Earnings Call Transcript - TD Q4 2025

Operator, Operator

Good morning, everyone. Welcome to the TD Bank Group Fourth Quarter 2025 Earnings Conference Call. I would now like to turn the meeting over to Ms. Brooke Hales, Head of Investor Relations. Please go ahead, Ms. Hales.

Brooke Hales, Head of Investor Relations

Thank you, operator. Good morning, and welcome to TD Bank Group's Fourth Quarter 2025 Results Presentation. We will begin today's presentation with remarks from Raymond Chun, the bank's CEO; followed by Leo Salom, Group Head, U.S. Retail, after which Kelvin Tran, the bank's CFO, will present our fourth quarter operating results. Ajai Bambawale, Chief Risk Officer, will then offer comments on credit quality, after which we will invite questions from analysts on the phone. Also present today to answer your questions are Sona Mehta, Group Head, Canadian Personal Banking; Barbara Hooper, Group Head, Canadian Business Banking; Tim Wiggan, Group Head, Wholesale Banking; and Paul Clark, Senior Executive Vice President, Wealth Management. Please turn to the next slide. Our comments during this call may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially. I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results. The bank believes that adjusted results provide readers with a better understanding of how management views the bank's performance. Ray, Leo, and Kelvin will be referring to adjusted results in their remarks. Additional information about non-GAAP measures and material factors and assumptions is available in our 2025 annual report. With that, let me turn the presentation over to Ray.

Raymond Chun, CEO

Thank you, Brooke, and good morning, everyone. We wrapped up the year with another strong quarter, and I'm eager to discuss it alongside the progress we've made on our new strategic pillars. First, I want to give my view on the external environment. There's still a significant level of uncertainty regarding tariffs and Canada-U.S. trade dynamics, which particularly affect industries with high tariffs like steel and aluminum. Despite economic uncertainty influencing business and consumer confidence, Canada's economy and employment remain largely strong. Recent government actions, such as the Canadian Mutual Recognition Agreement, increased defense spending, the major projects office, and other incentives for private sector and foreign investment are expected to support economic activity as Canada prepares for CUSMA renegotiations. As one of Canada’s largest employers, we are committed to working with our clients and governments to strengthen the economy. In the U.S., the economy is performing well, with businesses and households benefitting from regulatory and monetary policy changes, and there's been a noticeable increase in investment activity in some sectors. With a strong presence along the Eastern Seaboard serving over 10 million American businesses and households, we are focused on helping them achieve their financial objectives. Throughout our business, TD is well positioned to navigate through this period and assist our clients in adapting to a changing environment. Before discussing our performance, I want to express our deepest condolences to the family and friends of Nadir Mohamed. We were fortunate to have him as a director from 2008 to 2023, and he made a significant and lasting impact on our organization. Our thoughts are with all who knew him. Now, let's move on to the next slide. During our Investor Day, we outlined our strategy to strengthen client relationships, simplify processes, and execute efficiently. I look forward to updating you on our progress each quarter. Our biggest growth opportunity lies in deepening client relationships across our businesses. This year, we achieved record penetration rates for personal credit cards and generated record referrals from the Canadian Personal Bank to our wealth division, and we’re just getting started. In TD Securities, we are harnessing our platform to deliver a comprehensive suite of services to our clients, including advisory and financing support for National Fuel Gas' recent acquisition of the CenterPoint business. As mentioned at Investor Day, AI represents a huge opportunity for TD, and we have concrete plans in place that are already yielding significant results. This year, we implemented around 75 AI use cases that created $170 million in value. These initiatives range from improving loan underwriting to generating intelligent leads to enhancing client relationships. For next year, we anticipate that our AI use cases will produce $200 million in incremental value, including efforts to reinvent end-to-end processes as described at Investor Day. We are strategically prioritizing our AI investments across areas such as customer acquisition, customer insights, and risk management, while ensuring strong governance and controls. In fiscal 2025, we saw a 26% year-over-year reduction in fraud losses, thanks to ongoing investments in fraud modernization across our systems and processes. We have a clear strategy designed to drive growth, returns, and long-term shareholder value. I continue to be confident in our ability to meet the medium-term targets shared at Investor Day. This year, we achieved 5% earnings growth, which was significantly better than we expected last year when we anticipated challenges in delivering earnings growth during a transition period. Our year-over-year expense growth slowed this quarter, allowing us to achieve positive operating leverage. We are on track to deliver 3% to 4% expense growth and positive operating leverage in fiscal 2026, in line with the targets we shared at Investor Day. TD had a strong Q4, and we are carrying that momentum into fiscal 2026. We expect to reach the 6% to 8% EPS growth and 13% ROE targets for fiscal 2026 laid out at Investor Day. Additionally, there is potential for upside to these EPS and ROE targets due to our strong business momentum and the positive outcomes we see from deepening relationships, simplifying our operations, and executing disciplined strategy, especially if favorable macroeconomic conditions persist and trade and tariff uncertainties lessen. Ajai and Kelvin will provide more details about our fiscal 2026 outlook shortly. Please turn to Slide 3. In Q4, we had a strong quarter, with earnings reaching $3.9 billion, EPS of $2.18, and a ROE increase of 110 basis points year-over-year. We saw strong fee and trading income in our markets-driven businesses and year-over-year volume growth in Canadian Personal and Commercial Banking. TD achieved positive operating leverage this quarter, and PCLs remained stable quarter-over-quarter, showcasing robust credit performance. Ajai will share more details soon in his remarks. We have shifted from an annual dividend review cycle to a semiannual cycle to better align shareholder returns with our earnings growth. Today, we announced a $0.03 increase in our dividend, raising it to $1.08 per share, reflecting our confidence in TD's future growth and earnings potential. As mentioned at Investor Day, we expect our earnings growth to pick up in the medium term. The bank's Q4 CET1 ratio was 14.7%, demonstrating strong capital generation during the quarter. At the end of the quarter, we were over three-quarters into our current $8 billion share buyback program, having repurchased 65 million shares for a total exceeding $6 billion. We expect to complete this share buyback by the end of the first quarter of 2026. At that time, as we detailed at Investor Day and subject to regulatory approval, we plan to initiate a new share buyback of between $6 billion and $7 billion. Through these two share buyback initiatives, we aim to effectively return all capital generated from the Schwab sale to our shareholders. For fiscal 2025, we reported a total payout ratio of 93%, factoring in share buybacks and common share dividends. Please turn to Slide 4. In Q4, we observed solid momentum across our businesses. Canadian Personal and Commercial Banking achieved record revenue, deposits, and loan volumes. We also set a record in digital sales for day-to-day banking products, continuing our trend of mobile leadership. Real estate secured lending exhibited strong sequential growth, yielding higher origination margins and record Q4 originations. In the credit card segment, we experienced our best year for cards acquisition in nearly a decade. In the Business Bank, loans rose by 6% year-over-year, reflecting growth in our commercial sector, alongside a 10% year-over-year increase in small business checking account openings. In U.S. retail, we maintained momentum, with core loans growing by 2% year-over-year. U.S. bank card balances surged by 14% year-over-year, marked by the strongest account acquisition in seven years. Our U.S. wealth division reported a 10% year-over-year increase in total client assets, with mass affluent client assets up by 21% year-over-year. Additionally, for the ninth consecutive year, the bank ranked first in small business administration lending within its footprint, highlighting our commitment to our communities from Maine to Florida. Leo will update us on our U.S. balance sheet restructuring and AML remediation in his remarks. Wealth Management achieved record earnings and assets, particularly in direct investing, with new accounts soaring by 27% and daily trades increasing by 37% year-over-year. As mentioned during Investor Day, direct investing serves as an acquisition engine for the bank, creating substantial opportunities to deepen client relationships. This year, we saw record flows of $3.9 billion from direct investing to advice, along with record ETF sales of $1.6 billion this quarter. For the year, TD's ETF market share increased by 48 basis points. In Insurance, we have strengthened our position as Canada's leading digital direct insurer, achieving record digital adoption, particularly with our new usage-based auto insurance program. In Wholesale Banking, we reached a record revenue of $2.2 billion, demonstrating the strength of our client franchise and broad capabilities, benefiting from favorable conditions in capital markets. We also achieved record net income and ROE above 12%, executing on RWA optimization opportunities to grow revenue significantly compared to RWA growth over the quarter and fiscal year overall. As another indicator of our strong momentum, we climbed to sixth place in the U.S. corporate access rankings, reflecting the strength of our relationships with corporate and institutional clients and our ability to deepen our market share. Please turn to Slide 5. Before handing it over to Leo, I want to extend my gratitude to all our colleagues at the bank. Every day, you come to work with a commitment to our clients and a dedication to our bank that is truly impressive. During Investor Day, we laid out a clear strategy aimed at accelerating growth and delivering leading performance. You, our colleagues, are the foundation of TD's strength, and I am confident we will achieve our goals. With that, Leo, it's over to you.

