The Toronto-Dominion Bank

Toronto-Dominion reported strong fiscal third-quarter results. Adjusted EPS came in at CAD 2.77, up 26% from a year ago. The bank's third-quarter results translated into an adjusted return on equity of 16.0%, well above its fiscal 2026 target of 13.0%.

Why it matters: TD's US retail segment saw adjusted loan growth of 3% year over year after excluding noncore portfolios for run-off or for sale. Segment return on equity improved 130 basis points year over year to 10.2% in the quarter. Management expects to open 100 new branches and add 450 new bankers in the US by the end of calendar 2028. TD is still remediating its US regulatory issues, so any new branches would require regulatory approval. It remains confident about its expansion plan based on discussions with US regulators but indicated no signal yet on lifting its US asset cap. As part of its US restructuring, the bank closed 90 branches in the past two years. This new expansion plan is expected to deepen its reach in key US markets, with most of the branch investments, in our view, funded by cost savings, as it guided no material expense growth from its expansion plan.

The bottom line: As we incorporate the bank's fiscal third-quarter results, we expect to increase our CAD136/USD 98 per share fair value estimates for wide-moat Toronto-Dominion by a high-single-digit percentage. We continue to view the shares as overvalued. The increase in our valuation will primarily be driven by higher fee income from the bank's wealth and wholesale banking businesses, as well as higher net interest margin, partially offset by higher compensation costs. We still think the bank will deliver on its adjusted expense growth of 3%-4% for fiscal 2026. TD reiterated its cost reduction plan of around CAD 900 million in fiscal 2026.

Coming up: Amid the latest tariff spat between the US and Canada, TD lowered its credit guidance to the lower end of the prior range of 40 to 50 basis points for its provisioning for credit losses.

A prolonged and severe tariff situation would lead to higher credit costs and lower balance sheet growth for Toronto-Dominion as well as the other Canadian banks. That said, government-supportive measures for the tariff-affected sectors and the labor force would help alleviate the negative impact on profitability and returns for the Canadian banks.

TD's allowance for loan losses already included CAD 500 million related to tariff-related credit risks. The bank is currently in a strong capital position to weather potentially higher credit costs, with a common equity Tier 1 ratio of 14.3% at the end of the third quarter of fiscal 2026, well above its peers and the regulatory minimum. After the Canadian bank regulator lowered the minimum CET1 ratio requirement by 50 basis points in June to 11.0%, TD still targets a 13.0% CET1 ratio by the second half of fiscal 2027, implying around CAD 13 billion in share buyback capacity by management's estimate, or 4.7% of its market cap based on the Aug. 26 closing price.

We are increasing our fair value estimate to USD 98 from USD 84 per share. About 10% of the increase comes from time value of money, 76% from lowering our cost of equity to 8.1% from 9.0%, and the remainder from higher near-term profitability. The reduction in our cost of equity reflects our updated view regarding TD's business mix and cyclicality. Our fair value estimate is equivalent to 2.5 times tangible book value as of April 2026. We use an exchange rate of USD 0.72/CAD 1.

We have increased our trading income, underwriting and advisory income, and asset-based fees for TD in the near term, and we now expect TD to grow its adjusted fee income at a CAGR of 3.7% from 2025 to 2030, compared with our prior forecast of 3.6%. We acknowledge that predicting the capital markets segment's revenue is inherently challenging, and we still believe the capital markets segment remains highly volatile. We caution investors that a reduction in the revenue base will lead to a much larger decline in profitability, given the business' high operating leverage.

After net interest margin expanded by 4 basis points to 1.76% in 2025, we forecast an expansion by another 8 basis points in 2026 to 1.84%, mostly driven by lower funding costs and the benefits from the US retail balance sheet repositioning in 2025. We expect loan balances to grow by 3.3% in 2026, accelerating from 0.4% growth in 2025. For net interest income, we forecast a 7.0% growth in 2026, and we project it to grow at a CAGR of 3.6% from 2025 to 2030.

We expect credit costs to remain elevated in 2026, and we forecast a provisioning for a credit loss ratio of 48 basis points (44 basis points prior) in 2026, mostly in line with the 47 basis points in 2025 and within the bank’s guidance range of 40 to 50 basis points. We have increased our 2027 provisioning for the credit loss ratio to 44 basis points from 35 basis points, given some weaknesses in the Canadian consumer loan portfolio.

We project core noninterest income to grow at a compound annual rate of 3.7% over the next five years. Trading income grew by 50% and 27% in 2024 and 2025. On the other hand, the underwriting and advisory fee income business increased by 79%, 44%, and 19% over 2023, 2024, and 2025, respectively. We now expect trading income to decline by 9% in 2026, improving by 100 basis points compared with our previous model. As for underwriting and advisory income, we now forecast a growth of 10% in 2026, compared to a decline of 5% in our prior forecast.

