (Canadian dollars)
Per share earnings
Basic		$	1.70			$	1.27			$	1.54			$	2.97			$	2.78
Diluted			1.70				1.27				1.54				2.97				2.78
Dividends per share			0.74				0.67				0.67				1.41				1.27
Book value per share			43.51				41.69				38.26				43.51				38.26
Closing share price 6			76.42				74.00				72.11				76.42				72.11
Shares outstanding (millions)
Average basic			1,826.6				1,833.1				1,843.6				1,829.9				1,842.6
Average diluted			1,830.0				1,836.2				1,847.5				1,833.2				1,846.8
End of period			1,828.4				1,830.8				1,844.6				1,828.4				1,844.6
Market capitalization (billions of Canadian dollars)		$	139.7			$	135.5			$	133.0			$	139.7			$	133.0
Dividend yield 7			3.9	%			3.8	%			3.7	%			3.9	%			3.5	%
Dividend payout ratio			43.4				52.6				43.5				47.4				45.6
Price-earnings ratio			12.3				12.3				12.7				12.3				12.7
Total shareholder return (1 year) 8			10.0				2.6				16.3				10.0				16.3
Common share information – adjusted (Canadian dollars) 2
Per share earnings
Basic		$	1.75			$	1.57			$	1.62			$	3.32			$	3.18
Diluted			1.75				1.57				1.62				3.32				3.18
Dividend payout ratio			42.1	%			42.7	%			41.4	%			42.4	%			39.9	%
Price-earnings ratio			11.6				11.4				11.9				11.6				11.9
Capital ratios
Common Equity Tier 1 Capital ratio 3			12.0	%			12.0	%			11.8	%			12.0	%			11.8	%
Tier 1 Capital ratio 3			13.5				13.5				13.5				13.5				13.5
Total Capital ratio 3			15.8				15.9				15.8				15.8				15.8
Leverage ratio			4.2				4.1				4.1				4.2				4.1

 

1	Certain comparative amounts have been recast to conform with the presentation adopted in the current period.

2	Adjusted measures are non-GAAP measures. Refer to the "How the Bank Reports" section of this document for an explanation of reported and adjusted results.

3

Each capital ratio has its own risk-weighted assets (RWA) measure due to the Office of the Superintendent of Financial Institutions Canada (OSFI) prescribed scalar for inclusion of the Credit Valuation Adjustment (CVA). For fiscal 2019, the scalars for inclusion of CVA for Common Equity Tier 1 (CET1), Tier 1, and Total Capital RWA are all 100%. For fiscal 2018, the scalars for inclusion were 80%, 83%, and 86%, respectively.

4	Metrics are non-GAAP financial measures. Refer to the "Return on Common Equity" and "Return on Tangible Common Equity" sections of this document for an explanation.

5	Excludes acquired credit-impaired (ACI) loans.

6	Toronto Stock Exchange (TSX) closing market price.

7

Dividend yield is calculated as the annualized dividend per common share paid divided by daily average closing stock price in the relevant period. Dividend per common share is derived as follows: a) for the quarter – by annualizing the dividend per common share paid during the quarter; and b) for the year-to-date – by annualizing the year-to-date dividend per common share paid.

8	Total shareholder return is calculated based on share price movement and dividends reinvested over a trailing one-year period.

 

TD BANK GROUP • SECOND QUARTER 2019 • REPORT TO SHAREHOLDERS			Page 5

 

HOW WE PERFORMED

Corporate Overview

The Toronto-Dominion Bank and its subsidiaries are collectively known as TD Bank Group ("TD" or the "Bank"). TD is the sixth largest bank in North America by branches and serves more than 26 million customers in three key businesses operating in a number of locations in financial centres around the globe: Canadian Retail, which includes the results of the Canadian personal and commercial banking, wealth, and insurance businesses; U.S. Retail, which includes the results of the U.S. personal and business banking operations, wealth management services, and the Bank's investment in TD Ameritrade; and Wholesale Banking. TD also ranks among the world's leading online financial services firms, with approximately 13 million active online and mobile customers. TD had $1.4 trillion in assets on April 30, 2019. The Toronto-Dominion Bank trades under the symbol "TD" on the Toronto and New York Stock Exchanges.

How the Bank Reports

The Bank prepares its Interim Consolidated Financial Statements in accordance with IFRS, the current GAAP, and refers to results prepared in accordance with IFRS as "reported" results. The Bank also utilizes non-GAAP financial measures referred to as "adjusted" results to assess each of its businesses and to measure the Bank's overall performance. To arrive at adjusted results, the Bank removes "items of note", from reported results. The items of note relate to items which management does not believe are indicative of underlying business performance. The Bank believes that adjusted results provide the reader with a better understanding of how management views the Bank's performance. The items of note are disclosed in Table 3. As explained, adjusted results differ from reported results determined in accordance with IFRS. Adjusted results, items of note, and related terms used in this document are not defined terms under IFRS and, therefore, may not be comparable to similar terms used by other issuers.

The Bank's U.S. strategic cards portfolio comprises 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 related to these portfolios in the Bank's Interim 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 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.

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

 

TABLE 2:  OPERATING RESULTS – Reported ¹

 

(millions of Canadian dollars)			For the three months ended												For the six months ended
			April 30 2019				January 31 2019				April 30 2018				April 30 2019				April 30 2018
Net interest income		$	5,872			$	5,860			$	5,398			$	11,732			$	10,828
Non-interest income			4,356				4,138				4,084				8,494				8,029
Total revenue			10,228				9,998				9,482				20,226				18,857
Provision for credit losses			633				850				556				1,483				1,249
Insurance claims and related expenses			668				702				558				1,370				1,133
Non-interest expenses			5,248				5,855				4,837				11,103				9,698
Income before income taxes and equity in net income of an investment in TD Ameritrade			3,679				2,591				3,531				6,270				6,777
Provision for income taxes			773				503				746				1,276				1,786
Equity in net income of an investment in TD Ameritrade			266				322				131				588				278
Net income – reported			3,172				2,410				2,916				5,582				5,269
Preferred dividends			62				60				52				122				104
Net income available to common shareholders and non-controlling interests in subsidiaries		$	3,110			$	2,350			$	2,864			$	5,460			$	5,165
Attributable to:
Common shareholders		$	3,110			$	2,332			$	2,846			$	5,442			$	5,129
Non-controlling interests			–				18				18				18				36

