Toronto-Dominion Bank's Q2 Earnings Signal Sector-Wide Opportunity in Canadian Banks

The Toronto-Dominion Bank (TD) delivered a robust Q2 2025 earnings report, underscoring its resilience amid macroeconomic headwinds. While credit loss provisions rose and adjusted earnings dipped slightly, the bank's strong capital position, disciplined restructuring, and strategic investments position it—and the broader Canadian banking sector—for sustained earnings upside. Let's dissect the catalysts and why now is the time to act.

TD's Q2: Strength in Strategic Adjustments

TD reported adjusted earnings of $3.6 billion, with a CET1 ratio of 14.9%, reflecting exceptional capital strength. Loan growth was a standout, with Canadian Business Banking up 6% YoY and US Retail loans rising 2% YoY, driven by commercial lending and deposit growth. Despite a $129 million QoQ increase in provisions for credit losses (PCL)—linked to trade tensions—the bank maintained a watch list improvement across segments, signaling manageable risk exposure.

The key takeaway? TD is proactively preparing for uncertainty while capitalizing on opportunities. Its $500 million AML remediation investment and AI-driven digital initiatives (like generative AI virtual assistants) are not just costs—they're strategic bets to future-proof the business.

Sector-Wide Credit Loss Trends: Prudent, Not Problematic

While TD's PCL rose, it's part of a sector-wide trend of cautious risk management. RBC's credit provisions hit $568 million, up from $400 million YoY, while Scotiabank's soared to $1.4 billion (up from $1.01 billion). Even BMO and CIBC saw increases, but these banks are not buckling—they're hedging against a fluid macro environment.

The critical point: provisions remain manageable relative to earnings. For instance, TD's PCL-to-loans ratio rose to 0.58%, but its CET1 ratio remains comfortably above regulatory thresholds. Compare this to RBC's CET1 of 13.2% and BMO's 13.4%—all healthy buffers.

Loan Growth: The Engine of Earnings Upside

While Canadian housing markets sputter, commercial lending is thriving. TD's Canadian Business Banking revenue rose 3%, fueled by auto finance and small business loans. RBC and BMO both highlighted mid-to-high single-digit commercial loan growth, while CIBC's U.S. Commercial Banking revenue surged 81% YoY.

The U.S. segment is a hidden gem. TD's US Retail NIM of 3.04% and BMO's 20% rise in Capital Markets revenue showcase cross-border strength. Even Scotiabank, despite its net income miss, saw gains in international and wealth management.

This diversification is critical. As trade tensions and interest rate uncertainty linger, Canadian banks are leveraging global and commercial exposures to offset domestic softness.

Why This is a Buy Now Moment

1. Strong Capital Bases: All major banks maintain CET1 ratios above 13%, shielding them from shocks.
2. Cost Discipline: Restructuring programs (e.g., TD's $600–$700 million savings target) will boost margins over time.
3. Tech and Compliance Investments: AI and AML spending may pressure near-term profits but will reduce long-term risks and enhance efficiency.
4. Valuations Are Attractive: Canadian banks trade at 8–10x forward P/E, below historical averages.

Investment Thesis: Buy the Sector's Prudent Play

The Canadian banking sector is undergoing a strategic pivot—from housing-dependent lending to diversified, tech-driven growth. While PCL increases may spook short-term traders, they reflect prudent risk management, not systemic weakness.

TD stands out as a top pick:
- Its 14.9% CET1 ratio offers a margin of safety.
- The $8 billion share buyback program and 4% dividend yield (for peers like RBC and BMO) provide downside protection.
- Its US AML remediation, while costly now, will unlock future efficiency gains.

Final Call: Act Before the Rebound

The Canadian banking sector is primed for a rebound. Loan growth in commercial and cross-border segments, coupled with disciplined risk management and strong capitalization, will drive earnings upside. Investors who act now can capture this opportunity—before the market fully appreciates the sector's resilience.

The signal is clear: buy Canadian banks before the rally begins.