Toronto Dominion Bank (TDBCP) Q2 2026 Earnings Call Transcript

Good morning, everyone. Welcome to the TD Bank Group Second Quarter 2026 Earnings Conference Call. I would now turn the meeting over to Ms. Brooke Hales, Head of Investing Relations. Please go ahead, Ms. Hales.

Thank you, Operator. Good morning, and welcome to TD Bank Group's Second Quarter 2026 Results Presentation. We will begin today's presentation with remarks from Raymond Chun, the bank's CEO, followed by Leo Salome, Group Head, U.S. Banking, after which Kelvin Tran, the bank's CFO, will present our second quarter operating results. Ajay 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 Canadian Personal Banking, Barbara Hooper, Group Head, Canadian Business Banking, Paul Clark, Group Head, Wealth Management and Insurance, and Tim Wigan, Group Head, Wholesale Banking. Please turn to the next slide. 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 materials factors and assumptions is available in our Q2-2026 MD&A. Please turn to the next slide. I will now hand the presentation over to Ray. year-over-year.

TD is executing against the strategies and targets that we shared at Investor Day. In fact, in many cases, the bank is on track to send EPS growth and 13% ROE targets for fiscal 2026, provided that the current macroeconomic conditions can perform this quarter both in Canadian personnel. Impaired PCLs decline driving structure while at the same time innovation dividend increase bringing our dividend to a dollar 12 14.3 lending volumes grew five this this is based on the annual we again achieve small business credit in the business bank loans are upset in TD Auto Finance nice the game this year rank in dealer satisfaction you will hear more about offsetting balance business loans up one point this quarter middle market lending balances were up 13% year-over-year in u.s. proprietary u.s. banking and deep in U.S. wealth relationship down barriers and the app offers since the end of fiscal 2024. We are well on our way to achieving our medium-term target of $54 billion in ETF assets. The clients digitally engaged form enabled the business in Q2 last year. Equity and equity linked leads to TD security with their largest and most complex to deepen relationships make TD simply a medium-term target. Within wealth itself, TD has an unparalleled pipeline from direct investing 1.4 in canada with net client almost 90 percent of personal banking with td this real the canadian economy 60 basis leave its medium-term in structural mortgage pre-adjudication psychogenic ai in insurance becoming the first home and auto engine a 29 5 million in value these incredible accomplishments reflect the dedication thank you for content of TD's true thing to become chairman, TD launched the first.

We continue to make good progress on our AML remediation program. This quarter, with respect to the look-back activities required under the OCC and FinCEN consent orders, the third-party vendor has now a population of look-back reviews. While there's more work to do in the coming months, I'm encouraged by the progress being made on this very important deliverable. In systems, as you've heard me speak about in prior quarters, Our AML program is now running on a new transaction monitoring system that has an embedded machine learning and AI enhancements. We've streamlined and improved our investigative practices. And last quarter, we deployed our new KYC strategic platform. This foundational work has resulted in measurable residual risk reduction as our processes continue to mature. Notably, this quarter, we embedded an improved customer risk rating model into our KYC platform, which provides us with more accurate, timely, and consistent risk assessments of operational systems to enable frontline staff greater efficiency. Specifically this quarter, we updated our onboarding systems with the ability to sustainably identify, detect, and manage these to crime risk management. The introduction of enhanced controls, which provide detailed insights in the training effectiveness, completion metrics, remediation spend, validation, and remediation costs moderating in the second half of the year, largely in line with the previous guidance of $500 million.