Leo Salom, Group Head, U.S. Retail

Okay. And thank you, Ray, and good morning, everyone. Please turn to Slide 6. It's now been more than a year since we announced the global resolution, and we've made significant progress against our U.S. AML remediation program. As you've heard me talk about previously, we have an outstanding AML leadership team guiding us through this critical work, and we've completed a number of key milestones this year, such as the deployment of the next-generation transaction monitoring system, improved technology for investigation practices, and the implementation of our first AI-powered financial crimes automation platform and machine learning case triage model, which improved our team's productivity and risk assessment accuracy. This quarter, we deployed another round of machine learning enhancements to our transaction monitoring system. These AI and machine learning tools are not only improving the efficacy and accuracy of our program, they are important levers in creating an efficient and sustainable program that will serve us well into the future. We also introduced a new and enhanced system for submitting unusual transaction referrals, improving the end-to-end process from intake through investigation through reporting. UTRs are a key tool in facilitating early detection, and by increasing both the accuracy and efficiency with which our teams submit these reports, we are doing our part in detecting, reporting, and preventing criminal activity. Turning to our look-back activities. I'm very pleased to say that this quarter, we made good headway against the suspicious activity look-back reviews required under the OCC Consent Order. Importantly, thanks to the hard work and dedication of our teams, we've completed the majority of our U.S. management remediation actions this year, in line with our previous commitment. That being said, we're not at the end of the job, and AML remediation remains our top priority with significant work ahead and important milestones to come in 2026 and 2027. For fiscal 2025, total U.S. BSA AML remediation and governance and control investments in the segment were $507 million, in line with our guidance. And while investments will fluctuate from quarter to quarter, we continue to expect similar investments in fiscal 2026. Now I'd like to give you an update on the balance sheet restructuring activity. So please turn to Slide 7. You will recall this effort has 2 critical objectives. First, to strictly comply with and maintain a buffer to the asset limitation; and second, to ensure that we can continue to serve our clients and communities as their needs evolve. We made meaningful progress against our objectives this quarter. At the end of the fiscal quarter, total assets were $382 billion, reflecting continued runoff of noncore lending portfolios. We've achieved and exceeded the 10% asset reduction that we announced on October 10th, 2024, creating $52 billion of capacity versus the asset limitation. With the actions taken to date, coupled with selective actions in fiscal 2026 and beyond, U.S. Retail has the capacity to grow core loans at a rate consistent with our historical performance through the medium term without risking a breach to the asset limitation. As disclosed in the third quarter, we completed the U.S. investment portfolio repositioning by selling lower-yielding investment securities and reinvesting the proceeds into a similar composition of assets at higher rates. During the fourth quarter, we identified additional bonds and sold approximately $7 billion notional for an upfront loss of $274 million pretax. In the aggregate, through our investment portfolio repositioning, we have sold approximately $32 billion notional for an upfront loss of $1.6 billion pretax. The investment portfolio repositioning generated an NII benefit of approximately $500 million pretax in fiscal 2025 and is expected to generate an NII benefit of approximately $550 million pretax in fiscal 2026. We expect our investment portfolio repositioning, together with our asset reduction program, to help us improve return on equity through fiscal 2026 and deliver on our target of 9.5% ROE. We aim to deliver approximately $20 billion of RWA release, which will help support our medium-term target of 13% ROE. With that, let me turn it over to Kelvin now.