 

1	Certain comparative amounts have been recast to conform with the presentation adopted in the current period.

 

TD BANK GROUP • SECOND QUARTER 2019 • REPORT TO SHAREHOLDERS			Page 6

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

 

 

(millions of Canadian dollars)			For the three months ended												For the six months ended
			April 30 2019				January 31 2019				April 30 2018				April 30 2019				April 30 2018
Operating results – adjusted
Net interest income		$	5,872			$	5,860			$	5,398			$	11,732			$	10,828
Non-interest income 2			4,356				4,138				4,084				8,494				8,118
Total revenue			10,228				9,998				9,482				20,226				18,946
Provision for credit losses			633				850				556				1,483				1,249
Insurance claims and related expenses			668				702				558				1,370				1,133
Non-interest expenses 3			5,163				5,161				4,759				10,324				9,552
Income before income taxes and equity in net income of an investment in TD Ameritrade			3,764				3,285				3,609				7,049				7,012
Provision for income taxes			787				678				763				1,465				1,416
Equity in net income of an investment in TD Ameritrade 4			289				346				216				635				412
Net income – adjusted			3,266				2,953				3,062				6,219				6,008
Preferred dividends			62				60				52				122				104
Net income available to common shareholders and non-controlling interests in subsidiaries – adjusted			3,204				2,893				3,010				6,097				5,904
Attributable to:
Non-controlling interests in subsidiaries, net of income taxes			–				18				18				18				36
Net income available to common shareholders – adjusted			3,204				2,875				2,992				6,079				5,868
Pre-tax adjustments of items of note
Amortization of intangibles 5			(78	)			(80	)			(86	)			(158	)			(171	)
Charges related to the long-term loyalty agreement with Air Canada 6			–				(607	)			–				(607	)			–
Charges associated with the acquisition of Greystone 7			(30	)			(31	)			–				(61	)			–
Charges associated with the Scottrade transaction 8			–				–				(77	)			–				(150	)
Impact from U.S. tax reform 9			–				–				–				–				(48	)
Provision for (recovery of) income taxes for items of note
Amortization of intangibles 10			(12	)			(13	)			(13	)			(25	)			(30	)
Charges related to the long-term loyalty agreement with Air Canada			–				(161	)			–				(161	)			–
Charges associated with the acquisition of Greystone			(2	)			(1	)			–				(3	)			–
Charges associated with the Scottrade transaction			–				–				(4	)			–				(5	)
Impact from U.S. tax reform 9			–				–				–				–				405
Total adjustments for items of note			(94	)			(543	)			(146	)			(637	)			(739	)
Net income available to common shareholders – reported		$	3,110			$	2,332			$	2,846			$	5,442			$	5,129

 

1	Certain comparative amounts have been recast to conform with the presentation adopted in the current period.

2	Adjusted Non-interest income excludes the following item of note: Adjustment to the carrying balances of certain tax credit-related investments, as explained in footnote 9 – first quarter 2018 – $(89) million. This amount was reported in the Corporate segment.

3

Adjusted Non-interest expenses exclude the following items of note: Amortization of intangibles, as explained in footnote 5 – second quarter 2019 – $55 million, first quarter 2019 – $56 million, second quarter 2018 – $62 million, first quarter 2018 – $63 million; these amounts were reported in the Corporate segment. Charges related to the long-term loyalty agreement with Air Canada, as explained in footnote 6 – first quarter 2019 – $607 million; this amount was reported in the Canadian Retail segment. Charges associated with the acquisition of Greystone, as explained in footnote 7 – second quarter 2019 – $30 million, first quarter 2019 – $31 million; this amount was reported in the Canadian Retail segment. Charges associated with Scottrade transaction, as explained in footnote 8 – second quarter 2018 – $16 million and first quarter 2018 – $5 million; these amounts were reported in the U.S. Retail segment.

4

Adjusted Equity in net income of an investment in TD Ameritrade excludes the following items of note: Amortization of intangibles, as explained in footnote 5 – second quarter 2019 – $23 million, first quarter 2019 – $24 million, second quarter 2018 – $24 million, first quarter 2018 – $22 million; and the Bank's share of TD Ameritrade's deferred tax balances adjustment, as explained in footnote 9 – first quarter 2018 – $(41) million. The earnings impact of both of these items was reported in the Corporate segment. The Bank's share of charges associated with TD Ameritrade's acquisition of Scottrade Financial Services Inc. ("Scottrade"), as explained in footnote 8 – second quarter 2018 – $61 million, and first quarter 2018 – $68 million. This item was reported in the U.S. Retail segment.

5

Amortization of intangibles relates to intangibles acquired as a result of asset acquisitions and business combinations, including the after-tax amounts for amortization of intangibles relating to the Equity in net income of the investment in TD Ameritrade. Although the amortization of software and asset servicing rights are recorded in amortization of intangibles, they are not included for purposes of the items of note.

6

On January 10, 2019, the Bank's long-term loyalty program agreement with Air Canada became effective in conjunction with Air Canada completing its acquisition of Aimia Canada Inc., which operates the Aeroplan loyalty business (the "Transaction"). In connection with the Transaction, the Bank recognized an expense of $607 million ($446 million after-tax) in the Canadian Retail segment during the first quarter of 2019.

7

On November 1, 2018, the Bank acquired Greystone Capital Management Inc., the parent company of Greystone Managed Investments Inc. ("Greystone"). The Bank incurred acquisition-related charges including compensation to employee shareholders issued in common shares in respect of the purchase price, direct transaction costs, and certain other acquisition-related costs. These amounts have been recorded as an adjustment to net income and were reported in the Canadian Retail segment.

