Executive Summary / Key Takeaways

• Strategic Overhaul Underway: The Toronto-Dominion Bank is undergoing a significant strategic transformation, divesting non-core assets, restructuring its U.S. balance sheet, and implementing a comprehensive cost reduction program to enhance profitability and capital efficiency.
• U.S. AML Remediation as Top Priority: Extensive investments in its U.S. Anti-Money Laundering (AML) program are critical, with the majority of management actions expected by calendar year-end 2025, though significant work extends into 2026 and 2027, impacting near-term expenses.
• Digital and AI as Growth Engines: TD is aggressively investing in advanced digital and AI capabilities, including TD AI Prism and generative AI virtual assistants, to drive efficiency, enhance client experience, and secure a competitive edge across its diverse business segments.
• Resilient Core Businesses and Capital Strength: Despite U.S. challenges, TD's Canadian Personal and Commercial Banking, Wealth Management and Insurance, and Wholesale Banking segments demonstrate strong underlying performance and growth momentum, supported by a robust CET1 ratio of 14.8%.
• Outlook Hinges on Execution: Fiscal 2025 is a transition year with expense growth projected at the upper end of 5% to 7% due to remediation and investment costs, but management anticipates a return to positive net income after tax (NIAT) growth in the U.S. Retail segment by 2026, contingent on successful execution of its strategic initiatives and AML program.

A North American Banking Powerhouse in Transition

The Toronto-Dominion Bank, founded in 1855, stands as a diversified financial services giant with a significant footprint across Canada, the United States, and internationally. Its business model spans Canadian Personal and Commercial Banking, U.S. Retail, Wealth Management and Insurance, and Wholesale Banking. TD's overarching strategy is currently defined by a comprehensive strategic review initiated in late 2024, aiming to optimize its business mix, profitability, and risk-adjusted return on capital. This transformation is unfolding against a backdrop of fluid global trade dynamics, with ongoing macroeconomic and policy uncertainty, including the upcoming CUSMA/USMCA renegotiation, creating a challenging environment for businesses and households alike.

In the competitive North American banking landscape, TD faces formidable rivals such as Royal Bank of Canada (RY), Bank of Montreal (BMO), Bank of Nova Scotia (BNS) (Scotiabank), Canadian Imperial Bank of Commerce (CM), and JPMorgan Chase (JPM). TD's extensive retail presence in both Canada and the U.S. is a key differentiator, often positioning it as "America's Most Convenient Bank" due to its branch network and customer-focused approach. This emphasis on accessibility and integrated services, including point-of-sale financing and insurance offerings, provides a unique value proposition compared to rivals like CIBC, which has a more streamlined retail approach, or Scotiabank, with its international focus. TD's strong brand recognition and network effects foster customer loyalty, contributing to stable revenue from deposits and loans and potentially enhancing its pricing power in retail banking.

However, TD's competitive standing is currently influenced by significant regulatory challenges in the U.S., particularly related to its Anti-Money Laundering (AML) program. This regulatory exposure is a vulnerability, potentially increasing costs and impacting profitability, and contrasts with the scale and technological capabilities of a global player like JPMorgan Chase, which demonstrates faster innovation in AI-driven services. While TD's growth trajectory appears solid, especially in its U.S. expansion, it must address these regulatory hurdles and continue to invest in technological advancements to maintain its competitive edge against peers who may lead in innovation speed or global diversification.

Technological Edge: Fueling Efficiency and Personalization

TD is making substantial investments in technology, particularly in Artificial Intelligence (AI), to differentiate its offerings, enhance operational efficiency, and deepen client relationships. A core technological differentiator is the bank's commitment to AI-driven insights and automation across its operations.

In Q3 2025, TD launched TD AI Prism, a significant step forward in harnessing AI to deliver greater client personalization through accelerated AI-driven insights. This tool is designed to support client services and growth, providing tailored experiences that can enhance customer satisfaction and retention. The tangible benefit here is improved customer engagement and potentially higher cross-selling opportunities, though specific quantifiable metrics for its impact are not yet disclosed.

Furthermore, TD Securities launched a Virtual AI Assistant in Q3 2025, which queries its equity research library of approximately 8,500 proprietary research reports covering nearly 1,300 companies in seconds. This tool significantly enhances the productivity and effectiveness of front-office institutional sales, trading, and research professionals, enabling them to answer client inquiries with speed. This directly translates to operational efficiency and improved client service, providing a competitive advantage in the fast-paced wholesale banking sector.

Beyond these new launches, TD has been systematically integrating AI and digital capabilities. In Q2 2025, the bank deployed AI enhancements in its fraud operations and insurance claims, improving the detection of suspected fraudulent auto and residential claims. This helps improve response times for genuine claims, enhancing customer experience and reducing potential losses. The bank also expanded its Generative AI virtual assistant, initially deployed in Canadian Personal Bank contact centers, to its wealth and insurance businesses in Q1 2025. This initiative has already shown reductions in call hold times and escalations, driving efficiency and enhancing customer experience.