Kelvin Vi Tran, CFO

Thank you, Leo. Please turn to Slide 8. TD delivered a strong quarter. Total bank PTPP was up 25% year-over-year after removing the impact of the U.S. strategic card portfolio, FX and insurance service expenses. We've shared the details on Slide 26. Revenue net of ISE grew 15% year-over-year or 12%, excluding the $388 million net negative impact of severe weather-related events in the prior year, reflecting growth across all our businesses. Expenses increased 10% year-over-year, with approximately 1/3 of the growth driven by variable compensation, foreign exchange, and the impact of the U.S. strategic card portfolio. We delivered positive operating leverage while taking the opportunity to accelerate investments to drive business growth. Impaired PCLs were relatively stable quarter-over-quarter, reflecting strong credit performance and performing provisions were also stable quarter-over-quarter. Please turn to Slide 9. Through our restructuring program, we are reducing structural costs and creating capacity to invest to build the bank for the future. We expect to conclude the restructuring program next quarter with approximately $125 million pretax in additional charges for a total expected program size of approximately $825 million pretax. We identified additional opportunities to drive productivity, including U.S. store optimizations as part of the distribution transformation described at Investor Day and impacts from organizational reviews. We expect to generate higher savings from our restructuring program, with annual run rate savings now estimated at approximately $750 million pretax. Please turn to Slide 10. Canadian Personal and Commercial Banking delivered record revenue, deposit, and loan volumes. Average deposits rose 4% year-over-year, reflecting 3% growth in personal deposits and 5% growth in business deposits. Average loan volumes rose 5% year-over-year, with 5% growth in personal volumes and 6% growth in business volumes. Strong loan growth across our businesses this quarter capped a record year in RESL proprietary channel originations and in retail auto finance originations. Net interest margin was relatively stable quarter-over-quarter. The impact of balance sheet mix was partly offset by higher RESL origination margins. Tractor on and off rates were offset by rate reduction. As we look forward to Q1, with similar drivers, we again expect NIM to be relatively stable. Expenses increased year-over-year, reflecting higher employee-related expenses and other operating expenses. Please turn to Slide 11. U.S. Retail sustained business momentum and continued to execute against critical deliverables. Deposits, excluding sweeps, were down 1% year-over-year and were up 1% excluding targeted runoff in our government banking business. Core loans grew 2% year-over-year, reflecting continued strength in bank card, home equity and middle market. Net interest margin was 3.25%, up 6 basis points quarter-over-quarter, driven by higher deposit margins, higher loan margins from U.S. balance sheet restructuring, and normalization of elevated liquidity. As we look forward to Q1, we again expect NIM to moderately expand. Expenses increased USD 84 million or 5% year-over-year, reflecting higher governance and control investments and higher employee-related expenses, partially offset by costs associated with the extension of the Nordstrom program agreement last year. Overall, we continue to expect U.S. Retail expense growth in the mid-single-digit range this year. We remain focused on productivity initiatives to help fund investments in our core franchise. These include the conversion of Nordstrom strategic card customers onto our servicing platform in the first half of fiscal 2026 and investments in our digital and mobile capabilities and technology modernization. Please turn to Slide 12. In Q4, the Wealth Management business served almost 2.7 million clients fired on all cylinders. We saw client growth, net asset growth, strong trades per day, and market appreciation. We saw strong fundamentals in insurance with double-digit premium growth in general insurance in fiscal 2025 and more than 3.5 million quotes, which drive future client acquisition. For the Wealth Management and Insurance segment overall, revenue net of ISE was up 39%, with approximately 2/3 of the growth driven by the impact of prior year catastrophe claims. Expenses were up year-over-year, reflecting higher variable compensation, technology spend supporting business growth, and employee-related expenses. Please turn to Slide 13. Wholesale Banking delivered record revenue and net income, driven by broad-based growth across Global Markets and Corporate and Investment Banking. This quarter, we benefited from a constructive backdrop, especially in capital markets, and our pipeline of future deals remains robust. Reported expenses include acquisition and integration-related charges for TD Cowen. We do not expect these charges to continue going forward. Adjusted expenses increased year-over-year, reflecting higher variable compensation and spend supporting business growth, including technology. These investments are part of the strategy we outlined at Investor Day. We are continuing to mature our platform to support our ambition to become a top 10 North American investment bank. Please turn to Slide 14. Corporate net loss for the quarter was $195 million, largely flat year-over-year. Higher net corporate expenses were offset by higher revenue from treasury and balance sheet management activities. Please turn to Slide 15. The common equity Tier 1 ratio ended the quarter at 14.7%, down 15 basis points sequentially. We delivered strong internal capital generation this quarter, which was partially offset by RWA growth, excluding FX. The bank repurchased 19 million common shares under its share buyback program in Q4, which reduced CET1 by 33 basis points. And we continue to expect to complete our current share buyback by the end of Q1, subject to market conditions. Please turn to Slide 16. At this time last year, we noted that 2025 would be a transition year for the bank. Throughout the year, we took charges as we restructured our U.S. balance sheet. We do not expect balance sheet restructuring charges to continue going forward. Looking back over the year, I'm pleased with that we largely delivered what we said we would deliver in 2025. And in many cases, we delivered more. Even with a prudent reserve build for policy and trade uncertainty, fiscal 2025 earnings were up 5% year-over-year. And reflecting our commitment to return value to shareholders, we bought back over $6 billion in shares this year, helping drive EPS up 7% year-over-year. As Ray said, TD is entering fiscal 2026 in a position of strength. We expect to achieve our fiscal 2026 targets with upside potential driven by strong business momentum and execution against the strategy we laid out at Investor Day, supported by tailwinds if positive macroeconomic conditions continue and from PCLs if trade and tariff uncertainty reduces. With that, Ajai, over to you.

