Everything We Asked For, at a Price We Did Not: Credit Turns, U.S. Loans Inflect, and the Multiple Goes to 2.3x Book

All figures are Canadian dollars unless marked US$. TD's fiscal Q2 2026 covers the three months ended April 30, 2026. Share prices are shown for both the NYSE (USD) and TSX (CAD) listings.

Results vs. Consensus

Q2 FY2026 Scorecard

The reported line is not comparable and should be set aside. The prior-year quarter carried the $8,975M pre-tax gain on the sale of TD's remaining Schwab stake and a $1,129M balance-sheet-restructuring loss, which is why reported EPS of $2.43 sits against $6.27. This quarter's own items of note are small and mostly known in advance: $33M of intangible amortization, $43M from the terminated First Horizon capital hedge, the pre-announced $197M Nordstrom receivable adjustment, and a $288M income tax credit on last year's Schwab gain recognized on filing the return. Those net to a positive $83M, so reported earnings this quarter exceed adjusted earnings, which is unusual and worth naming rather than glossing.

Year-Over-Year Comparison (C$M unless noted, adjusted basis)

Operating leverage on the basis that matters for a bank carrying an IFRS 17 insurance book, revenue net of insurance service expenses against expenses, is positive 130bp. That is the fourth consecutive quarter of it, and it is the first of the four in which the expense side is inside its own full-year guide rather than being carried by the revenue side.

Quarter-Over-Quarter Comparison (C$M unless noted, adjusted basis)

The sequential decline in headline earnings is an artifact of the calendar. TD's fiscal Q2 is three days shorter than its fiscal Q1, and management invoked the day count four separate times in the segment disclosures. Normalized for it, adjusted earnings per calendar day rose 2.2% sequentially, the return on equity rose 20bp, and the efficiency ratio improved. Anyone reading the $2.38 against the prior quarter's $2.44 as deceleration is reading a February-to-April quarter against a November-to-January one.

Assessment: revenue. The most important sentence in the revenue line is not the growth rate, it is that group loans grew. At initiation we wrote that TD was generating double-digit revenue growth on a shrinking balance sheet, which was simultaneously the quality of the quarter and its central question, because margin and trading gains do not compound the way volume does. Three months later loans are up 3.0% year over year and 0.6% sequentially, deposits have stopped falling sequentially, and net interest income is now the faster-growing half of revenue. That is a different kind of revenue growth than Q1's, and it is a better kind.

Assessment: margins. A 3bp sequential move in the U.S. margin sounds trivial and is not, because of what it was achieved against. The segment absorbed three fewer days, a 1% sequential decline in average loans and a 1% decline in average deposits, and still expanded the margin through loan and deposit repricing. The composition is also improving: management attributed the sequential gain to higher loan and deposit margins with no help from the liquidity item. The Canadian margin story is the same shape, achieved in what the Canadian retail head described as a quarter in which competitive pricing "set in," and the guidance for fiscal Q4 was upgraded from stability to possible upside.

Assessment: EPS. We are going to keep flagging the share-count contribution every quarter, because it is the part of the growth rate with a known expiry. TD retired 1.1% of its shares in the quarter and 4.1% over the year, funded by a capital surplus that has now fallen from roughly $9.5B to roughly $8.3B against the 13% target. On the current pace the surplus supports something like two more years of this contribution. That is a long runway and it is not a permanent one, and the 6% to 8% underlying EPS growth target management publishes is closer to the through-cycle truth than the 20.8% headline.

Segment Performance

Adjusted Net Income by Segment (C$M)

The U.S. Banking column needs a basis note that the headline growth rate hides. The segment's adjusted net income including the Schwab equity method income was $967M in the prior-year quarter, so on an as-reported segment basis this quarter's $960M is slightly down year over year. Excluding Schwab, which TD sold in February 2025 and which will never recur, the comparison is $960M against $889M, up 8.0% in Canadian dollars and 12.1% in U.S. dollars. Every U.S. growth rate in this report is on the ex-Schwab basis, and any source quoting a U.S. Banking decline is quoting the other one.