8

On September 18, 2017, the Bank acquired Scottrade Bank and TD Ameritrade acquired Scottrade, together with the Bank's purchase of TD Ameritrade shares issued in connection with TD Ameritrade's acquisition of Scottrade (the "Scottrade transaction"). Scottrade Bank merged with TD Bank, N.A. The Bank and TD Ameritrade incurred acquisition related charges including employee severance, contract termination fees, direct transaction costs, and other one-time charges. These amounts have been recorded as an adjustment to net income and include charges associated with the Bank's acquisition of Scottrade Bank and the after-tax amounts for the Bank's share of charges associated with TD Ameritrade's acquisition of Scottrade. These amounts were reported in the U.S. Retail segment.

9

In the first quarter of 2018, the reduction of the U.S. federal corporate tax rate enacted by the Tax Cuts and Jobs Act (the "U.S. Tax Act") resulted in a net charge to earnings of $453 million, comprising a net $48 million pre-tax charge related to the write-down of certain tax credit-related investments, partially offset by the favourable impact of the Bank's share of TD Ameritrade's remeasurement of its deferred income tax balances, and a net $405 million income tax expense resulting from the remeasurement of the Bank's deferred tax assets and liabilities to the lower base rate of 21% and other related tax adjustments. The earnings impact was reported in the Corporate segment.

10	The amount reported for the six months ended April 30, 2018, excludes $31 million relating to the one-time adjustment of associated deferred tax liability balances as a result of the U.S. Tax Act. The impact of this adjustment is included in the Impact from U.S. tax reform item of note.

 

TD BANK GROUP • SECOND QUARTER 2019 • REPORT TO SHAREHOLDERS			Page 7

TABLE 4:  RECONCILIATION OF REPORTED TO ADJUSTED EARNINGS PER SHARE (EPS) ¹

 

(Canadian dollars)			For the three months ended												For the six months ended
			April 30 2019				January 31 2019				April 30 2018				April 30 2019				April 30 2018
Basic earnings per share – reported		$	1.70			$	1.27			$	1.54			$	2.97			$	2.78
Adjustments for items of note 2			0.05				0.30				0.08				0.35				0.40
Basic earnings per share – adjusted		$	1.75			$	1.57			$	1.62			$	3.32			$	3.18
Diluted earnings per share – reported		$	1.70			$	1.27			$	1.54			$	2.97			$	2.78
Adjustments for items of note 2			0.05				0.30				0.08				0.35				0.40
Diluted earnings per share – adjusted		$	1.75			$	1.57			$	1.62			$	3.32			$	3.18

 

1	EPS is computed by dividing net income available to common shareholders by the weighted-average number of shares outstanding during the period.

2	For explanations of items of note, refer to the "Non-GAAP Financial Measures – Reconciliation of Adjusted to Reported Net Income" table in the "How We Performed" section of this document.

 

TABLE 5:  AMORTIZATION OF INTANGIBLES, NET OF INCOME TAXES ^1,2

 

(millions of Canadian dollars)			For the three months ended												For the six months ended
			April 30 2019				January 31 2019				April 30 2018				April 30 2019				April 30 2018
TD Bank, National Association (TD Bank, N.A.)		$	21			$	21			$	24			$	42			$	46
TD Ameritrade Holding Corporation (TD Ameritrade) 3			23				24				24				47				46
MBNA Canada			9				10				14				19				29
Aeroplan			5				4				5				9				9
Other			8				8				6				16				11
			66				67				73				133				141
Software and asset servicing rights			117				110				123				227				228
Amortization of intangibles, net of income taxes		$	183			$	177			$	196			$	360			$	369

 

1	The amount reported for the six months ended April 30, 2018 excludes $31 million relating to the one-time adjustment of associated deferred tax liability balances as a result of the U.S. Tax Act. The impact of this adjustment is included in the Impact from U.S. tax reform item of note.

2

Amortization of intangibles, with the exception of software and asset servicing rights, is included as items of note. For explanations of items of note, refer to the "Non-GAAP Financial Measures – Reconciliation of Adjusted to Reported Net Income" table in the "How We Performed" section of this document.

3	Included in Equity in net income of an investment in TD Ameritrade.

Return on Common Equity

The Bank's methodology for allocating capital to its business segments is aligned with the common equity capital requirements under Basel III. For fiscal 2019, the capital allocated to the business segments is based on 10% CET1 Capital. Capital allocated to the business segments was based on 9% for fiscal 2018.

Adjusted Return on common equity (ROE) is adjusted net income available to common shareholders as a percentage of average common equity.

Adjusted ROE is a non-GAAP financial measure as it is not a defined term under IFRS. Readers are cautioned that earnings and other measures adjusted to a basis other than IFRS do not have standardized meanings under IFRS and, therefore, may not be comparable to similar terms used by other issuers.

 

TABLE 6:  RETURN ON COMMON EQUITY

 

(millions of Canadian dollars, except as noted)			For the three months ended												For the six months ended
			April 30 2019				January 31 2019				April 30 2018				April 30 2019				April 30 2018
Average common equity		$	77,369			$	75,873			$	69,579			$	76,663			$	69,332
Net income available to common shareholders – reported			3,110				2,332				2,846				5,442				5,129
Items of note, net of income taxes 1			94				543				146				637				739
Net income available to common shareholders – adjusted		$	3,204			$	2,875			$	2,992			$	6,079			$	5,868
Return on common equity – reported			16.5	%			12.2	%			16.8	%			14.3	%			14.9	%
Return on common equity – adjusted			17.0				15.0				17.6				16.0				17.1

 

1	For explanations of items of note, refer to the "Non-GAAP Financial Measures – Reconciliation of Adjusted to Reported Net Income" table in the "How We Performed" section of this document.

Return on Tangible Common Equity

Tangible common equity (TCE) is calculated as common shareholders' equity less goodwill, imputed goodwill and intangibles on an investment in TD Ameritrade and other acquired intangible assets, net of related deferred tax liabilities. Return on tangible common equity (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 items of note, as a percentage of average TCE. Adjusted ROTCE provides a useful measure of the performance of the Bank's income producing assets, independent of whether or not they were acquired or developed internally. TCE, ROTCE, and adjusted ROTCE are each non-GAAP financial measures and are not defined terms under IFRS. Readers are cautioned that earnings and other measures adjusted to a basis other than IFRS do not have standardized meanings under IFRS and, therefore, may not be comparable to similar terms used by other issuers.