Ajai Bambawale, Chief Risk Officer

Okay. Thank you, Kelvin, and good morning, everyone. Our key message for the quarter is that credit results for the bank are strong. Please turn to Slide 17. Gross impaired loan formations were 23 basis points, a decrease of 3 basis points or $256 million quarter-over-quarter. The decrease was largely recorded across the wholesale banking and U.S. commercial lending portfolios, partially offset by higher formations in Canadian personal and commercial. Please turn to Slide 18. Gross impaired loans were stable quarter-over-quarter at 56 basis points. Please turn to Slide 19. Recall that our presentation reports PCL ratios, both gross and net of the partner share of the U.S. strategic card PCLs. We remind you that U.S. card PCLs recorded in the corporate segment are fully absorbed by our partners and do not impact the bank's net income. The bank's provision for credit losses was stable quarter-over-quarter at 41 basis points as higher provisions in the Canadian Personal and Commercial segment were offset by lower provisions in the wholesale and U.S. Retail segments. Please turn to Slide 20. Impaired PCLs were $943 million, increasing $39 million quarter-over-quarter, driven by the Canadian and U.S. consumer lending portfolios, including the impact of seasonal trends in the U.S. card and auto portfolios. Performing PCL was $39 million, a decrease of $28 million quarter-over-quarter. The current quarter performing build largely reflects the adoption impact of a model update in our Canadian credit card portfolio, partially offset by improvements in the Canadian and U.S. economic forecasts. Please turn to Slide 21. The allowance for credit losses increased $40 million quarter-over-quarter, reflecting the adoption impact of a model update in our Canadian credit card portfolio and a $47 million impact from foreign exchange, largely offset by lower impaired allowance in the Canadian commercial and wholesale lending portfolios, driven by resolutions and some improvement in the Canadian and U.S. economic forecasts. Now in summary, the bank exhibited strong credit performance in the fourth quarter, reflected in lower gross impaired loan formations and stable gross impaired loans and PCLs. Our fourth quarter credit results capped off a strong fiscal 2025 as elevated performing provisions for policy and trade uncertainty were offset by good underlying credit performance, resulting in a full year PCL rate of 47 basis points, stable year-over-year and within the guidance we offered at the start of the year. Looking forward, while economic uncertainties remain elevated, we expect PCLs to be in the 40 to 50 basis points range, an improvement from the 45 to 55 basis points range guided for fiscal 2025. Though economic uncertainty remains elevated, TD is well positioned considering our prudent provisioning, broad diversification across products and geographies, our strong capital position, and our through-the-cycle underwriting standards. With that, operator, we are now ready to begin the Q&A session.

Operator, Operator

The first question comes from John Aiken at Jefferies.

John Aiken, Analyst

I apologize for the technical issues. Ajai, I understand that most of the decline in our domestic consumer portfolio is tied to residential mortgages, which don’t pose significant risk. I would appreciate your insight into why we are experiencing year-over-year deterioration in residential mortgages, yet the HELOC portfolio has not shown any significant decline. What are the underlying factors at play? Additionally, when can we expect any incremental impairments on residential mortgages to start affecting the HELOC portfolio?