Where the Earnings Growth Actually Came From

At initiation the same table showed Wholesale contributing 37% of the year-over-year increase from 12.8% of segment earnings, on trading revenue that had risen 32.5% sequentially. This quarter Wholesale contributed 30.8% from 14.1% of earnings, and it did so with trading-related revenue falling 24.3% sequentially to $868M. Excluding Wholesale entirely, group adjusted earnings grew 11.8%. The over-contribution is still there and it is smaller, better distributed, and sourced from a more durable place.

Canadian Personal and Commercial Banking

Net income of $1,925M was a record for a fiscal second quarter, up 15.4% year over year on revenue of $5,256M growing 5.3% against expenses of $2,088M growing 1.8%. That is 350bp of segment operating leverage, an efficiency ratio of 39.7% against 41.1%, and a 31.3% return on equity. Average loans grew 6% with personal at 5% and business at 7%, and average deposits grew 3%. The margin reached 2.85%, up 3bp year over year and 2bp sequentially, which management delivered in a quarter it described as competitively priced.

"So if we look at the quarter, we were up in CAD PNC 2 bps 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 tracker repricing as well as driving higher loan margins." — Sona Mehta, Group Head, Canadian Personal Banking

The sequential decline of 5.8% is the day count and a $62M increase in provisions, of which $41M is the impaired line, driven by higher commercial provisions. Consumer credit migration is present and management was direct about where: the sub-650 credit-score cohort, in real estate secured lending, auto and cards. Card and deposit share gains continued, and the personal bank generated close to $9B of closed referrals into the wealth business, up double digits.

Assessment: This is the pillar we described at initiation as a high-return annuity already sitting at its own medium-term targets, and it behaved exactly that way. The 350bp of operating leverage is better than we expected and is partly a timing benefit management flagged, so we would not extrapolate it. What matters more is that 31.3% on equity and a 39.7% efficiency ratio leave very little further contribution available from this segment. Canadian P&C is now a source of cash and stability rather than a source of upside, and the ROE bridge does not run through it.

U.S. Banking

Adjusted net income of US$702M grew 12.1% year over year and declined 3.0% sequentially, on adjusted revenue of US$2,906M up 6% and adjusted expenses of US$1,807M up 9.9%. The segment's adjusted return on equity was 9.6%, flat sequentially and up 130bp year over year, and its return on tangible common equity expanded more than 200bp to 14.8%. The adjusted efficiency ratio deteriorated to 62.2% from 61.5% sequentially and 60.2% a year ago, which is the honest cost of running a remediation programme through the expense line.

The volume story is where this quarter differs from the last four. Total average loans fell 7% year over year, an improvement from the 9% decline reported in fiscal Q1, and core average loans excluding the portfolios identified for sale or run-off grew 3% year over year against 2% last quarter. The run-off book itself has shrunk from US$27B of average balances a year ago to US$9B, so the drag it exerts is nearly spent.

"We'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." — Leo Salom, Group Head, U.S. Banking

Underneath the aggregate, the acceleration is broad. Proprietary card balances grew 18% year over year with new account acquisition up 32%, middle market lending balances grew 13% with commitments up 17%, commercial loans grew 1.2% sequentially, and TD Auto Finance posted record fiscal Q2 originations. Provisions of US$250M fell 20% year over year, with the impaired component down 14% sequentially. Deposits remain the weak side: average balances fell 5% year over year, with sweep deposits down 14%.

