道明银行

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.

After incorporating third-quarter results, we are increasing our fair value estimate to USD 107 from USD 98 per share, mostly driven by higher near-term profitability. We now forecast the bank to grow its adjusted revenue at a CAGR of 3.8% from 2025 to 2030, up 40 basis points from our previous expectation of 3.4% and lower our adjusted expense growth CAGR to 3.5% from 3.6% over the same time period. Our fair value estimate is equivalent to 2.7 times tangible book value as of July 2026. We use an exchange rate of USD 0.72/CAD 1.

We have tweaked our trading income, underwriting and advisory income, and asset-based fees for TD in the near term, and we still expect TD to grow its adjusted fee income at a CAGR of 3.7% from 2025 to 2030. 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 15 basis points in 2026 to 1.91%, 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 2.2% in 2026, accelerating from 0.4% growth in 2025. For net interest income, we forecast 9.6% growth in 2026, and we project it to grow at a CAGR of 4.1% from 2025 to 2030.

We expect credit costs to remain elevated in 2026, and we forecast a provisioning for a credit losses (PCL) ratio of 42 basis points in 2026, lower than the 47 basis points in 2025 and within the bank’s guidance range of the low end of 40 to 50 basis points. We expect around 43 basis points of PCL ratio in 2027.

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 5% in 2026. As for underwriting and advisory income, we now forecast a growth of 25% in 2026.

We forecast 2026 adjusted expenses to grow by 2.7%, slightly better than management guidance of 3% to 4%, and this is an improvement from the 8.6% growth in 2025. Over the next five years, we expect adjusted expenses to grow at a CAGR of 3.9% (reported: 3.4%). This leads to an adjusted efficiency ratio of 59.2% 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 17.3%. We use an 8.1% cost of equity.

We believe Toronto-Dominion Bank has a wide Morningstar Economic Moat Rating 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 17.3% through the cycle, comfortably above its 8.1% cost of equity.

Bank moats are derived primarily from cost advantages and switching costs, and 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. In Canada, switching costs stem from a tightly regulated oligopolistic market structure (Big Six Canadian banks control more than 95% market share), which limits competition, stabilizes pricing, and reduces customer incentive to switch banks. Cost advantages stem from a low-cost deposit base, strong operating efficiency, and conservative underwriting, reinforced by a Canadian regulatory environment favorable to the big banks. This combination produces lower operating, credit, and regulatory costs, along with lower and better-diversified risk, supporting higher risk-adjusted returns for the big Canadian banks.

Canada's favorable banking environment stems from several factors. First, barriers to entry are very high. Nonresidents may not own more than 25% of a bank's shares without government approval, and foreign banks face operating restrictions. Domestic competition is also controlled, as exclusive federal chartering control has entrenched a few large banks. Second, a protective, efficient regulatory system also drives cost advantages through risk reduction. Regulators need only monitor the Big Six banks, far simpler than overseeing thousands of US banks. Regulators also help control mortgage pricing, limiting pricing wars that erode underwriting standards. Rules curb bad credit issuance through mandatory insurance on riskier mortgages, the absence of a GSE-like subsidized securitization market, and requirements that banks hold more risk on the balance sheet. A higher-tax, stronger safety-net model has fostered a more stable middle class, supporting political stability and further reducing systemic risk. Combined with government subsidies on deposits and mortgage insurance, and the implicit too-big-to-fail subsidy (all Big Six banks are domestic systemically important banks at a minimum), these factors create an environment where excess bank returns are highly likely in Canada.

Scale further reinforces these cost advantages. Larger scale spreads fixed costs, improving efficiency, as the five largest Canadian banks are all bigger than the largest US regional bank. Nationwide branch networks lower customer acquisition costs. The banks span nearly every major financial product, generating economies of scope on top of economies of scale.

Within the Canadian banking system, TD's position as one of the two largest banks (along with Royal Bank of Canada) is solid. TD derives around 31% of its 2025 revenue from its Canadian banking business and has a number-one or -two share in all key banking products. It is one of the dominant investment banks in Canada. It also has the second-largest amount of assets under management among the Canadian banks, giving it a larger exposure to this asset-light business and a larger share of clients’ overall wealth. The strength of TD’s Canadian banking franchise translates into superior domestic efficiency ratios and domestic returns over its smaller Canadian peers. That said, we don’t view TD as having superior all-bank 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 expense spending related to the US anti-money-laundering remediation efforts.

Beyond Canadian banking, Toronto-Dominion derived around 18% of revenue from US banking, 21% from wealth and insurance operations, and 12% from the wholesale (capital markets) segment.

We assess TD's US retail banking business (around 18% of its 2025 revenue base) as worthy of a narrow moat from cost advantages and switching costs. We estimate Schwab-related sweep deposits represent about 24%-28% of TD US retail deposits and view this as a relatively cheap funding source. TD’s resolution of regulatory issues in the US, the asset cap, and other consent orders create headwinds to the bank’s growth profile, profitability, and returns in the short to medium term. However, we don’t think the bank’s US banking return profile will be permanently reduced to its 8.1% cost of equity on a normalized basis.

The wealth and insurance management segment accounts for about 21% of TD's 2025 revenue. We estimate that wealth management contributes two-thirds of segment earnings and the insurance business contributes around one-third. The primary moat for wealth management and asset management businesses is switching costs, and we view the bank as moaty. Big Six banks and Big Three life insurers have taken shares from pure-play asset managers, a trend we expect to continue given their larger distribution networks and more fungible pricing across their broader product sets.

Lastly, TD derived around 12% of its 2025 revenue from wholesale business. We think TD Securities, along with Cowen (acquired in 2023), has brand recognition that provides a competitive advantage for garnering investment banking deals and recruiting top talent. Around 60% of its 2025 wholesale banking revenue was from trading and 40% from corporate banking and investment banking. While we don't view its trading business as moaty, it's deeply intertwined with its investment banking business and serves as a crucial part of the bank's value proposition to institutional clients.

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 artificial intelligence 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.

If the United States-Mexico-Canada Agreement renewal process is significantly delayed or yields unfavorable tariff rates to Canada, the Canadian economy could enter a recession and make the bank see lower growth and higher credit costs.

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.