TD's R&D initiatives in AI are further underscored by its new office for Layer 6, TD's AI research and development center, in New York City. With over 800 AI patent filings, TD's portfolio ranks in the top 10 among banks globally, according to Evident AI. This commitment to AI research aims to continuously upgrade capabilities and scale relationship banking, creating capacity through structural cost reductions. For investors, these technological differentiators contribute to TD's competitive moat by driving operational excellence, improving customer satisfaction, and potentially leading to higher revenue growth and better margins through enhanced efficiency and personalized offerings.

Strategic Transformation and Financial Performance

TD's recent financial performance reflects a bank in the midst of a significant strategic overhaul, balancing growth initiatives with substantial investments in risk and control infrastructure. In Q3 2025, the bank delivered a strong quarter with earnings of $3.9 billion and EPS of $2.20. Total bank Pre-Tax Pre-Provision (PTPP) earnings were up 13% year-over-year, excluding the impact of the U.S. strategic card portfolio, FX, and insurance service expenses, demonstrating robust underlying performance. This growth was fueled by higher fee and trading income in markets-driven businesses and solid volume growth in Canadian Personal and Commercial Banking.

The Canadian Personal and Commercial Banking segment continues to be a pillar of strength, delivering record revenue, earnings, deposits, and loan volumes in Q3 2025. Average deposits rose 4% year-over-year, with personal deposits up 4% and business deposits up 6%. Average loan volumes also increased by 4% year-over-year, driven by 3% growth in personal volumes and 6% in business volumes. Real Estate Secured Lending (RESL) volumes surpassed $400 billion, and credit card acquisitions reached their highest level in almost a decade, with balances up a robust 7% year-over-year. Net Interest Margin (NIM) for the segment was 2.83%, up 1 basis point quarter-over-quarter, primarily due to higher loan and deposit margins. This consistent performance highlights the segment's resilience and its ability to generate stable revenue streams, even as expenses increased due to technology spend and other operating costs.

The U.S. Retail segment, operating as TD Bank, America's Most Convenient Bank, is undergoing a profound transformation driven by AML remediation and balance sheet restructuring. In Q3 2025, core loans were up 2% year-over-year, with U.S. bank card balances growing 12% year-over-year to a new milestone of USD 3 billion. Home equity balances grew by 9%, small business by 5%, and mid-market and specialty businesses by 6%. The segment's total assets were reduced to USD 386 billion by quarter-end, reflecting the deployment of loan sale proceeds to pay down bank borrowings and ensuring compliance with the OCC's asset limitation. The investment portfolio repositioning, completed in Q3 2025, involved selling approximately $25 billion notional for an upfront loss of $1.3 billion pretax, but is expected to generate an NII benefit of approximately $500 million pretax in fiscal 2025. These actions have already improved the U.S. Retail segment's return on equity (excluding Schwab) by 140 basis points since Q4 2024. Net interest margin (NIM) in U.S. Retail was 3.19%, up 15 basis points quarter-over-quarter, reflecting the impact of balance sheet restructuring and normalization of liquidity levels.

Wealth Management and Insurance delivered record earnings and assets in Wealth in Q3 2025, alongside strong underlying business performance in Insurance. U.S. Wealth total client assets were up 12% year-over-year, with mass affluent client assets increasing by 26%. TD Asset Management secured key institutional mandates and continued to gain market share in its growing ETF franchise. TD Direct Investing saw trades per day rise 18% year-over-year, benefiting from traction in partial shares and its Active Trader platform. TD Insurance achieved strong premium growth year-over-year.

Wholesale Banking, operating as TD Securities, demonstrated the power of its broader platform by delivering over $2 billion in revenue for the third consecutive quarter in Q3 2025. This was driven by broad-based revenue growth as market volatility normalized and capital markets and advisory businesses accelerated. The integration of TD Cowen has been instrumental, with the combined franchise winning mandates that neither legacy business would have secured alone.

On a consolidated basis, TD's latest TTM financial ratios indicate a Gross Profit Margin of 47.17%, an Operating Profit Margin of 20.14%, and a Net Profit Margin of 17.76%. The bank's P/E Ratio stands at 8.89, with a P/B Ratio of 1.48 and a Dividend Yield of 3.85%. These figures, while reflecting a challenging period, underscore the bank's underlying profitability and commitment to shareholder returns.

Capital Strength and Liquidity Management

TD maintains a robust capital position, with a Common Equity Tier 1 (CET1) ratio of 14.8% in Q3 2025, reflecting strong internal capital generation. This provides significant flexibility for strategic investments and shareholder returns. The bank is over halfway through its share buyback program, having repurchased 46 million shares for over CAD 4 billion, part of the $8 billion intended to be deployed from the Schwab (SCHW) share sale proceeds.