Assessment: The commitment we were grading was for total U.S. loans to post net growth at the aggregate level in fiscal Q3, and management claimed it in fiscal Q2. The claim is real but the basis moved: it is spot balances, quarter-end to quarter-end, while the segment table reports averages, and on averages total loans still fell 1% sequentially. That is not a trick, spot is the leading indicator and average is the lagging one, but it is a different measure than the one the commitment was made on, and the switch was not flagged. Net of that caveat, this is the first quarter in which the U.S. franchise looks like it is growing rather than being repaired, and the 9.6% return on equity is the number that has to keep climbing for the bank's own bridge to work.

Wealth Management and Insurance

Net income of $837M grew 18.4% year over year and 10.6% sequentially, both records. The split is Wealth Management at $558M, up 16% year over year but down 3% sequentially, and Insurance at $279M, up 23% year over year and up 52% sequentially. Assets under administration of $797B grew 22% and assets under management of $643B grew 19%. Revenue net of insurance service expenses grew 14.1% year over year to $2,380M, and the efficiency ratio on that basis improved 170bp to 52.5%.

The sequential jump is Insurance, and its source deserves to be named precisely: insurance service expenses fell $224M, or 14%, which the filing attributes to "lower claims frequency as well as reserve releases related to prior years." Catastrophe claims were nil this quarter against $50M in the prior-year period. Insurance return on equity of 35.9% against 22.7% last quarter is a claims-experience outcome, not a franchise re-rating.

"In wealth, we had new account growth of 15% year-over-year, driven by 16% account growth in TD Direct Investing. Trades per day were up 11% year-over-year as clients continue to engage across our platform. Insurance delivered record earnings, reflecting disciplined claims management and accelerated structural cost reduction." — Kelvin Vi Tran, Chief Financial Officer

Assessment: Wealth is the higher-quality half and it grew 16% on asset growth and deposit volumes, which is the compounding kind. Insurance is the volatile half and it delivered the sequential surprise through benign claims and prior-year reserve releases, which is not. We would model the segment off the Wealth trajectory and treat the 35.9% Insurance return as a favourable draw rather than a new run rate, particularly with the filing's own economic outlook pointing to higher inflation feeding through to claims severity.

Wholesale Banking

Adjusted net income of $612M was a record, up 37.5% year over year and 9.1% sequentially, on revenue of $2,393M up 12.4% year over year. The return on equity of 14.5% is 360bp better than a year ago and now sits above the segment's own 13% Investor Day target. The adjusted efficiency ratio improved to 63.1% from 67.0%.

The composition is the story. Trading-related revenue fell 24.3% sequentially to $868M, roughly flat against the prior year, and the segment still posted a record. The growth came from lending and financing revenue, advisory fees, equity commissions and underwriting, plus a $94M sequential reduction in provisions as the wholesale impaired line normalized. The average gross lending portfolio grew 6.5% sequentially to $100.0B. Management also noted the platform absorbed the loss of the Schwab-transaction revenue that inflated the prior-year comparison.

"Broad-based momentum across our platform enabled the business to earn through the almost $200 million in revenue from the Schwab transaction in Q2 last year. The team continued to execute against the strategies we laid out at Investor Day and placed in the top 10 in the U.S. equity and equity-linked league tables calendar year-to-date." — Raymond Chun, Group President and CEO

Assessment: At initiation we treated Wholesale's contribution as the least durable part of the earnings mix because it came from a seasonal trading peak. This quarter tests that view and partly refutes it. A record with trading down a quarter of its prior-quarter level, funded instead by lending, advisory and underwriting, is a materially better earnings artifact. We are raising our normalized quarterly Wholesale earnings assumption, but not to $612M: the segment head himself framed the environment as "constructive," and constructive capital markets are a cyclical input, not a structural one.

Credit Quality

This is the most consequential table in the report, because it settles the question we said would take two quarters to settle. Last quarter impaired provisions rose $221M sequentially, more than half of it attributed by the Chief Risk Officer to a single wholesale borrower, with the assertion that the level "is not reflective of a typical run rate." Wholesale impaired provisions have now fallen $136M, the filing attributes the drop to "higher impairments in the prior period," and the sequential decline in the allowance is credited to "lower impaired allowance in wholesale banking driven by resolutions." The characterization was accurate.