Through the TD Cowan acquisition, and as you heard on Investor Day, we are taking deliberate strategic action to diversify the bank's business. We saw the benefits of that margin expansion, 5% year-over-year, and the impact of the U.S. strategy. We delivered a significant pro-related investment. CTPP was up 12% year-over-year after removing the impact of the U.S. strategy. The details of Canadian personal and commercial banking delivered CTPP and earnings season, including year-over-year, continued investment in action against our low. We again expect net interest margin to be relatively 6% year-over-year. ROTCE expanded 0.8% year-over-year. New bank card extend year-over-year. NTD Auto Finance delivered year-over-year increase. Home equity lending pipeline to 3% year-over-year to TD's service. In the Midwest in net income for the U.S. banking sector, TD's service completed smoothly strategic milestones as we build out our and illustrative strategic cards for the item of note in Q&A. Turn to slide 11. In wealth year-over-year driven by in TD direct investment, insurance essentially including global markets to invest in talent equity for the quarter was 14.5 year-over-year, moderating expense growth, and disciplined capital. Corporate net loss, please turn to slide 14. down 26 but basically 19 million common sheets reduce CET1 by 41 basis completing a seven completion of this program we will have return a 15

billion thank you Kelvin and good morning everyone the bank exhibited continued strong credit performance this quarter please turn to slide 15 gross Impaired loan formations were 22 basis points, a decrease of five basis points of 457 million quarter over quarter. The decrease was largely recorded in the wholesale and U.S. commercial lending portfolios, partially offset by an increase in Canadian commercial. It turned to slide four basis points, quarter over quarter, to 54 basis points. U.S. banking segments partially offset by an increase in Canadian personal and commercial. Please turn to slide 17. Recall that our presentation reports PCL ratios, both gross and net, of the partner's 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 43% as lower provisions in the segments by an increase in Canadian personal and commercial and U.S. banking. Please turn to slide 18. Impaired PCLs were 973 million, decreasing 191 million quota over quota, reflecting lower provisions in the wholesale, U.S. banking, and corporate segments, partially offset by an increase in Canadian commercial. The bank recorded a performing PCL of $28 million, largely related to an update to the macroeconomic outlook, migration of performing reserves to impaired in the wholesale segment. Please turn to slide 19. The allowance for credit losses decreased 147 million quarter over quarter due to lower impaired allowance in wholesale banking driven by resolutions, partially offset by performing bills largely related to an update to the macroeconomic outlook. I'd like to spend a few minutes discussing two key risk topics, private credit and private equity. We've added a slide in our appendix detailing a breakdown of our gross loans to the financial sector. TD's exposure to private credit and equity is small, at approximately 1% of total bank gross loans, and is primarily concentrated in subscription or capital call facilities. Our exposure is low risk, primarily investment grade, and does not pose a material concern for the bank as it continues to perform well with no watch list or impaired loans. It is the geopolitical environment and the ongoing conflict in the Middle East. We have not realized material impacts on credit performance to date. We have, however, added some performing reserves this quarter to reflect deterioration in our economic outlook and the uncertainty related to the duration and impact of the war. We will continue to carefully monitor potential impacts of the heightened risk environment on our credit portfolios and take suitable actions. With that, let me summarize the quarter. However, the bank exhibited strong credit performance as evidenced by lower gross-impaired loans and gross-impaired loan formations. And additionally, we continue to be prudently reserved at 97 basis points of allowance coverage. While results may vary by quarter and are subject to changes to economic conditions, we continue to expect fiscal 2026 PCLs to fall within a range of 40 to 50 basis points. With that operator, we are now ready to begin the Q&A session.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. should you have a question please press the star followed by the one on your touchtone phone you will hear a prompt that your hand has been raised if you wish to decline from the polling process please press star followed by the two and if you are using your speakerphone please lift the handset before pressing any keys the first question comes from ibrahim punawala with vlva securities please go ahead good morning it is maybe uh starting with you on um ahead and your line is open uh sorry about that so i guess maybe ajay starting with you on credit

quality you're you on the pcl guidance just give us a sense when we think about you probably have among of all the banks like the best sense of what's happening with the consumer uh the sort of dynamic with high unemployment rates going higher as we look through the next six months and beyond do you think generally credit and it is the only indicators that you see suggest that credit sense for the Canadian consumer book are moving in the right direction or do you expect further worsening and with the end point being unclear in terms of when we actually see some of are peaking up on delinquency, GILs, etc. Thanks.