 

TD BANK GROUP • SECOND QUARTER 2019 • REPORT TO SHAREHOLDERS			Page 8

TABLE 7:  RETURN ON TANGIBLE COMMON EQUITY

 

(millions of Canadian dollars, except as noted)			For the three months ended												For the six months ended
			April 30 2019				January 31 2019				April 30 2018				April 30 2019				April 30 2018
Average common equity		$	77,369			$	75,873			$	69,579			$	76,663			$	69,332
Average goodwill			17,083				17,021				16,031				17,067				16,024
Average imputed goodwill and intangibles on an investment in TD Ameritrade			4,136				4,170				4,060				4,160				4,090
Average other acquired intangibles 1			717				676				696				690				728
Average related deferred tax liabilities			(269	)			(238	)			(222	)			(254	)			(257	)
Average tangible common equity			55,702				54,244				49,014				55,000				48,747
Net income available to common shareholders – reported			3,110				2,332				2,846				5,442				5,129
Amortization of acquired intangibles, net of income taxes 2			66				67				73				133				141
Net income available to common shareholders after adjusting for after-tax amortization of acquired intangibles			3,176				2,399				2,919				5,575				5,270
Other items of note, net of income taxes 2			28				476				73				504				598
Net income available to common shareholders – adjusted		$	3,204			$	2,875			$	2,992			$	6,079			$	5,868
Return on tangible common equity			23.4	%			17.5	%			24.4	%			20.4	%			21.8	%
Return on tangible common equity – adjusted			23.6				21.0				25.0				22.3				24.3

 

1	Excludes intangibles relating to software and asset servicing rights.

2	For explanations of items of note, refer to the "Non-GAAP Financial Measures – Reconciliation of Adjusted to Reported Net Income" table in the "How We Performed" section of this document.

SIGNIFICANT AND SUBSEQUENT EVENTS IN 2019

Agreement for Air Canada Credit Card Loyalty Program

On January 10, 2019, the Bank's long-term loyalty program agreement (the "Loyalty Agreement") with Air Canada became effective in conjunction with Air Canada completing its acquisition of Aimia Canada Inc., which operates the Aeroplan loyalty business (the "Transaction"). Under the terms of the Loyalty Agreement, the Bank will become the primary credit card issuer for Air Canada's new loyalty program when it launches in 2020 through to 2030. TD Aeroplan cardholders will become members of Air Canada's new loyalty program and their miles will be transitioned when Air Canada's new loyalty program launches in 2020.

In connection with the Transaction, the Bank paid $622 million plus applicable sales tax to Air Canada, of which $547 million ($446 million after sales and income taxes) was recognized in non-interest expenses – other in the Canadian Retail segment during the first quarter of 2019, and $75 million was recognized as an intangible asset which will be amortized over the Loyalty Agreement term. In addition, the Bank prepaid $308 million plus applicable sales tax for the future purchase of loyalty points over a ten-year period. The Bank also expects to incur additional pre-tax costs of approximately $100 million over two years to build the functionality required to facilitate the new program. The Transaction reduced the Bank's CET1 ratio by approximately 13 basis points (bps).

Acquisition of Greystone

On November 1, 2018, the Bank acquired 100% of the outstanding equity of Greystone for consideration of $817 million, of which $475 million was paid in cash and $342 million was paid in the Bank's common shares. The value of 4.7 million common shares issued as consideration was based on the volume weighted average market price of the Bank's common shares over the 10 trading day period immediately preceding the fifth business day prior to the acquisition date and was recorded based on market price at close. Common shares of $167 million issued to employee shareholders in respect of the purchase price will be held in escrow for two years post-acquisition, subject to their continued employment, and will be recorded as a compensation expense over the two-year escrow period.

The acquisition was accounted for as a business combination under the purchase method. As at November 1, 2018, the acquisition contributed $169 million of assets and $55 million of liabilities. The excess of accounting consideration over the fair value of the identifiable net assets has been allocated to customer relationship intangibles of $140 million, deferred tax liability of $37 million, and goodwill of $433 million. Goodwill is not deductible for tax purposes. The results of the acquisition have been consolidated from the acquisition date and reported in the Canadian Retail segment. The purchase price allocation is subject to refinement and may be adjusted to reflect new information about facts and circumstances that existed at the acquisition date during the measurement period.

Normal Course Issuer Bid

As approved by the Board on May 22, 2019, the Bank announced its intention to initiate a normal course issuer bid (NCIB) for up to 20 million of its common shares, subject to the approval of OSFI and the TSX. The timing and amount of any purchases under the program are subject to regulatory approvals and to management discretion based on factors such as market conditions and capital adequacy.

 

 

FINANCIAL RESULTS OVERVIEW

Performance Summary

Outlined below is an overview of the Bank's performance on an adjusted basis for the second quarter of 2019. Shareholder performance indicators help guide and benchmark the Bank's accomplishments. For the purposes of this analysis, the Bank utilizes adjusted earnings, which excludes items of note from the reported results that are prepared in accordance with IFRS. Reported and adjusted results and items of note are explained in the "How the Bank Reports" section of this document.

•

Adjusted diluted earnings per share for the six months ended April 30, 2019, increased 4% from the same period last year. The Bank's goal is to achieve 7 to 10% adjusted earnings per share growth over the medium term.

•

Adjusted ROTCE for the six months ended April 30, 2019, was 22.3%.

•

For the twelve months ended April 30, 2019, the total shareholder return was 10.0% compared to the Canadian peer 3 average of 7.6%.

 

3	Canadian peers include Bank of Montreal, Canadian Imperial Bank of Commerce, Royal Bank of Canada, and The Bank of Nova Scotia.