"Impaired PCLs were $973 million, decreasing $191 million quarter-over-quarter, 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, partially offset by migration of performing reserves to impaired in the Wholesale segment." — Ajai Bambawale, Chief Risk Officer

The quality of the 43bp headline also improved even though the number did not move. Last quarter it cleared the guided range only because a $125M performing release offset a $1,164M impaired charge. This quarter the performing line is a $28M build and the impaired charge is $973M, so the same 43bp is now arrived at without help. On the impaired line alone the ratio moved from roughly 48bp to roughly 42bp, which is the single cleanest measure of what changed.

Assessment: The bear point we carried at the top of the risk list is contained rather than resolved. Contained, because every indicator that moved adversely in Q1 reversed in Q2, and the single-name explanation held. Not resolved, because the Chief Risk Officer volunteered three named sources of future pressure, because Canadian consumer migration in the sub-650 cohort is real and rising, and because allowance coverage fell 2bp in a quarter in which management added reserves for a war. A bank that carries close to $500M of largely unused trade and tariff reserve has genuine flexibility; a bank whose consumer book is migrating in a 6.5% to 7% unemployment economy has a genuine watch item. Both are true.

Key Topics & Management Commentary

Overall Management Tone: Management was assured and unusually specific, leading with arithmetic rather than adjectives and volunteering the two figures that had been open questions from the prior call, the structural cost run rate and the wholesale credit normalization, before anyone asked. The posture shifted from the confident-but-defending stance of the first quarter to something closer to a progress report against a plan management now expects to beat, and the only place the answers thinned was on what happens to the expense base and the anti-money-laundering spend in the second half. Where the first-quarter call declined an invitation to raise targets, this one said the bank is "on track to outperform" them.

1. The Bridge to a 16% Return on Equity Got Shorter While the Return Went Up

At initiation the central artifact of the story was management's own arithmetic connecting a delivered 14.2% return on equity to a 16% medium-term target: roughly 100bp from retiring capital toward a 13% CET1 ratio, and roughly 150bp from the $2.0B to $2.5B structural cost programme, summing to 16.7%. This quarter the CEO ran the same calculation with new inputs and got a different, smaller answer.

"If I look at our ROE target and ROE being up 200 basis points year-on-year at 14.4%. If I look at just us going from our current CET1 ratio of 14.3% down to 13%, that picks up another 90 basis points of ROE. And then if you look at our expense management or structural cost reduction from $2 billion to $2.5 billion, that adds another 110 basis points. And so when you look at that, that's about 200 basis points of ROE pickup, and that's all within our control." — Raymond Chun, Group President and CEO

The destination has moved from 16.7% to 16.4% and the remaining gap from 250bp to 200bp, while the delivered return improved 20bp. Both legs shrank for good reasons. The capital leg is smaller because the surplus is being spent: 130bp of CET1 above the 13% target on $641.4B of risk-weighted assets is roughly $8.3B, against roughly $9.5B one quarter ago. The cost leg is smaller because part of it has already been banked into the run rate. Neither change was flagged on the call, and nobody asked about it.

Assessment: This is what a bridge looks like when it is actually being crossed, and it is also the mechanism by which the remaining upside shrinks every quarter that execution goes well. For a shareholder buying today, the relevant number is not the 16.4% destination but the 200bp of distance left, which is 50bp less than it was three months ago at a share price that is 15.6% higher.

2. The Structural Cost Programme Moved From Promise to Evidence

The single weakest pillar at initiation was the cost programme, which we tagged as at risk because $2.0B to $2.5B of structural savings was supported by illustrative examples and no phased schedule, while fiscal Q1 adjusted expense growth ran 7.3% against a 3% to 4% full-year target. Three months later there is a number attached.