Yeah, again, there's quite a few things there, Abraham, but let me answer your question comprehensively. Let me start with what I expect. First, I should remind you I've reaffirmed the bank's guidance. What I do with PCLs, because of three reasons, potential impacts of the Middle East war, and the macro environment, particularly in Canada. If you think about trade and tariffs, TD Bank is already well provisioned. You know, we have close to 500 million dollars there, and most of that reserve is unused. With respect to the Middle East war, I'd call it a watch. I said that what we did this quarter is we put more weight on our downside case, and we have already built some incremental reserves. So we are going to continue to reassess our reserves each quarter, but I feel quite comfortable that at 97 beeps, we're well positioned on reserves. As I mentioned, we still have that $500 million and we have a lot of financial flexibility. If I turn to the second part of your question, which is on Canadian consumers, I start by saying the whole debt in Canada is high. But if you look at how the Canadian consumer has done, they've been very resilient. The reason they've been very resilient is a few things. One, rates are down. If you look at where rates peak, rates are down 275 beats. The second reason I'd offer up is the starting point on wealth is much better than it was pre-pandemic. The third is wage growth, and the fourth is ongoing government support. having said that are we seeing some migration in Canadian consumer the answer is yes we're seeing it largely in the less than 650 segment but it is entirely expected it's linked to the macro environment so again I think you should expect some migration on the Canadian book we're seeing a little bit of it in Brazil we're seeing a bit of it in order we're seeing a bit of it in cards but overall i think credit is still in good shape yes there are some uncertainties we'll continue to watch them we'll reassess them through our process but at 97 beats including 500 million for trade and tariffs i think the bank is very well provisioned so hopefully i gave you enough context uh abraham no that's good context and very comprehensive and i guess one for you a Ray, AI is going to transform the bank.

Like you talked a lot in terms of the details in how TD is deploying AI. As we look forward, I think you obviously laid out some ROE targets that they invest today. You're running ahead of those. As we look forward, like do you think, is it unreasonable to assume that TD, despite its business mix having more U.S. exposure, could actually become a much profitable bank than what we are historically used to and even in terms of as we think about the timeline to achieve some of your investor day targets uh are you feeling better about them today than you did on the day off thanks thanks i think it was about about 800 million in expense or more into

abriel de chay with national bank financial please go ahead hey good morning first on the uh well a A couple of angles here in the U.S., but let's just revisit that to indulge me. And what stands out is the AML cost, $173 million. That's ahead of the $500 million annual kind of figure. Was there mention of some sort of a third-party agreement that's no longer going to be costing you money, something like that?

Well, Gabe, thanks very much for the question. Let me start by saying that I think the quarter was a solid quarter for the U.S. I came in at 7.02, and that was up 12% on a year-on-year basis. And if you break down the factor, we had moderate NIMM expansion. And as Ajay described, I think PCL performance in the U.S. was quite strong. So expenses were somewhat elevated at 9.9% on a year-on-year basis. But I would note that it was flat on a quarter-on-quarter basis and it's definitely the same expense. And I think composition matters here. As I've indicated in previous quarters, we would expect to start seeing more validation and less remediation implementation expenses, and that's exactly what we saw in the quarter. So that was somewhat elevated. The other important milestone in the quarter, an operating expense that we assumed is part of that transaction. So if you isolate those two categories, our base operating expenses were below 3%. So I feel like we're making some really good progress in terms of moderating the rate of growth. Let me just reaffirm our mid-single-digit expense growth guidance for the year. In fact, we've got a good line of sight to being able to achieve that. And more importantly, I think we're tracking really well to meet and or exceed today. So, NetNet, I'm feeling good at where we are. Obviously, any opportunity that I've got to accelerate the remediation process, it is my number one priority. We're trying to work through it as quickly as possible because we know how important that is to the overall franchise.

Yeah, no, I get that. I wasn't critiquing the number, just trying to get a sense of the, you know, I guess, additional elements this quarter that, you know, might not be around in coming quarter as that cost line kind of does drift down sequentially. But I guess more on the strategic side, as you move, I appreciate that AML remediation is your number one priority, but as you move through the process and maybe increase bandwidth for growth, it sounds like there's some improvement in the core book, it sounds, to exploring new strategic card partnerships. How are you thinking about the growth aspect of the business at this point and what we can look forward to?