 

TD BANK GROUP • SECOND QUARTER 2019 • REPORT TO SHAREHOLDERS			Page 9

Net Income

Quarterly comparison – Q2 2019 vs. Q2 2018

Reported net income for the quarter was $3,172 million, an increase of $256 million, or 9%, compared with the second quarter last year. The increase reflects higher revenue and a higher contribution from TD Ameritrade, partially offset by higher non-interest expenses, insurance claims, and provision for credit losses (PCL). Adjusted net income for the quarter was $3,266 million, an increase of $204 million, or 7%.

By segment, the increase in reported net income was due to an increase in U.S. Retail of $284 million, or 29%, an increase in Canadian Retail of $16 million, or 1%, and a lower net loss in the Corporate segment of $2 million, or 1%, partially offset by a decrease in Wholesale Banking of $46 million, or 17%.

Quarterly comparison – Q2 2019 vs. Q1 2019

Reported net income for the quarter increased $762 million, or 32%, compared with the prior quarter. The increase was largely due to charges related to the agreement with Air Canada in the prior quarter, higher revenue in Wholesale Banking, and lower PCL. Adjusted net income for the quarter increased $313 million, or 11%.

By segment, the increase in reported net income was due to an increase in Canadian Retail of $470 million, or 34%, an increase in Wholesale Banking of $238 million, an increase in U.S. Retail of $23 million, or 2%, and a lower net loss in the Corporate segment of $31 million, or 16%.

Year-to-date comparison – Q2 2019 vs. Q2 2018

Reported net income of $5,582 million increased $313 million, or 6%, compared with the same period last year. The increase reflects higher revenue, the impact from U.S. tax reform in the same period last year, and a higher contribution from TD Ameritrade, partially offset by higher non-interest expenses, including charges related to the agreement with Air Canada, and higher insurance claims and PCL. Adjusted net income was $6,219 million, an increase of $211 million, or 4%, compared with the same period last year.

By segment, the increase in reported net income was due to an increase in U.S. Retail of $572 million, or 30%, a lower net loss in the Corporate segment of $444 million, or 56%, partially offset by a decrease in Canadian Retail of $362 million, or 10%, and a decrease in Wholesale Banking of $341 million, or 63%.

Net Interest Income

Quarterly comparison – Q2 2019 vs. Q2 2018

Net interest income for the quarter was $5,872 million, an increase of $474 million, or 9%, compared with the second quarter last year. The increase reflects volume growth and higher margins in the Canadian and U.S. Retail segments, and the impact of foreign currency translation.

By segment, the increase in net interest income was due to an increase in U.S. Retail of $254 million, or 13%, an increase in Canadian Retail of $229 million, or 8%, and an increase in the Corporate segment of $1 million, partially offset by a decrease in Wholesale Banking of $10 million, or 4%.

Quarterly comparison – Q2 2019 vs. Q1 2019

Net interest income for the quarter increased $12 million, compared with the prior quarter, primarily due to higher net interest income in Wholesale Banking reflecting improved market conditions, and higher margins and volume growth in the Canadian Retail segment, partially offset by the impact of fewer days in the current quarter.

By segment, the increase in net interest income was due to an increase in Wholesale Banking of $89 million, or 51%, partially offset by a decrease in Canadian Retail of $34 million, or 1%, a decrease in the Corporate segment of $27 million, or 7%, and a decrease in U.S. Retail of $16 million, or 1%.

Year-to-date comparison – Q2 2019 vs. Q2 2018

Net interest income was $11,732 million, an increase of $904 million, or 8%, compared with the same period last year. The increase was primarily due to volume growth and higher margins in the Canadian and U.S. Retail segments, and the impact of foreign currency translation, partially offset by lower net interest income in Wholesale Banking reflecting challenging market conditions in the first quarter of this year.

By segment, the increase in net interest income was due to an increase in U.S. Retail of $561 million, or 14%, an increase in Canadian Retail of $448 million, or 8%, and an increase in the Corporate segment of $61 million, or 9%, partially offset by a decrease in Wholesale Banking of $166 million, or 28%.

Non-Interest Income

Quarterly comparison – Q2 2019 vs. Q2 2018

Reported non-interest income for the quarter was $4,356 million, an increase of $272 million, or 7%, compared with the second quarter last year. The increase was primarily due to higher fee-based revenue, changes in the fair value of investments supporting claims liabilities, the acquisition of Greystone, and the impact of foreign currency translation.

By segment, the increase in reported non-interest income was due to an increase in Canadian Retail of $218 million, or 8%, an increase in U.S. Retail of $23 million, or 4%, an increase in the Corporate segment of $21 million, or 25%, and an increase Wholesale Banking of $10 million, or 2%.

Quarterly comparison – Q2 2019 vs. Q1 2019

Reported non-interest income for the quarter increased $218 million, or 5%, compared with the prior quarter. The increase was primarily due to higher non-interest income in Wholesale Banking reflecting improved market conditions, changes in the fair value of investments supporting claims liabilities, and higher asset levels in the wealth management business, partially offset by the effect of fewer days in the current quarter, and a seasonal decline in personal banking fees in the U.S. Retail segment.

By segment, the increase in reported non-interest income was due to an increase in Wholesale Banking of $216 million, or 53%, an increase in the Corporate segment of $21 million, or 25%, and an increase in Canadian Retail of $5 million, partially offset by a decrease in U.S. Retail of $24 million, or 3%.

Year-to-date comparison – Q2 2019 vs. Q2 2018

Reported non-interest income was $8,494 million, an increase of $465 million, or 6%, compared with the same period last year. The increase reflects higher revenues from the insurance business, higher fee-based revenue, the impact from U.S. tax reform in the same period last year, the acquisition of Greystone, and the impact of foreign currency translation, partially offset by lower non-interest income in Wholesale Banking reflecting challenging market conditions in the first quarter of this year.

By segment, the increase in reported non-interest income was due to an increase in Canadian Retail of $437 million, or 8%, an increase in Corporate of $149 million, and an increase in U.S. Retail of $21 million, or 2%, partially offset by a decrease in Wholesale Banking of $142 million, or 12%.