We forecast 2026 adjusted expenses to grow by 4.1%, mostly in line with the high-end management guidance of 3% to 4%, and this is a slowdown from the 8.6% growth in 2025. Over the next five years, we expect adjusted expenses to grow at a CAGR of 3.6%. This leads to an adjusted efficiency ratio of 60.6% by 2030, a bit above where the bank has been in the past, as we think the bank will have higher operating costs in its US retail business. TD will also incorporate a large mix of its lower-margin wholesale business, as the US retail segment can’t grow its balance sheet as fast as the rest of the bank. In sum, our forecasts lead to a normalized return on tangible common equity of around 16.2%. We use an 8.1% cost of equity.

We believe Toronto-Dominion Bank has a wide economic moat because it possesses durable cost advantages and switching costs that are consistent with our bank moat framework. TD has a superior market share in the advantageous Canadian banking environment, a solid funding base, and exposure to more lucrative nonbank businesses. We are confident that it will consistently earn returns on tangible common equity around 16% through the cycle, comfortably above its 8.1% cost of equity, underpinned by TD Bank deriving the majority of its earnings in the favorable Canadian market.

We believe bank moats are derived primarily from two sources: cost advantages and switching costs. We see switching costs in the Canadian system being driven by a tightly regulated oligopolistic structure (the Big Six Canadian banks control more than 90% market share) that limits excess competition, therefore stabilizing product pricing and giving customers less incentive to switch banks. We see cost advantages as stemming from three primary factors: a low-cost deposit base, excellent operating efficiency, and conservative underwriting. Regulatory costs must also be considered. We view the Canadian banking regulators as relatively favorable to the big Canadian banks. We view the Canadian banking environment as offering systemic cost advantages that manifest themselves in the form of lower operating costs, lower credit costs, lower regulatory costs, and lower absolute levels of and better diversification of risks, all of which allow the big Canadian banks to achieve greater risk-adjusted returns.

Toronto-Dominion Bank derives more than 50% of revenue from the Canadian market. It is one of the two largest banks in Canada (along with Royal Bank of Canada) and has dominant market share in many categories, including number-one or -two share in all key retail and commercial banking products. It is also one of the dominant investment banks in Canada. We view the bank as having a moat in investment banking built on intangible assets, which increases its probability of sourcing larger deals and generating better revenue share and economics from a deal with a lead advisor position. It also has the second-largest amount of assets under management among the Canadian banks, giving it a larger exposure to this higher-margin, asset-light business and a larger share of clients’ overall wealth. We don’t view TD as having superior operating efficiency compared with peer Canadian banks going forward, mostly because of its business mix of more US earnings exposure (which has an asset cap) and the higher expense spending related to the US anti-money-laundering remediation efforts.

Canadian Personal and Commercial Banking Business Has Wide Moat

We believe the Canadian banking environment offers systemic cost advantages and switching costs that lead to returns above the cost of capital, allowing the big banks operating under its jurisdiction to possess moats. We view Toronto-Dominion’s Canadian personal and commercial banking segment (contributing around 30% of total TD Bank revenue) as having a wide moat. As one of the two largest Canadian banks, TD Bank represents more than 20% of domestic deposits (with over 25% share in demand deposits) and has number-one or -two market share in all consumer and commercial banking products. TD has consistently operated with one of the best efficiency ratios in Canadian personal and commercial banking segment, partially through operational execution, and partially due to its favorable funding mix with the number-one share in demand deposits. The bank’s domestic net interest margin benefits from its favorable funding mix (less reliant on the more expensive wholesale funding sources) as well as its attractive credit-adjusted net interest margin from a larger exposure to credit cards (about 1 in 3 Canadians have a TD credit card). The bank also has one of the best cross-selling capabilities and execution among all Big Six Canadian banks, leading to TD extrapolating a larger portion of its consumer wealth. We think its comprehensive product sets in banking, wealth management, and insurance allow TD to form deep client relationships that span multiple businesses and can generate better switching costs. Toronto-Dominion’s average Canadian retail client tenure is around 17 years, which is indicative of high switching costs. The strength of TD’s Canadian banking franchise translates into superior domestic efficiency ratios and domestic returns over its smaller Canadian peers.

Barriers to entry are very high for the Canadian banking system. Existing regulations prevent foreign competition, as non-Canadian residents may not own more than 25% of the shares of a bank unless approved by the government, and foreign banks can only operate in Canada under certain restrictions. Domestic competition is also controlled, as Canada’s banking system historically developed to favor a few large banks controlling the majority of the domestic market, and this is actively enforced through the handling of chartering by the federal government exclusively. Additionally, the rejection of merger proposals in 1998—between Royal Bank of Canada and Bank of Montreal and between Toronto-Dominion and Canadian Imperial Bank of Commerce—created a precedent where no further consolidation between the main Canadian banks will be accepted by the regulators.