Gabe, thank you very much for the question. I think the quarter did highlight the fact that we are seeing acceleration in a number of different areas. I know Kelvin described a little bit of the loan growth, but I just want to call out maybe a couple stats. One, you've been talking about the fact that total loan growth was going to turn the corner. Well, on a spot basis, total loan growth this quarter versus last quarter was, in fact, positive. So that's the first quarter that we've seen that since we embarked on the balance sheet restructuring exercise. So that was a step in the right direction, and we would expect to build on that momentum in the subsequent quarters. If I look at core loan growth, core loan growth was 3% for the quarter, and it was really well distributed across both their consumer lending portfolios as well as commercial loans. I'll talk about consumer loans just for a moment. We saw a number of our businesses, particularly the bank card business. We saw overall balances up 18% and 32% growth in account sales. We're seeing real positive momentum there. We've been investing in that business over the past three years, and we're beginning to see the fruit. I'd say turning to commercial, I was particularly pleased about the quarter-on-quarter performance in commercial. Growth was 1.2% for the quarter. So if you annualize that, that would suggest a mid-single-digit growth rate for our commercial businesses. But probably more important than just the absolute number was the performance in sort of the middle market. What we saw this quarter was stronger performance in both small business and our commercial regional businesses. So it was a – and I think that – I do think that given the work that we're doing, to your point, I think the fact that we're increasing the number of bankers on the street supporting, you know, our commercial banking business, I do expect us to see some degree of acceleration in that business. There's obviously some macroeconomic factors that you can't control, and there's still risk of trade and supply chain disruptions. But generally speaking, I'm really confident about what I'm seeing in terms of some of the pipelines and some of the leading indicators.

Sometimes it's an investor day. I thought you were having fun. That's all, folks. Have a good day.

I think a question on the expense, Calvin, you're pretty clear in terms of, you know, core expense growth was pretty good this quarter. I think, you know, 2% FBHS for some, you know, FX and variable comp, so better than the mid-single-digit guidance. But then you kind of stuck with the mid-single-digit guidance for the full year. So maybe you can talk about some of the things that were timing-related and why that would come back next quarter. And I would have thought, you know, given what Ray had said on being ahead of plan on AI, that maybe there was some upside to expenses and efficiencies this year. So maybe you can help us think through all of that. And then maybe just a quick one for Sona. Increasingly hearing about some, you know, increased competition, and maybe on the loan side and also on the deposit side, sort of pressuring margins a bit. What are you seeing in your business specifically and your confidence around the ability to sort of maintain margins in Canadian retail banking?

Okay. Thanks for that question, Paul. So if we look at the quarter, we were up in CAD, PNC, 2BIP sequentially in line with our NIM guidance, and really that's broken down in a couple of factors. We saw some positive trends on deposit margins, including tractor repricing, as well as driving higher loan margins. And so let me tag a little bit at what you're getting to. So in the market, we definitely did see in the second quarter particularly competitive pricing set in. But, Paul, as you've heard me say, we are firmly committed to profitable growth. And for us, that means disciplined pricing. and you know so as we anchor in this principle we've nonetheless had five percent year-over-year result growth and that's because we are with our disciplined pricing we are able to drive positive on-off margin including in this competitive quarter and so as we look ahead we expect to see relatively stable MIM in Q3 similar to this quarter and you know I'm even optimistic for some potential MIM upside in Q4. And if I just step back, Paul, you know, I think, and picking up off what Ray said earlier, you know, I think we're out to capture organic growth upside. We see tremendous momentum across the businesses. Obviously, we're pleased with in Rizzle how we're leaning in, competing on speed and specialization rather than price. But across the board, we see momentum.