Ajai Bambawale, Chief Risk Officer

Yes, let me discuss Canadian housing and our asset quality in general. The outlook for Canadian housing is actually somewhat positive due to pent-up demand and an improved job market. Our customer profile remains strong across all of our products, including residential mortgages and HELOCs. In our uninsured Canadian residential mortgages, less than 1% have credit scores below 650 and loan-to-value ratios over 75%. Additionally, our current loan-to-value ratios are low, standing at around 56%. Regarding quality, I see consistent strength in residential mortgages and HELOCs. Delinquency rates across both categories are stable, with no significant differences between them. The greater than 90-day delinquency rate has slightly increased by 1 basis point to 15 basis points, which is a pre-COVID figure. Charge-offs remain very low, and while impaired provisions for credit losses are slightly higher at $6 million, this is still relatively minimal. As for gross impaired loans, those have increased by about $55 million to $60 million, primarily from loans originated between 2022 and 2024 at higher rates, showing migration mainly from the marginal segment. There is a slight uptick in residential mortgages, but I'm not concerned about the strength of that portfolio; I believe it remains strong. I hope this answers your question.

Operator, Operator

The next question comes from Ebrahim Poonawala at Bank of America.

Ebrahim Poonawala, Analyst

Maybe for Kelvin or Ray, in terms of capital, with the CET1 at 14.7% and half of retained earnings going into dividends and half into buybacks, how should we think about this? Do you believe you can adjust the capital ratio to the mid-13s over the next year due to RWA growth? Should we anticipate that the pace of buybacks will significantly increase in the upcoming quarters?

Raymond Chun, CEO

I’ll begin and then hand it to Kelvin. I believe there are opportunities and favorable conditions as we approach fiscal 2026, both in terms of earnings per share and return on equity. However, I must emphasize that this depends on the prevailing macroeconomic conditions and the ongoing uncertainties surrounding tariffs and trade. As seen in our Q4 results, the momentum of our businesses should positively impact our return on equity. Regarding capital, as mentioned during our Investor Day, we are adopting a more disciplined approach to capital allocation. Our first priority is to allocate capital organically, which involves assessing all of our existing portfolios, including noncore businesses. We will continue to evaluate these and ensure that any noncore businesses generate appropriate returns. Additionally, we will ensure that we allocate capital within our core businesses to those that provide the highest long-term return on equity to enhance shareholder value. As we stated publicly at Investor Day, we will consistently return capital to shareholders if there is no organic need for it. Now, I'll pause and let Kelvin discuss RWA.

Kelvin Vi Tran, CFO

Sure, it's Kelvin. As Ray mentioned, we intend to finish our current share buyback program by the end of the first quarter and then start a new buyback program of $6 billion to $7 billion, pending regulatory approval. We will also aim to reduce our CET1 ratio as much as possible, depending on market conditions. The key point is that we continue to generate substantial capital growth each year. However, this is contingent on market factors. Currently, it appears we won't reach the 13% goal by 2026, but perhaps in 2027.

Ebrahim Poonawala, Analyst

That's helpful. And if I can have a follow-up for Leo, maybe on Slide 6, Leo. So I just want to make sure I understand this correctly. I understand you need to demonstrate sustainability, nothing needs to break in a material way. But just hypothetically, if we go through all of '26 through the sustainability review, I'm just wondering in a world where there was no big sort of leakage in terms of all the systems that you put in place. Is there anything different that needs to happen in 2027? And I'm asking this in the context of a U.S. regulatory framework that's becoming a little bit more pragmatic and not sort of belaboring banks that have had issues in the past. I'm just wondering, is there a scenario where assuming you check all the boxes in '26 on sustainability, where maybe the asset cap could get reviewed as early as '27?

Leo Salom, Group Head, U.S. Retail

Thank you for your question, Ebrahim. I won't comment on the timing of any relief. However, I want to provide some context to your question. We've made significant progress in implementing the management actions. We've improved areas such as our transaction monitoring platform, customer risk rating tools, and AI tools. We feel confident about the reduction of residual risk in our overall AML program. As I've mentioned before, we have a couple of stages. Every management action will be subject to internal challenge and ultimately internal audit validation, which is an important process, much of which will occur in 2026. We are also collaborating closely with the monitor and the regulator to ensure we can demonstrate long-term sustainability. Both of these stages are critical to the process. It will be essential to show not only that we've taken the right actions and reduced residual risk, but also that we can prove this over time to earn release from the consent order and potentially any interim relief. We are making good progress, and we will keep you updated in the coming quarters. I feel very comfortable with our AML remediation plan at this point.

Operator, Operator

The next question comes from Gabriel Dechaine at National Bank.

Gabriel Dechaine, Analyst

The margin outlook seems relatively stable. In Canada, I've noticed that some of your peers are benefiting from wider mortgage spreads, and I'm curious if this could positively impact your outlook. Regarding expenses, you previously guided for 5% to 7% growth this year, but it came in at 10%, including 10% in Q4. You mentioned some year-end investments you made due to strong revenue growth. As for 2026, you're now guiding for mid-single digits and have taken another restructuring charge. Do these investments enhance your efficiency? Are you in a better position to deliver, and are you more committed to this goal?