Having larger banks helps to spread out fixed costs across a larger operating base, increasing operating efficiency, as the four largest Canadian banks are all bigger than the largest US regional bank. The Canadian banks, because their branch networks spread out throughout the country, arguably have some of the most powerful distribution networks in Canada. This offers cost advantages via lower customer acquisition costs. In addition, the banks are involved in nearly every major financial product, including asset management, wealth management, insurance, investment banking, and a variety of other consumer and commercial banking products and services. Bigger scale, powerful distribution networks, a multitude of products, and diversification of business lines lead to economies of scope in addition to the economies of scale already achieved.

We believe a more protective and efficient regulatory system also leads to cost advantages, primarily through risk reduction. More consolidated and well-integrated banking systems, like the Canadian system, have tended to be more stable over time, reducing risk. Also, the Canadian regulators must only primarily monitor and develop relationships with the Big Six Canadian banks, which is much easier than trying to monitor the thousands of banks that exist in the US, for example. This leads to more collaboration and cooperation between regulators and banks, as well as greater institutional memory and more coordinated and easily implemented responses if strains begin to appear in the system. Regulators also help to control pricing in the market at times, such as on mortgage products, helping to reduce the potential for pricing wars to gain market share at the expense of underwriting standards. Canadian regulation makes it more difficult for bad credit to be issued in many ways, including mandatory insurance and standards on riskier mortgage loans, not having a government-sponsored enterprise-like government-subsidized mortgage securitization market, and forcing banks to hold more of the risk on their own balance sheets. These factors help contribute to better absolute risk reduction in the system as well as regulatory economies of scale.

The Canadian banks are more geographically diversified on average than the majority of US regional banks, which often have concentrations in individual states or local economies. This diversifies credit risk, lowering the overall risk for each individual bank. Canada’s system of higher taxes, more social safety nets, and other complex factors have also led to a more robust and stable middle class that contributes to economic and political stability, further reducing systemic risk.

Combine all of these factors, along with explicit government subsidies on deposit insurance and mortgage insurance and the implicit subsidy of being too big to fail domestically (all Big Six Canadian banks are labeled as domestic systemically important banks at a minimum), and we believe an environment exists where excess returns for banks are almost certain to exist in Canada.

US Retail Segment Has Narrow Moat From Cost Advantages and Switching Costs

Toronto-Dominion has around one-fifth of revenue from its US retail segment, which we view as having a narrow moat based on cost advantages and switching costs. The bank made a series of acquisitions from 2000 to 2010 and has built a Maine-to-Florida footprint on the East Coast with around USD 382 billion in assets at the end of fiscal 2025.

We view TD’s US retail banking business as having cost advantages from its favorable funding mix. The bank has over 40% of its deposits in the Philadelphia-Camden-Wilmington metropolitan statistical area with number-one share. TD also has additional low-cost deposits from its insured deposit agreement with Charles Schwab. The Schwab IDA comes from the 2020 Charles Schwab merger with TD Ameritrade. The 2023 revised IDA has a floor of USD 60 billion and a ceiling of USD 90 billion (set to expire in 2034). We estimate Schwab IDA-related sweep deposits represent about 26%-30% of TD US retail deposits and view this as a relatively cheap funding source.

TD’s resolution of anti-money-laundering/Bank Secrecy Act regulatory issues in the US, the asset cap, and other consent orders create headwinds to the bank’s growth profile, profitability, and returns (lower balance sheet growth and higher expense spending) in the short to medium term. However, we don’t think the bank’s return profile will be permanently reduced to its 9% cost of equity on a normalized basis. Toronto-Dominion sold all its equity stake in Charles Schwab in February of 2025; it previously reported Schwab-related earnings in its US retail segment. The Schwab holding provided some earnings benefit, but this equity investment also required TD to hold more regulatory capital compared with lending mortgages or retail auto loans. We estimate the bank’s US retail business core return excluding the Schwab equity stake should still be in the low to mid-teens under a normalized basis and comfortably above its 9% cost of equity.

Wealth Management and Insurance Segment Mostly Benefits From Switching Costs

The wealth management and insurance segment represents about 21% of Toronto-Dominion’s total revenue. We estimate that wealth management (including advice, asset management, and discount brokerage) contributes two thirds of segment earnings and the insurance business (mostly general insurance and life insurance) contributes around one third. We think the wealth-management and asset-management businesses’ primary moat source is switching costs, and we view Toronto-Dominion as moaty in both. We also think cost advantages apply to the discount brokerage business, as the scalable infrastructure allows retail brokerage firms to process additional trades at low costs. As such, we view TD as advantageous as it has around one-third market share in Canadian online brokerage assets. In Toronto-Dominion’s insurance business, we estimate general insurance (property and casualty) represents over 80% of its premiums. As it is the leading direct-to-consumer personal insurer, this direct distribution focus leads to lower costs by selling insurance products on its online platform.