We've had number one year over year growth in Rizzle in cards and deposits so we're particularly pleased with the quarter and proud of our team's work thank you always with that thank you the next question comes from matthew lee with taylor continuity please go ahead hi thanks for my question um most of my questions have been answered but maybe one on cards um you did highlight strong acquisition and record penetration u.s bank card bounce there up and obviously the nordstrom conversion onto the tv's platform How do you think about cards in general as a growth engine, especially balancing kind of position, credit normalization, and maybe potential new security partnership?

Matt, thanks for the question. I'll start on the U.S. side, and maybe I'll pass it to Sona to add something from a Canadian perspective. I think from a U.S. business, we're somewhat underweight in terms of total cards in our overall book, so it is a segment that is a product that we're very focused on, And it's one of the reasons why three years ago we embarked on a really comprehensive build. Operations, we retooled the product lineup. We changed some of our credit underwriting. In fact, we implemented a number of AI models that allow us to be able to leverage deposit activity, be able to fine-tune some of our targeting. All those things are culminating in the performance that you're seeing today on the bank card side of the house. One of the investor day targets that we established was to get to a 30% penetration of our deposit book. And quite frankly, Matt, I'd like to exceed that. In fact, we're tracking quite well. We picked up 200 base points on a year-on-year basis. Some of the growth in Nordstrom transaction being partnered with one of the premier retailers in the U.S. marketplace is a privilege. And to the extent that we can deepen our relationship with Target and potentially, you know, both on other cards received. based on what we're seeing at this point, we're quite comfortable with the credit risk that that portfolio represents. And I think in many ways, bigger cards business is part of our overall U.S. balance sheet, will improve our overall diversification in terms of our asset earnings. So net-net, it's a big priority for us in the U.S. Sona.

Yeah, maybe just briefly, Matt, really strong story north of the border as well in our cards business. You know, we've had a strong cards acquisition up double digits year over year, and it's really driving to continued momentum towards our investor day targets on depth of relationship, both for personal consumer cards as well as small business banking clients. You know, what I'm particularly pleased with is, you know, it's exactly growing in the spots that we would want it to grow. So we've had a really thoughtful execution playbook against how do we really increases depth of relationship within our existing clients. And so most of our growth year over year is actually coming from strong pre-approval conversion amongst our existing clients. Those are the clients we know the most about and very additive, right, from a quality book perspective. And then on the flip side, with our new to banking clients, we've seen continued momentum in deepening that relationship at point of sale in our branches. So really healthy mix and really healthy growth, supporting our number one position in the industry this year.

All right, that's helpful.

Thank you. The next question comes from Doug Young with Desjardins Securities. Please go ahead.

Good morning. I guess for Tim and for Ray here, on wholesale, I mean, I know this was a particularly strong quarter and results are pretty good, but are we, caught my eye, in wholesale at 14.5%. I think you've targeted 13% from the investor day. And Tim, you can talk a bit about sustainability. Is there room for further ROE expansion? And then what drives this? And Ray, as you look over at that, does that give you more comfort? You've got a lot of excess capital, and I know it's pointed towards organic growth and buybacks and whatnot. But does that give you more comfort to point capital into capital markets?

So let me start.

Or about volatility, I would characterize it as a healthy level. able to monetize volatility on the trading side while keeping the capital markets open and then I would just say generally there's an openness to M&A so it's a constructive environment and quite a healthy backlog the second point is Ray mentioned we've invested heavily in our platform and we continue to invest so we're doing more we're deepening our relationships with our existing clients. And if we look at $180 million in the swap trend, capital specifically, I would continue to emphasize we're not capital constrained by any means, but we do need to do more with WA growth. And again, in this quarter, that number was about. The other point I wanted to emphasize is mix. And I think that's reflected as well in the results. 2022, which was in the U.S., and today that number is to tremendous amount but it's about creating durability and repeatability i appreciate the color and the sake of time i'll leave it there thanks thank you though no more

questions in the queue at this time i would now like to return the call to mr raymond chun for closing remarks thank you operator and thank you everyone for joining us today we appreciate your questions and comments performance conference call for today we thank you for participating and we ask that you please disconnect your lines.