Sona Mehta, Group Head, Canadian Personal Banking

Thank you, Gabe. Sona, I'll start with your first question about Canadian margins, specifically RESL, and provide some insight into what's influencing our net interest margin. Kelvin mentioned three factors earlier. Regarding RESL, we experienced a strong volume growth quarter. I'm particularly pleased to see that we're adhering to our strategy focused on speed and specialization to drive growth, maintaining excellent pricing discipline. This approach has allowed us to achieve sequential margin expansion in origination, which positively impacts our net interest margin. However, when looking at overall Canadian P&C net interest margins, the strong loan growth outpacing deposits has a dilutive effect on the balance sheet and, consequently, on net interest margin. Additionally, as Kelvin mentioned, the impact of the tractor on-off situation is significant. The degree of benefit to net interest margin is highly dependent on the maturing tractor rate. If I may continue—yes, please go ahead.

Gabriel Dechaine, Analyst

That tractor tailwind is sort of flattening out, I guess. Is that what you're saying?

Sona Mehta, Group Head, Canadian Personal Banking

Yes, in a sense. And like that really is reflective of the maturing tractor profile. So if I go back several years ago, when rates were the lowest, we locked in less tractors through prudent treasury management. And so as we fast forward to today, our tractor on-off lift was largely offset by the recent Bank of Canada rate cut. So on total, many factors, but that's what's driving stability in NIM.

Gabriel Dechaine, Analyst

I'm not entirely sure about the commentary on mortgages since some other banks are quite optimistic about it. They had a large number of originations in 2021 and 2022 during a very competitive market, and the renewals are coming in at better spreads. Is that not a situation that would be advantageous for you?

Sona Mehta, Group Head, Canadian Personal Banking

No, absolutely. It is something that we are seeing, Gabe. It's been several quarters. we've had positive expansion. And so as this accumulates, that becomes a broader tailwind.

Raymond Chun, CEO

The other thing, Gabe, I think you'll see in our mortgage portfolio, and Sona has commented on that on a number of occasions is just the mix of the mortgages, right? And so you're going to see more and more proprietary mortgages that are booked through our proprietary channels, whether it's our branches or our MMS, which are both proprietary and obviously, better margin in those, and you're seeing that margin expansion in our residential book while we continue to take market share and loan and mortgage growth, as you saw on a quarter basis. So I think it's a good story from both a volume perspective, but also from a mix and margin expansion in the RESL book that you're going to continue to see favorability as we play through.

Gabriel Dechaine, Analyst

All right. Then on the expenses...

Raymond Chun, CEO

Regarding your question about expenses, let me clarify a few points. The 5% to 7% guidance we provided earlier this year was based on expectations of relatively flat earnings year-over-year, but we actually achieved a 5% earnings growth. The expenses you’re seeing reflect this positive earnings performance. Additionally, we have been indicating that you would notice a moderation in expenses on a quarter-over-quarter basis, and we have seen that from Q3 to Q4. When considering variable costs and foreign exchange influences, our expense growth for Q4 is around 7%, and we are on track for 3% to 4% expense growth by 2026, which I am confident we will achieve. This confidence stems from the six expense categories we outlined during Investor Day, where we identified specific initiatives and progress has already begun. Of the $2.5 billion in expense reductions we’ve committed to over the medium term, $900 million will occur in 2026—$500 million from restructuring carried over from 2025, and we have a solid plan for the additional $400 million. Lastly, it’s crucial to note that we’ve consistently delivered positive operating leverage, as evidenced by TD Bank's performance over the last two quarters, and we anticipate this will continue into fiscal 2026. Therefore, I am fully committed to our Investor Day commitments, and effective cost management is a key strategic focus for us.

Operator, Operator

The next question comes from Doug Young at Desjardins.

Doug Young, Analyst

Hopefully, this will be relatively quick. But Leo, you set out a target at the Investor Day, and thanks, Ray and everyone for all the other targets and guidance provided in the remarks. But Leo, you set a target of USD 2.9 billion NIAT for fiscal '26 at the Investor Day. Just wondering how you're feeling about that as you sit and look at today and all the different variables, macro rates, balance sheet restructuring expenses. Can you unpack that?

Leo Salom, Group Head, U.S. Retail

Sure, Doug. I’d like to discuss the quarter as an indicator of the momentum as we head into 2026. We are pleased with the quarter's revenue growth of 7%, driven by a 7% increase in net interest income due to 6 basis points of net interest margin expansion. Additionally, we experienced approximately 11% growth in fees, with contributions from service fees, lending fees, and wealth management all driving a double-digit increase. I believe this momentum is sustainable as we move into 2026. Regarding expenses, we saw a moderation in our growth profile in the fourth quarter, with expenses up 5%. However, we managed to achieve positive operating leverage of 232 basis points, and we remain committed to our guidance of mid-single-digit expense growth, feeling quite comfortable with that. As Ajai mentioned, our provision for credit losses was $220 million, which reflects a decrease both quarter-on-quarter and year-on-year, marking the lowest level since the last quarter of 2023. Looking at all fundamental indicators, I am confident in our guidance of a $2.9 billion net income after tax target for the year, as well as our return on equity. Our return on equity for the quarter reached 9.3%, showing an improvement of 180 basis points since the fourth quarter of last year. While there is ongoing macro uncertainty and potential rate declines that may introduce some challenges for next year, I am quite confident about the underlying business momentum and the guidance we shared on the September Investor Day.

Doug Young, Analyst

I appreciate it. However, I noticed that while insurance is a small segment, the earnings were quite weak. I was somewhat surprised considering this quarter had relatively low catastrophe losses compared to last year, at least based on the companies I follow. Could you clarify if there are any unusual factors, such as actuarial assumption reviews, affecting the insurance results that contributed to the weaker bottom line?