 

TD BANK GROUP • SECOND QUARTER 2019 • REPORT TO SHAREHOLDERS			Page 10

Provision for Credit Losses

Quarterly comparison – Q2 2019 vs. Q2 2018

PCL for the quarter was $633 million, an increase of $77 million, or 14%, compared with the second quarter last year. PCL – impaired for the quarter was $593 million, an increase of $73 million, or 14%, reflecting low prior period provisions driven by strong credit performance and volume growth in Canadian Retail, and volume growth, seasoning, and mix shift in the U.S. strategic credit card portfolios, largely recognized in the Corporate segment. PCL – performing for the quarter was $40 million, an increase of $4 million, or 11%, reflecting current quarter provisions in the Canadian personal lending portfolios and volume growth in the U.S. commercial portfolio, partially offset by prior year credit migration in Wholesale Banking. Total PCL for the quarter as an annualized percentage of credit volume was 0.39%.

By segment, increase in PCL was due to an increase in Canadian Retail of $61 million, or 28%, an increase in U.S. Retail of $22 million, or 11%, an increase in the Corporate segment of $15 million, or 13%, partially offset by a decrease in Wholesale Banking of $21 million.

Quarterly comparison – Q2 2019 vs. Q1 2019

PCL for the quarter decreased by $217 million, or 26%, compared with the prior quarter. PCL – impaired was $593 million, a decrease of $124 million, or 17%, reflecting lower provisions for the U.S. commercial portfolio and seasonal trends in the U.S. credit card and auto portfolios. PCL – performing was $40 million, a decrease of $93 million, or 70%, reflecting seasonal trends in the U.S. credit card portfolios and prior quarter credit migration in Canadian Retail and Wholesale Banking, partially offset by a prior quarter migration from performing to impaired in the U.S. commercial portfolio. Total PCL for the quarter as an annualized percentage of credit volume was 0.39%.

By segment, the decrease in PCL was due to a decrease in Corporate segment of $95 million, or 42%, a decrease in U.S. Retail of $80 million, or 26%, a decrease in Canadian Retail of $30 million, or 10%, and a decrease in Wholesale Banking of $12 million.

Year-to-date comparison – Q2 2019 vs. Q2 2018

PCL was $1,483 million, an increase of $234 million, or 19%, compared with the same period last year. PCL – impaired was $1,310 million, an increase of $233 million, or 22%, reflecting volume growth, seasoning, and mix shift in the U.S. credit card portfolios, higher provisions in the U.S. commercial portfolio, and increased provisions and volume growth in Canadian Retail. PCL – performing was $173 million, an increase of $1 million, or 1%, reflecting credit migration in Canadian Retail, offset by lower provisions for the U.S. auto portfolio, and prior period credit migration in Wholesale Banking. Total PCL as an annualized percentage of credit volume was 0.45%.

By segment, the increase in PCL was due to an increase in Canadian Retail of $101 million or 21%, an increase in U.S. Retail of $81 million or 18%, an increase in the Corporate segment of $59 million, or 20% (largely reflecting PCL for the U.S. strategic cards portfolio, which is offset in Corporate segment non-interest expenses), partially offset by a decrease in Wholesale Banking of $7 million, or 78%.

 

TABLE 8:  PROVISION FOR CREDIT LOSSES

 

(millions of Canadian dollars)			For the three months ended												For the six months ended
			April 30 2019				January 31 2019				April 30 2018				April 30 2019				April 30 2018
Provision for credit losses – Stage 3 (impaired)
Canadian Retail		$	256			$	264			$	219			$	520			$	456
U.S. Retail			199				285				199				484				386
Wholesale Banking			–				–				(8	)			–				(8	)
Corporate 1			138				168				110				306				243
Total provision for credit losses – Stage 3			593				717				520				1,310				1,077
Provision for credit losses – Stage 1 and Stage 2 (performing) 2
Canadian Retail			24				46				–				70				33
U.S. Retail			27				21				5				48				65
Wholesale Banking			(5	)			7				24				2				17
Corporate 1			(6	)			59				7				53				57
Total provision for credit losses – Stage 1 and Stage 2			40				133				36				173				172
Total provision for credit losses		$	633			$	850			$	556			$	1,483			$	1,249

 

1	Includes PCL on the retailer program partners' share of the U.S. strategic cards portfolio.

2	Includes financial assets, loan commitments, and financial guarantees.

Insurance claims and related expenses

Quarterly comparison – Q2 2019 vs. Q2 2018

Insurance claims and related expenses for the quarter were $668 million, an increase of $110 million, or 20%, compared with the second quarter last year, reflecting changes in the fair value of investments supporting claims liabilities, less favourable prior years' claims development, and higher current year claims, partially offset by decreases in reinsurance claims assumed and less severe weather-related events.

Quarterly comparison – Q2 2019 vs. Q1 2019

Insurance claims and related expenses for the quarter decreased $34 million, or 5%, compared with the prior quarter, reflecting more favourable prior years' claims development and lower current year claims, partially offset by the impact of changes to actuarial assumptions in the life and health business in the prior quarter, changes in the fair value of investments supporting claims liabilities, and more severe weather-related events.

Year-to-date comparison – Q2 2019 vs. Q2 2018

Insurance claims and related expenses were $1,370 million, an increase of $237 million, or 21%, compared with the same period last year. The increase reflects changes in the fair value of investments supporting claims liabilities, less favourable prior years' claims development, and higher current year claims, partially offset by less severe weather-related events and the impact of changes to actuarial assumptions in the life and health business.

Non-Interest Expenses and Efficiency Ratio

Quarterly comparison – Q2 2019 vs. Q2 2018

Reported non-interest expenses were $5,248 million, an increase of $411 million, or 8%, compared with the second quarter last year, reflecting additional employees supporting business growth, higher spend on strategic initiatives, the impact of foreign currency translation, charges related to the acquisition of

 

TD BANK GROUP • SECOND QUARTER 2019 • REPORT TO SHAREHOLDERS			Page 11

Greystone, and continued investments supporting the global expansion of Wholesale Banking's U.S. dollar strategy. Adjusted non-interest expenses were $5,163 million, an increase of $404 million, or 8%.