Liquidity levels have also normalized, with the average Liquidity Coverage Ratio (LCR) for Q3 2025 at 138%. This is within the bank's comfortable operating range of 125% to 135%, and the elevated levels seen in prior quarters, partly due to Schwab share sale proceeds, are expected to normalize further as capital is redeployed.

Outlook and Guidance: A Transition Year with Strategic Focus

Fiscal 2025 is positioned as a transition year for TD, with management acknowledging the challenges in generating earnings growth due to ongoing AML remediation and strategic investments. The bank expects to host an Investor Day on September 29, 2025, to provide a comprehensive update on its strategy and medium-term outlook.

Expense Management: TD anticipates fiscal 2025 expense growth to be at the upper end of the 5% to 7% range, reflecting significant investments in governance and control, as well as business growth initiatives. This includes approximately USD 500 million pretax for U.S. BSA/AML remediation and related governance and control investments in both fiscal 2025 and 2026. To offset these costs, TD is undertaking a restructuring program, expecting to incur $600 million to $700 million pretax in charges over several quarters, but projecting annual run-rate savings of $550 million to $650 million pretax. These savings will be driven by workforce and real estate optimization, asset write-offs, and business wind-downs.

U.S. Retail Outlook: Leo Salom, President and CEO of TD Bank, America's Most Convenient Bank, expects the majority of U.S. AML management remediation actions to be completed by the end of calendar 2025, though significant work will continue into 2026 and 2027. He anticipates similar AML spend in fiscal 2026 as in 2025. Despite some expected contraction in the loan book through most of 2026 due to identified loan run-offs (an additional $18 billion identified beyond the $17 billion already reduced), Salom projects an inflection point towards the end of 2026, with the U.S. Retail segment capable of growing core loans at historical rates without breaching the asset limitation. He also expects a strong revenue dynamic in 2026, leading to net income after tax (NIAT) growth for the U.S. business.

Credit Quality: Ajai Bambawale, Chief Risk Officer, expects fiscal 2025 PCLs to fall within the range of 45 to 55 basis points, acknowledging that some further pressure on credit is anticipated as the credit cycle plays out. While impaired PCLs decreased quarter-over-quarter in Q3 2025, performing reserves were prudently increased by almost $600 million year-to-date for policy and trade uncertainty. Bambawale anticipates impaired PCLs to "gradually rise from these levels" as the impact of tariffs unfolds.

Risks and Challenges

The investment thesis for TD is subject to several key risks. The ongoing U.S. AML remediation program remains the top priority, and while significant progress has been made, the multi-year nature of the effort, subject to review by the monitor and acceptance by regulators (DOJ and FinCEN), introduces uncertainty regarding timelines and potential future costs. The asset limitation imposed by the OCC also restricts growth in the U.S. Retail segment, although management is confident in managing within these limits.

Macroeconomic and policy uncertainty, particularly related to global trade dynamics and tariff risks, poses a significant challenge. The potential for CUSMA/USMCA renegotiation and sector-specific tariffs creates business uncertainty and economic distortions, which could impact credit performance, especially in trade-exposed sectors. TD has proactively built approximately $600 million in reserves for policy and trade uncertainty, but the ultimate credit impact will depend on the magnitude and duration of these factors.

Furthermore, the competitive landscape in both Canada and the U.S. remains intense. While TD boasts strong brand recognition and an extensive distribution network, it faces pressure from rivals with advanced digital capabilities and aggressive growth strategies. The need for continuous investment in technology and digital innovation to keep pace with competitors could impact profitability if not managed effectively.

Conclusion

The Toronto-Dominion Bank is at a pivotal juncture, actively reshaping its future through a comprehensive strategic review and a determined focus on resolving its U.S. AML challenges. The core investment thesis rests on the bank's ability to successfully execute this transformation, leveraging its foundational strengths in Canadian Personal and Commercial Banking, Wealth Management, and Wholesale Banking, while simultaneously building a more resilient and profitable U.S. Retail franchise. The strategic divestitures, balance sheet restructuring, and aggressive investments in digital and AI technologies are critical steps towards unlocking long-term value and enhancing its competitive standing.

While fiscal 2025 is a transition year marked by elevated expenses for remediation and growth initiatives, management's concrete guidance on cost savings, NII benefits from balance sheet repositioning, and a projected return to NIAT growth in the U.S. by 2026 provides a clear roadmap. The bank's strong capital position and prudent provisioning for credit risks offer a buffer against macroeconomic uncertainties. For investors, TD represents an opportunity to invest in a diversified financial institution actively addressing its challenges and strategically positioning itself for future growth, with technological leadership playing an increasingly vital role in its long-term success. The upcoming Investor Day on September 29, 2025, will be crucial for further clarity on the bank's refined medium-term targets and strategic direction, offering deeper insights into its path toward sustained profitability and competitive advantage.