Raymond Chun, CEO

Thanks, Doug. From an insurance standpoint, I look at the business over the full year. When considering the full year, gross written premiums have shown robust performance, with a 10% increase in General Insurance gross written premiums. As stated during the Investor Day, our aim is to double the size of our home and auto business by 2029. Evaluating the year as a whole, the performance has been strong, with a return on equity of 24.4%, slightly above our expectations. In response to your specific question about Q4, one adjustment we made throughout 2025, which became more noticeable in Q4, was to ensure profitable growth across all regions of our insurance business. We rebalanced certain areas with higher severe weather risks, and this adjustment will enhance the resilience and stability of our earnings going forward. I am very confident in the commitments we made at Investor Day regarding the insurance business, and we took the opportunity in Q4 to adjust our geographical focus and profitability in high catastrophe zones.

Doug Young, Analyst

So you moved out of the high CAT zones or you were in high CAT zones and therefore, that impacted Q4, and therefore, you've moved out of that, and that should benefit you going forward? Is that...

Raymond Chun, CEO

Yes. Just a little less concentration. And so where we had higher concentration in some of the high severe weather zones, we've moderated the concentration there while accelerating growth in 2026 going forward in the geographies with less CAT exposure.

Operator, Operator

The next question comes from Paul Holden at CIBC.

Paul Holden, Analyst

I want to ask a couple of questions on deposit growth, maybe starting with Sona because you already gave some flavor on NIM sort of tailwinds and headwinds and you mentioned that deposits is not quite growing at the same pace as loans. So maybe you can talk about why that is and what TD is doing to accelerate particularly low-cost deposit growth.

Sona Mehta, Group Head, Canadian Personal Banking

Yes, definitely. Thank you for the question, Paul. I want to begin by saying that this has been an exceptionally strong quarter, completing an impressive year. We've achieved the highest growth across our three main product lines in the Canadian Personal Bank, which includes deposits, cards, and RESL. We're quite optimistic about the growth momentum we're experiencing. Regarding the mix of demand deposits and term deposits, we're seeing a clear shift similar to what is happening in the industry, with non-term deposits growing at a much faster rate than term deposits. It's important to note that we start from a solid position in non-term deposits; as we mentioned during our Investor Day, 86% of our new clients open a checking or savings account, which continues to enhance our favorable portfolio mix. Currently, 69% of our deposits are in non-term deposits, compared to the industry average in the mid-50s. Overall, we are very comfortable with the trends in the industry and especially with what we're observing among our clients.

Paul Holden, Analyst

Okay. So no reason to suggest any kind of change in trend then in the near term?

Sona Mehta, Group Head, Canadian Personal Banking

Correct.

Paul Holden, Analyst

Okay. So I also wanted to ask Leo about deposit growth there. It's down a little bit Q-over-Q and year-over-year. I'm not going to make a big deal of it because it's not down a lot, but still down. Like how should we think about that in '26? Should we start to see those personal deposits growing again? Or do they continue to shrink as maybe you continue to rationalize the retail store count? Just help us think through that.

Leo Salom, Group Head, U.S. Retail

Sure, Doug. Thank you. So if you look at our deposit numbers on a headline basis, they were down slightly. The runoff is really coming from the Schwab sweep deposits running off essentially as planned. We had indicated that under the new agreement, Schwab did have the ability to bring down the overall level of sweep deposits and they're executing that plan as per the agreement. In addition, we've targeted the government banking collateralized portfolios, those that provide us very little liquidity, largely commoditized in terms of pricing. We targeted about $5 billion of that portfolio for runoff, and that was aligned to the overall portfolio balance sheet restructuring activity. In addition, we have taken from about, as you know, earlier this year, we had taken a very defensive posture in terms of pricing to defend our deposit base. As we move through the year, as we've made progress on the balance sheet restructuring on the lending side or on the asset side of the house, we've also looked at our deposit business and implemented much more pricing discipline around some of our higher-priced deposit categories, both in consumer and corporate to make sure that we are managing healthy deposit margins. And in the quarter, we saw a 5 basis point expansion in deposit margins as a result of the actions that we're taking. So given where we are in the U.S., given the restructuring activities, we are being more selective around our pricing, and we have the opportunity to do so, and that is translating into some margin expansion for us. So to your point with regards to the outlook, absolutely, I expect us to go back to a growth posture, but particularly around our core deposits, our core checking account interest and noninterest-bearing checking account balances, we believe that's critical for long-term profitability. And so we did provide guidance as part of Investor Day that we would target mid-single-digit deposit growth rates over the MTO period, and I fully expect us to go back to that profile.

Paul Holden, Analyst

Okay. Is it too early to ask for that in '26 or not?

Leo Salom, Group Head, U.S. Retail

I think we've already provided enough guidance at this point. So maybe next quarter.

Raymond Chun, CEO

Maybe I can just ask Paul Clark to jump in. I do think we have a terrific momentum in what we said at Investor Day on referrals from retail to wealth and the momentum that we see there because that, to me, is also another significant deepening of our client relationships and will play into sort of our volume story as we move forward.

