Q4 2025 Earnings Call Contradictions: U.S. Loan Runoff, Expense Trajectories, and Deposit Strategy Shifts

Date of Call: None provided

Financials Results

• Revenue: Revenue net of ISE grew 15% YOY (12% excluding a $388M prior-year severe-weather impact); Total Bank PTPP up 25% YOY on an adjusted basis.
• EPS: CAD 2.18 per share, EPS up ~7% YOY.
• Operating Margin: Positive operating leverage; expenses up 10% YOY (~1/3 driven by variable comp, FX and U.S. strategic card portfolio).

Guidance:

• Expect 3%-4% expense growth and positive operating leverage in fiscal 2026.
• Target 6%-8% adjusted EPS growth and ~13% ROE for fiscal 2026, with potential upside.
• Expect PCLs of 40–50 bps in fiscal 2026 (improvement from 45–55 bps guidance for fiscal 2025).
• Complete current CAD 8B buyback by end-Q1 2026; plan to seek approval for a new CAD 6–7B buyback.
• Investment portfolio repositioning to generate ~CAD 550M pre-tax NII in 2026 and target ~CAD 20B RWA release.
• Canadian NIM relatively stable; U.S. NIM to moderately expand in Q1; U.S. Retail expense growth expected mid-single-digit.

Business Commentary:

* Strong Quarterly and Annual Performance: - TD Bank Group reported earnings of CAD 3.9 billion for Q4, with EPS of CAD 2.18 and a Return on Equity (ROE) up 110 basis points year over year. - The strong performance was driven by robust fee and trading income in market-driven businesses, volume growth in Canadian personal and commercial banking, and stable credit performance.

• AI and Digital Transformation:
• TD implemented approximately 75 AI use cases that generated CAD 170 million in value during fiscal 2025, with expectations to generate CAD 200 million in incremental value in fiscal 2026.

• The company leveraged AI to transform loan underwriting, enhance customer relationships, and improve risk management processes.

• U.S. Balance Sheet and AML Remediation:

• Total assets were reduced to CAD 382 billion, achieving a 10% asset reduction target, creating capacity for core loan growth without risking asset limitations.
• Significant progress was made in the U.S. AML remediation program, with comprehensive system upgrades and AI-driven enhancements.

• Wealth Management and Direct Investing Growth:
• The Wealth Management business reported record earnings and assets, with CAD 3.9 billion in record flows from direct investing to advice.
• Growth was driven by strong new accounts and trades per day in direct investing, which serves as an acquisition engine for the bank.

Sentiment Analysis:

Overall Tone: Positive

• Management stated they "ended the year with another strong quarter," reported "earnings of CAD 3.9 billion, EPS of CAD 2.18, and ROE up 110 basis points YOY," noted "positive operating leverage," record revenue and record earnings in businesses, and highlighted 5% FY25 earnings growth—all framing a positive outlook.

Q&A:

• Question from John Aiken (Jefferies): Most deterioration on domestic consumer portfolio came from residential mortgages but not HELOCs — what dynamics explain that divergence and would incremental impairments on residential mortgages impact the HELOC portfolio; when would that start?
  Response: Management: Asset quality across RESL, HELOC and mortgages remains strong with very low delinquencies/charge-offs; slight uptick driven by higher-rate vintages (2022–24) in marginal segments, but current HELOC performance is stable and this is not viewed as a material concern.

• Question from Ibrahim Punawala (Bank of America): With CET1 at 14.7% and current buybacks, can you flex the capital ratio toward mid-13s via RWA growth or will pace of buybacks materially increase; and if AML remediation is sustained through 2026, could the asset cap be reviewed as early as 2027?
  Response: Management: Plan to finish current buyback by end-Q1 and seek approval for a CAD 6–7B program; will lower CET1 subject to market conditions and ongoing capital generation (13% ROE target may be realized later, possibly 2027); on AML, substantial remediation progress made but sustainability validation and monitor/regulator review will dictate timing of any relief — timing remains uncertain.

• Question from Gabriel Dechaine (National Bank): Could wider mortgage spreads drive positive surprises to NIM in Canada, and on expenses — after 10% growth in Q4 can you deliver the 3%-4% expense growth target for 2026?
  Response: Management: Mortgage mix and proprietary-channel originations are driving margin expansion and are a tailwind; expenses have moderated and management remains confident in achieving ~3%-4% expense growth in fiscal 2026 backed by identified cost‑takeout initiatives and positive operating leverage.

• Question from Doug Young (Desjardins): How confident are you in the CAD 2.9B U.S. NIAT target for fiscal 2026 given macro/reshaping, and why were insurance earnings weaker in Q4 despite lower catastrophe activity?
  Response: Management: Confident in the $2.9B NIAT target based on Q4 momentum (NII and fee growth, moderated expenses, low PCLs) though macro uncertainty remains; insurance Q4 was impacted by a deliberate geographic rebalancing away from high-cat regions which reduced Q4 earnings but improves long‑term resiliency.

• Question from Paul Holden (CIBC): Why are deposits not growing as fast as loans in Canada and how will TD accelerate low‑cost deposit growth; and in the U.S. should we expect deposit trends to recover after recent declines?
  Response: Management: Canada has a strong non‑term deposit franchise (69% non‑term deposits versus industry mid‑50s) and is comfortable with mix; U.S. deposit declines reflect planned Schwab sweep runoff and targeted runoff of low‑liquidity government portfolios plus disciplined repricing — expect to return to mid‑single‑digit deposit growth over the medium term.