By segment, the increase in reported non-interest expenses was due to an increase in Canadian Retail of $249 million, or 11%, an increase in Wholesale Banking of $81 million, or 16%, an increase in the Corporate segment of $42 million, or 7%, and an increase in U.S. Retail of $39 million, or 3%.

The Bank's reported efficiency ratio was 51.3%, compared with 51.0% in the second quarter last year. The Bank's adjusted efficiency ratio was 50.5%, compared with 50.2% in the second quarter last year.

Quarterly comparison – Q2 2019 vs. Q1 2019

Reported non-interest expenses for the quarter decreased $607 million, or 10%, compared with the prior quarter, largely due to charges related to the agreement with Air Canada in the prior quarter, and fewer days in the current quarter, partially offset by charges related to the acquisition of Greystone. Adjusted non-interest expenses decreased $2 million.

By segment, the decrease in reported non-interest expenses was due to a decrease in Canadian Retail of $603 million, or 20%, a decrease in U.S. Retail of $84 million, or 5%, and a decrease in Wholesale Banking of $5 million, or 1%, partially offset by an increase in the Corporate segment of $85 million, or 15%.

The Bank's reported efficiency ratio was 51.3%, compared with 58.6% in the prior quarter. The Bank's adjusted efficiency ratio was 50.5%, compared with 51.6% in the prior quarter.

Year-to-date comparison – Q2 2019 vs. Q2 2018

Reported non-interest expenses of $11,103 million increased $1,405 million, or 14%, compared with the same period last year, primarily reflecting charges related to the agreement with Air Canada, additional employees supporting business growth, higher spend on strategic initiatives, and the impact of foreign currency translation. Adjusted non-interest expenses were $10,324 million, an increase of $772 million, or 8%.

By segment, the increase in reported non-interest expenses was due to an increase in Canadian Retail of $1,022 million, or 22%, an increase in U.S. Retail of $203 million, or 7%, an increase in Wholesale Banking of $157 million, or 15%, and an increase in the Corporate segment of $23 million, or 2%.

The Bank's reported efficiency ratio was 54.9%, compared with 51.4% in the same period last year. The Bank's adjusted efficiency ratio was 51.0%, compared with 50.4% in the same period last year.

Income Taxes

As discussed in the "How the Bank Reports" section of this document, the Bank adjusts its reported results to assess each of its businesses and to measure overall Bank performance. As such, the provision for income taxes is stated on a reported and an adjusted basis.

The Bank's effective income tax rate on a reported basis was 21.0% for the second quarter, compared with 21.1% in the second quarter last year and 19.4% in the prior quarter. The year-over-year decrease was due to slightly higher tax-exempt dividend income and the positive impact of tax items, partially offset by the effects of higher income before taxes. The quarter-over-quarter increase was mainly due to higher income before taxes, partially offset by the positive impact of tax items.

 

TABLE 9:  INCOME TAXES

 

(millions of Canadian dollars, except as noted)			For the three months ended																								For the six months ended
			April 30 2019								January 31 2019								April 30 2018								April 30 2019								April 30 2018
Income taxes at Canadian statutory income tax rate		$	974				26.5	%		$	687				26.5	%		$	934				26.5	%		$	1,661				26.5	%		$	1,795				26.5	%
Increase (decrease) resulting from:
Dividends received			(27	)			(0.7	)			(23	)			(0.9	)			(17	)			(0.5	)			(50	)			(0.8	)			(97	)			(1.4	)
Rate differentials on international operations			(170	)			(4.6	)			(185	)			(7.1	)			(180	)			(5.1	)			(355	)			(5.6	)			74				1.1
Other			(4	)			(0.2	)			24				0.9				9				0.2				20				0.3				14				0.2
Provision for income taxes and effective income tax rate – reported		$	773				21.0	%		$	503				19.4	%		$	746				21.1	%		$	1,276				20.4	%		$	1,786				26.4	%
Total adjustments for items of note 1			14								175								17								189								(370	)
Provision for income taxes and effective income tax rate – adjusted 2,3		$	787				20.9	%		$	678				20.6	%		$	763				21.1	%		$	1,465				20.8	%		$	1,416				20.2	%

 

1	For explanations of items of note, refer to the "Non-GAAP Financial Measures – Reconciliation of Adjusted to Reported Net Income" table in the "How We Performed" section of this document.

2	The tax effect for each item of note is calculated using the statutory income tax rate of the applicable legal entity.

3	Adjusted effective income tax rate is the adjusted provision for income taxes before other taxes as a percentage of adjusted net income before taxes.

The Bank's adjusted effective tax rate was 20.9% for the quarter, lower than 21.1% in the second quarter last year and higher than 20.6% in the prior quarter. The year-over-year decrease was mainly due to slightly higher tax-exempt dividend income and the positive impact of tax items, partially offset by the effects of higher income before taxes. The quarter-over-quarter increase was mainly due to higher income before taxes, partially offset by the positive impact of tax items.

 

TD BANK GROUP • SECOND QUARTER 2019 • REPORT TO SHAREHOLDERS			Page 12

Impact of Foreign Currency Translation on U.S. Retail Segment Earnings

The following table reflects the estimated impact of foreign currency translation on key U.S. Retail segment income statement items.

 

TABLE 10:  IMPACT OF FOREIGN CURRENCY TRANSLATION ON U.S. RETAIL SEGMENT EARNINGS

 

(millions of Canadian dollars, except as noted)			For the three months ended				For the six months ended
			April 30, 2019 vs. April 30, 2018 Increase (Decrease)				April 30, 2019 vs. April 30, 2018 Increase (Decrease)
U.S. Retail Bank
Total revenue		$	124			$	269
Non-interest expenses			65				144
Net income – after-tax			43				89
Equity in net income on an investment in TD Ameritrade 1			13				25
U.S. Retail segment decreased net income – after-tax			56				114
Earnings per share (Canadian dollars)
Basic		$	0.03			$	0.06
Diluted			0.03				0.06

 

1	Equity in net income on an investment in TD Ameritrade and the foreign exchange impact are reported with a one-month lag.

