TD’s (TD) Record Quarter Comes With A Regulatory Asterisk

On August 27, Toronto-Dominion Bank (TD) announced a record quarter that boasted nearly flawless growth across all divisions. Adjusted net income soared to $4.7 billion, a 21% increase year over year, while adjusted diluted earnings per share jumped 26% to $2.77. Every major business at TD, including Canadian and US banking, wealth and insurance, and wholesale, reported higher earnings simultaneously—an uncommon occurrence for a bank of its size. Return on equity climbed to 16.0%, a 280 basis point increase from a year ago.

Canadian Personal and Commercial Banking contributed $2,095 million in net income, marking a 7% year-over-year rise, fueled by record deposit and loan volumes and a 3 basis point increase in margins. US Banking saw a 41% year-over-year surge in net income to $1,074 million, with a notable jump in net interest margin to 3.47%, up 6 basis points sequentially.

CEO Raymond Chun highlighted that increasing loan volumes turned positive for the US business, with bank card balances up 20%, mid-market lending up 15%, and home equity lending up 6% year-over-year.

Wholesale Banking emerged as the standout performer, with net income rising 87% year-over-year to $743 million. Chun noted that wholesale revenue has nearly doubled every quarter since TD acquired Cowen, with deposits growing 18% year-over-year as the bank expands its global transaction banking platform. Wealth Management and Insurance added $841 million in net income, up 20%, driven by a 26% increase in new accounts and a record $24 billion in referrals to date.

TD had already allocated $900 million towards its structural cost cuts for fiscal 2026, ahead of schedule, and realized $200 million in value from AI tools now deployed across over 20,000 client-facing employees.

Management opened the call by acknowledging the strain in the Canada-US trade relationship, setting aside roughly $500 million in reserves for trade and policy risk. Chief Risk Officer Ajai Bambawale emphasized that future credit forecasting must now factor in trade tensions, the Middle East conflict, and other unresolved factors not typically considered in banking risk assessments.

The US anti-money laundering remediation program remains in place, with roughly $550 million in remediation costs expected for the fiscal year. Despite these challenges, TD is expanding its US footprint with plans to open 100 new branches by the end of 2028, a move that coincides with the bank's compliance efforts.

Notably, the CET1 ratio dipped 3 basis points to 14.3%, impacted by the repurchase of 14.5 million common shares. US Banking deposits remained flat year-over-year when excluding sweep and government banking balances. Hedge fund ownership of TD declined from 33 funds to 30 funds quarter-over-quarter, indicating some institutional reallocation despite the record quarter.

The stock currently trades at a forward price-to-earnings ratio of 15.48, a modest valuation multiple for a bank achieving double-digit earnings and EPS growth.

Management projected up to $13 billion in potential capital returns for fiscal 2027, a figure that has not yet fully reflected in the stock price. Investors should watch the gap between TD's impressive financial results and the current market valuation for potential opportunities. While TD has demonstrated strong performance across multiple fronts, the company's open questions regarding the trade reserve and ongoing AML consent order remain a point of concern.

As such, while acknowledging the bank's potential as an investment, some analysts believe that certain AI-focused stocks offer greater upside potential with less downside risk.