• Question from Sohrab Movahedi (BMO Capital Markets): Which business segments are likely to exceed the 6%-8% EPS growth target and under what conditions would you accelerate buybacks?
  Response: Management: Momentum is broad-based — market-driven businesses (Wholesale, Wealth) plus core Canadian and U.S. retail underpin guidance and potential upside; buyback pace is conditional on market environment and capital generation — the bank will accelerate repurchases if market conditions create attractive opportunities.

Contradiction Point 1

U.S. Loan Growth and Runoff Strategy

It involves differing expectations regarding the timeline and impact of strategic loan portfolio runoff in the U.S., which could have implications for financial projections and investor expectations.

Is the low single-digit U.S. loan growth for 2026 consistent with the prior expectation of reducing $18 billion in loans by year-end 2026, or has the expectation changed? - Andrew F. Jeffrey (Deutsche Bank)

2025Q4: We expect to see a contraction in the U.S. portfolio through 2026 due to strategic portfolio runoff and repricing. However, the core underlying growth is strong, particularly in bank cards and home equity. - Leovigildo Salom(Group Head, U.S. Retail)

Will the U.S. lending portfolio see an inflection point by 2026 when loan balances begin to grow? - John Aiken (Jefferies LLC)

2025Q3: We expect to see a contraction in the U.S. portfolio through 2026 due to strategic portfolio runoff and repricing. However, by the end of 2026, we expect that we will be able to resume growth. - Leovigildo Salom(Group Head, U.S. Retail)

Contradiction Point 2

Expenses and Operational Efficiency

It involves differing statements on the trajectory of expenses and operational efficiency, which are critical for understanding the company's ability to control costs and maintain profitability.

Will mortgage spreads impact margin growth in Canada, and how are you addressing expenses in 2026? - Gabriel Dechaine (National Bank)

2025Q4: Brooke Hales: We expect expenses to moderate quarter over quarter, with a focus on disciplined execution and strategic initiatives. Sona Mehta: Mortgage spreads are expanding positively, and we are seeing a broader expansion trend. Our proprietary mortgage channels are showing margin growth. - Brooke Hales(Head of Investor Relations), Sona Mehta(Group Head, Canadian Personal Banking)

What are the expected investments and spending needs in wholesale banking, and when will their results be sustained? - Sohrab Movahedi (BMO Capital Markets)

2025Q3: Brooke Hales: We expect expenses to moderate quarter over quarter, with a focus on disciplined execution and strategic initiatives. Sona Mehta: We continue to see volumes at record levels, which are supportive of revenue growth and margin expansion. - Brooke Hales(Head of Investor Relations), Sona Mehta(Group Head, Canadian Personal Banking)

Contradiction Point 3

Deposit Growth Strategy

It highlights a shift in strategy regarding deposit growth, which is crucial for funding loan growth and maintaining financial stability.

Why is deposit growth lagging loan growth, and are there plans to accelerate low-cost deposit growth? - Paul Holden (CIBC)

2025Q4: Sona Mehta: There's a strong non-term deposit base, and we continue to see positive trends in low-cost deposits. Leo Salom: The runoff of Schwab Sweep deposits was planned, and we've reduced higher-priced deposit categories. We expect to transition back to a deposit growth posture in 2026, focusing on core checking account growth. - Sona Mehta(CFO), Leo Salom(CFO)

Is the exit of the correspondent loans business to invest in proprietary bank card operations? - John Aiken (Jefferies)

2025Q2: Leo Salom: As we continue to normalize our deposit levels, we expect that the quarterly run rate will return to positive levels as we successfully reallocate our partner deposits to our own products. - Leo Salom(CFO)

Contradiction Point 4

Capital Allocation and Share Buyback

It involves changes in capital allocation strategy, including share buybacks, which are critical for shareholder returns and investor confidence.

How will capital allocation and CET1 ratio impact buyback plans, and what are the prospects for 2026? - Ibrahim Punawala (Bank of America)

2025Q4: We plan to complete the current share buyback by the end of Q1 and initiate a new one of $6-7 billion, subject to regulatory approval. - Raymond Chun(Bank CEO)

Will strategic investments and portfolio exits affect expense growth and capital allocation? - Ebrahim Poonawala (Bank of America)

2025Q1: Capital will be deployed to invest in growth opportunities and to return excess capital to shareholders. - Raymond Chun(President and CEO, TD Bank)

Contradiction Point 5

Expansion in U.S. Retail Banking

It reflects differing strategies and expectations regarding the expansion of U.S. retail banking, which is crucial for growth and market penetration.

How do you view the $2.9 billion U.S. NIAT target for fiscal 2026, considering macro rates and balance sheet restructuring? - Doug Young (Desjardins)

2025Q4: Leo Salom: Q4 revenue growth and fee income indicate sustainable momentum. Expenses moderated in Q4, and we maintain confidence in mid-single-digit growth targets. Despite macro uncertainties, we feel comfortable with the NIAT target and ROE projections. - Leo Salom(CFO)

Regarding the US portfolio repositioning, does the $500 million NII benefit indicate additional benefits in 2026? - Matthew Lee (Canaccord Genuity)

2025Q2: Leo Salom: We are encouraged by the continued strong performance in U.S. retail. Revenue grew 6% in Q2 year-over-year, driven by record fee income and an increase in average interest earning assets. - Leo Salom(CFO)