 

Average foreign exchange rate (equivalent of CAD $1.00)

For the three months ended

For the six months ended

April 30 2019

April 30 2018

April 30 2019

April 30 2018

U.S. dollar

0.751

0.784

0.751

0.787

Economic Summary and Outlook

Real gross domestic product (GDP) worldwide is expected to grow at a relatively subdued average pace of 3.3% per year over calendar years 2019 and 2020, a notable deceleration from the near 4% pace set in calendar year 2018. This reduction in growth can be partly attributed to the fading impact of past fiscal and monetary stimulus and increased trade and geopolitical tensions. The global slowdown has prompted G-7 central banks to take a 'wait and see' approach with respect to further monetary policy adjustments. This, in combination with some early signs of economic stabilization, should limit the degree to which the world economy slows in the near term.

After outperforming other major advanced economies in 2018, the American economy turned in rapid growth in the first calendar quarter of 2019. The advance report by the U.S. Department of Commerce revealed a gain of 3.2% (annualized) in the January-March period, roughly in line with last year's average. However, the underlying details of the report were softer. Inventory accumulation and a contraction of imports were significant contributors to headline growth. Conversely, spending by households and businesses decelerated notably. More recent data point to renewed strength in consumer spending heading into the second calendar quarter. Nevertheless, with the impact of previous tax cuts and large government spending increases expected to fade, we expect that overall growth in the U.S. economy is poised to run at a more sustainable trajectory of around 2% growth over the reminder of this calendar year and in 2020. However, on May 10, 2019, the U.S. escalated trade tensions with China by imposing a 25% tariff (previously 10%) on US$200 billion in Chinese goods. China's government responded with increased tariffs on roughly $60 billion of goods imported from the U.S. The situation remains fluid as both governments are engaged in negotiations and have a forum to reach an agreement, unlike previous tariff action. The ultimate economic impact will depend on many factors, including how long the tariffs are imposed, further retaliatory actions or escalation, and importantly, market sentiment. Should the tariffs remain in place beyond the near-term, it is estimated to result in slightly higher consumer prices and a modest drag on U.S. economic growth.

At its latest policy meeting of April 30-May 1, the Federal Reserve Open Market Committee (FOMC) reaffirmed its neutral policy stance as it continues to balance domestic and international considerations. Although the FOMC characterized trends in the labor market and economic activity as solid, it acknowledged the recent weakness in inflation trends, with its preferred measure running below its symmetric target of 2%. The central bank attributed the recent softness to transitory factors. Provided that inflation remains steady (tariff impacts aside) in the coming months, we expect that the target range for the federal funds rate is likely to hold at its current rate of 2.25-2.50% over the next few years.

The Canadian economy remains in a soft patch. Real GDP is projected to have expanded by less than 1% annualized during the January-March 2019 period, marking little improvement from the anemic 0.4% pace of the prior quarter. Importantly, a softening in housing activity and household demand for big ticket items, such as household furnishings and automobiles in the autumn of 2018, carried over into the opening months of calendar year 2019. Oil production curtailment in Alberta also continued to weigh on growth.

We consider that some of the headwinds are temporary and will likely dissipate in the coming quarters, helping the Canadian economy accelerate modestly. Among these was poor weather acting as a partial factor behind soft resale housing and transportation/warehousing activity. In addition, recent declines in residential borrowing rates and a strong labour market backdrop are expected to lead to a gradual firming in household spending and housing activity. Within the oil sector, mandatory production curtailments have already begun to shrink in scale, which should gradually lift the weight it has placed on overall economic growth over the past several months. However, this adjustment appears to be slower than expected, as demonstrated by ongoing elevated domestic crude oil inventories.

Near-term relief should help place the Canadian expansion back on a 1.5-2% quarterly growth trajectory in the second half of this year. It is expected that further upside will ultimately remain restrained by cautious households given high average debt loads and tighter macroprudential policies on mortgage lending. In addition, there appears to be elevated inventory levels among both manufacturers and wholesalers. This dynamic is expected to limit the pace of overall growth, due to the risk that firms re-adjust elevated inventories via lessened production. Lastly, Canada's non-energy export performance has been lackluster for several quarters, which is unlikely to change in a meaningful way with a global economy that is on a slower growth trajectory, including the United States.

For 2019 as a whole, TD Economics projects Canadian real GDP growth to average only 1.2%, which is consistent with the Bank of Canada's downwardly-revised forecast in its April Monetary Policy Report. As noted, this forecast does not include any potential spill-over to Canada from the U.S.-China trade dispute. Although the sub-par rate of expansion implies a larger degree of economic slack than it had previously anticipated, the Bank of Canada indicated comfort in April with the current setting of its overnight policy rate (1.75%). Accordingly, TD Economics anticipates no change in the policy rate over the foreseeable future. With bond yields in Canada likely to remain below those in the U.S. and the recent rally in crude oil prices forecast to taper off, the Canadian dollar is projected to hold at the lower end of its recent range of US74 to US77 cents in calendar year 2019.

Downside risks, both domestic and global, remain. Domestically, the Bank of Canada will remain watchful of the possibility of a renewed slowdown in housing activity and a period of household deleveraging. Energy sector developments are also important, with prices subject to international forces and the possibility of a further investment retrenchment due to domestic transportation capacity issues. Geopolitical issues with Venezuela and Iran also remain fluid, with potential impacts on North American energy markets. Beyond the aforementioned U.S.-China trade dispute, there is now additional focus on trade with Europe and Japan. This maintains a risk of further disruption to globally integrated supply chains. The United Kingdom's exit from the European Union is progressing more slowly than expected, creating longer-lasting uncertainty on the investment backdrop. Lastly, other areas that continue to present a downside risk include ongoing tensions in

 

TD BANK GROUP • SECOND QUARTER 2019 • REPORT TO SHAREHOLDERS			Page 13