Toronto-Dominion is the second-largest wealth manager, the second-largest retail mutual fund manager, the largest institutional asset manager, and the largest discount brokerage in Canada. TD Bank had around CAD 530 billion in assets under management and CAD 651 billion in assets under administration at the end of fiscal 2024. We think the Toronto-Dominion brand makes it competitive in recruiting top talent and retaining advisors.

Wealth-management firms benefit from client asset stickiness and advisor stickiness. Clients are often hesitant to switch advisors because of existing relationships, uncertainty about the potential cost/benefit trade-off of a switch, and inertia with financial management decision-making. We believe advisors tend to stay with their current firm due to the threat of losing client assets if they switch.

We think the asset-management business is conducive to the creation of economic moats, with switching costs and intangible assets being the most durable sources of competitive advantage. Asset managers can improve the switching costs (higher retention) through organizational attributes such as depth and breadth of product mix and distribution channel concentration and geographic reach. A strong brand and great manager reputation from a record of investment performance can also help retention rates.

Although the switching costs might not be explicitly large, inertia and the uncertainty of achieving better results by moving from one manager to another tend to keep investors in place for extended periods. As a result, money that flows into asset-management firms tends to stay there. For the US fund industry, the average retention rate for long-term mutual funds (which excludes money market funds) has been around 75% annually for the past three decades.

Retention rates have been much higher in the Canadian market, where the average annual retention rate for long-term funds has historically been closer to 85% on average annually. This is because fund distribution is different in the Canadian market. Big Six banks and the Canadian life insurers have taken shares from purer-play asset managers. They have used their position as the largest distributors of mutual funds and expansions of their own fund products to compete more heavily with the independents on price. For example, Canadian banks can charge management fees that are 10% less than what the purer-play asset managers are charging, with trailer fees that are 15%-25% lower than the industry average. As their fund manufacturing and distribution operations are one of many different products and services they provide customers, pricing can be more competitive for the Big Six banks than it is for purer-play asset managers.

Wholesale Banking Segment Has Narrow Moat From Intangible Assets

Toronto-Dominion derives around 12% of its revenue from its wholesale banking business. We think TD Securities—with Cowen acquired in 2023—has brand recognition that provides a competitive advantage for garnering investment banking deals and recruiting top talent. TD Securities is one of the dominant investment banks in Canada, and Cowen is strong in the midmarket space in the US. Of its CAD 8.4 billion wholesale banking segment revenue in fiscal 2025, more than 60% is from its market/trading business and the remaining from corporate and investment banking business.

Moat in investment banking (equity underwriting, debt underwriting, merger advisory, restructuring advisory) are primarily built on intangibles. Intangibles for an investment bank are rooted in the strength of its reputation, relationships with investors, history with company executives, industry expertise, research analyst coverage, record of successful deals, and distribution capabilities. Strengths of an investment bank’s intangible asset can be seen in its investment banking league table position, participation in high-profile transactions, and revenue production of its bankers. Having a strong intangibles asset-based moat increases the probability that the investment bank will be hired for the coveted lead advisor position on an investment banking deal that comes with superior revenue share and economics from a deal. A strong brand can attract more productive bankers.

We see little evidence of moats in developed financial markets for institutional securities trading by investment banks and broker/dealers. Financial instruments in developed markets often have transparent pricing and high levels of liquidity and don’t carry high trading profitability. Increased profits may be had in more opaque areas of trading, such as derivatives or block trades, but they often come with greater risk for the broker/dealer, which may need to hold the trading securities on its own balance sheet before selling the inventory. Even high revenue and operating margins in institutional trading don't necessarily indicate an economic moat that generates excess returns on capital because of the heightened regulation. Regulators require broker/dealers to hold generally expensive capital to fund trading operations to reduce risk. As a result, a high operating margin in an investment bank’s institutional trading business can come with a low return on capital.

As TD invests more capital in its Canadian banking segments because of the asset cap on its US retail segment, it can take even more share domestically. This could improve total returns.

TD has a lower exposure to the Canadian housing market than peers.

If AI leads to a material improvement in bankers' productivity, TD could enjoy a structurally better operating efficiency and higher return on equity on a normalized basis.

Should the Canadian economy see a major downturn, the bank would have higher credit costs and likely limited growth, pressuring earnings and returns.

TD is remediating its US anti-money-laundering operations, and expense spending will likely be elevated in the short term.

The bank will have to look at other areas for growth, given its US retail asset cap. If the bank allocates more capital to its lower-return wholesale banking business, overall bank returns could be diluted.