Paul Clark, Senior Executive Vice President, Wealth Management

Yes. Thanks, Ray. For the full year, we saw over $31 billion in assets as a result of our relationship with retail and commercial. So this is closed referred business. In the quarter, the number was over $7 billion, which is just a testament to the momentum that we continue to gain. When you think about that in the context of Sona and Barb's business, but predominantly Sona, the way that you have to think about that is for every dollar that Sona sends us, we're consolidating $3 roughly from our competitors. So in the quarter, that results in 2 things. Sona graciously sends us business, which is obviously going to impact our numbers, but we're consolidating from our competitors away. And if you remember at Investor Day, we committed to get that number to $40 billion annually, and we're already up 11% year-over-year. So just great momentum from both Sona and Barbara in the context of this.

Operator, Operator

The next question comes from Sohrab Movahedi at BMO Capital Markets.

Sohrab Movahedi, Analyst

Ray, I wanted to focus on Slide 16. You have some targets for 2026, including 6% to 8% adjusted EPS growth. Could you share which business segments are expected to exceed that range and which might fall a bit short? In other words, how did you arrive at those numbers by business segment?

Raymond Chun, CEO

Sure, I'll begin. You've heard from Leo and Sona about the excellent momentum we're experiencing. I’d also like to invite Tim to share his insights. When we examine our Q4 results, we see strong performance across all our business segments. There's momentum in each area. As I mentioned earlier, we anticipate positive trends in earnings per share and return on equity as we move toward 2026, largely driven by our fee income sectors and market-driven operations in TD Securities and Wealth Management. Moreover, as Leo noted, the fundamentals in our core banking businesses in Canada and the United States are even stronger than we expected at our Investor Day, right as we concluded Q4 and transitioned into the new fiscal year. I’ll turn it over to Tim and Paul to discuss their specific areas, as they contribute significantly to our fee income, and then Barb can elaborate on the performance of the business bank. This will provide you with a comprehensive overview of all our business segments following Sona and Leo's earlier comments.

Tim Wiggan, Group Head, Wholesale Banking

Thanks, Ray. And Sohrab, I would just say, obviously, an exceptionally strong Q4, a record revenue and NIAT number. I would say that the shape of the year continued to play out in favor of investment banking in the second half of the year. And so if I look at Q4, specifically for our investment banking business, we had a record revenue quarter, exceeding Q2, which obviously had Schwab in it. Early days for Q1, although I will say that the momentum is carrying through into the new fiscal year. And finally, something that we talked about at the Investor Day, a tremendous amount of focus on capital discipline and optimization, and that applies both to the market side as well as the loan book and investment banking, which accounts for about 40% of our overall RWA. And so if you look at the ROEs, obviously high in the quarter at 12.4%, up close to 500 basis points. But more importantly, if we look at revenue growth, the RWA growth in Q4 came in at 2.6x and 1.6x for the year as a whole. So I would say, overall, results for the year exceeded our expectations. We had talked about delivering anywhere from $375 million to $425 million in NIAT on average per quarter, and we're at the high end there and exceeded our revenue targets per quarter that we expected, which were $1.8 billion. So I feel very good about the momentum that we showed in Q4 and thus far carrying over nicely into the new fiscal year.

Leo Salom, Group Head, U.S. Retail

The only thing I'd add on ours, and I know Kelvin took you through the numbers and people tend to focus on the top line revenue line at 16% year-over-year. And each of our businesses have had tremendous market share growth this year, which bodes well for earnings next year. But what I would tell you, I've been most impressed with this year is just the focus on efficiency. Our efficiency ratio through the year improved about 250 basis points, and that really sets us up nicely as we head into next year. ROE for the full year was just over 62%, and we continue to see strong momentum this quarter and heading into 2026.

Barbara Hooper, Group Head, Canadian Business Banking

Thanks, Sohrab. So for the Canadian Business Bank, we are seeing very strong momentum as well. We laid out the strategies at Investor Day that we are looking at to accelerate our growth. And I'm happy to report that we did add about 200 incremental frontline bankers in 2025. Almost half of those were in small business banking, and we made those additions a little bit earlier in the year. And we did see in our results in Q4, a pickup in our new client originations and our deposit growth. We're looking to add more small business bankers in 2026. And so we expect good momentum to continue. We also added to our commercial banking that was a little bit later in the year. So I don't think we're really seeing a significant amount of benefit in Q4, but we certainly expect to see that in '26. So we're feeling very positive.

Raymond Chun, CEO

Sohrab, I hope that gives you a sense of the momentum that we're carrying.

Sohrab Movahedi, Analyst

Yes, that's very helpful. And I just wanted to put Kelvin on this but and get him to clarify something. In the context of buybacks, I think a couple of times you mentioned subject to market conditions. So under what conditions would you not do the buyback?

Kelvin Vi Tran, CFO

The speed at which you can buy depends on the market's volatility and the amount you can buy back from a regulatory standpoint. If market conditions are favorable like they were earlier this year, we would take more aggressive action in that area.

Sohrab Movahedi, Analyst

So you're price sensitive?

Kelvin Vi Tran, CFO

Not really, but at the margin, we would be.

Operator, Operator

There are no more questions in the queue at this time. I would now like to return the call to Mr. Raymond Chun for closing remarks.

Raymond Chun, CEO

Thank you, operator, and thank you, everyone, for joining us today. We certainly appreciate your questions and comments. TD delivered for its stakeholders in Q4 with robust top line growth, positive operating leverage and strong credit performance. We are well positioned for the year ahead. So let me take a moment to wish you and your families all the best for the holiday season, and we certainly look forward to connecting in the new year. Thank you, everyone.

Operator, Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.