"On the structural cost reduction, which has been a critical focus for us. Leveraging AI, automation, process redesign, we set a goal of $2 billion to $2.5 billion. What I can tell you, Ebrahim, is we are well ahead of pace. Our goal for this year was to have $900 million of structural cost reduction, and we have already achieved that." — Raymond Chun, Group President and CEO

The expense line corroborates it. Adjusted expenses grew 5.4% year over year on the headline, of which management attributes roughly two points to variable compensation, foreign exchange and the U.S. strategic cards portfolio, putting growth on the guided basis at 3%, inside the 3% to 4% target and at its low end. The CEO characterized the outcome as "the smallest expense growth since 2022." No restructuring charge was taken this quarter, against $200M in fiscal Q1.

Assessment: A full-year structural cost goal delivered at the halfway mark, with the expense line independently landing inside the guided range in the same quarter, is the strongest single piece of evidence in this print. It moves the cost pillar from at risk to on track. The residual caveat is unchanged and worth keeping: there is still no phased schedule for the remaining $1.1B to $1.6B, and the CEO's own bridge now credits the cost leg with 110bp rather than 150bp, which is the arithmetic conceding that some of the easy part is done.

3. Credit: the Single-Borrower Claim Was Tested and It Held

The most testable claim from the fiscal Q1 call was that a $221M sequential rise in impaired provisions was substantially one wholesale borrower and not a run rate. That claim now has a result. Wholesale impaired provisions fell from $216M to $80M, gross impaired loan formations fell 5bp, gross impaired loans fell 4bp, and the allowance declined on wholesale resolutions.

"Gross impaired loan formations were 22 basis points, a decrease of 5 basis points or $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." — Ajai Bambawale, Chief Risk Officer

The Chief Risk Officer paired the good news with an explicit list of what could reverse it, which is the disclosure posture we want and did not entirely get last quarter.

"What I do expect is some pressure on PCLs because of 3 reasons: Trade and tariff actions, 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. We have close to $500 million there, and most of that reserve is unused." — Ajai Bambawale, Chief Risk Officer

Assessment: Management said something specific and falsifiable, and the following quarter falsified the bear reading rather than the management reading. That is worth crediting, and it is why this bear point moves from emerging to contained. The offset is that Canadian consumer migration is running the other way, with Canadian P&C impaired provisions up $41M sequentially and credit migration named in real estate secured lending, auto and cards.

4. Artificial Intelligence Is Now a Reported Number, Not a Slide

Last quarter's AI discussion was a $1.0B medium-term ambition with a description of use cases. This quarter it has a fiscal-year target, a half-year actual against that target, and unit metrics.

"We are tracking well ahead of pace on our target to deliver $200 million in value from AI this year. At the halfway mark, we have already delivered almost $145 million in value across predictive, generative and Agentic AI use cases." — Raymond Chun, Group President and CEO

The supporting detail: mortgage pre-adjudication cycle time reduced from approximately 15 hours to 3 minutes using agentic AI, more than 40,000 colleagues using Copilot, more than 7,000 engineers using AI for software development with the most active achieving a 29% throughput increase, and TD Insurance launching a client-facing generative AI virtual assistant, the first from a Canadian home and auto insurer.

Assessment: $145M against a $200M annual target at the halfway mark is credible pacing, and the disclosure discipline of publishing a number that can be missed is a meaningful improvement over describing use cases. The honest caveat is that "value delivered" is a management-defined measure with no reconciliation to the income statement, split between expense reduction and revenue in a ratio the bank has published only for the medium-term $1.0B figure. We treat this as directional support for the cost pillar rather than as an independently verifiable line.

5. The U.S. Loan Inflection Arrived a Quarter Early, on a Different Measure

The commitment from the fiscal Q1 call was that total U.S. loans, including the run-off portfolios, would post net growth at the aggregate U.S. bank level in fiscal Q3. Management claimed it in fiscal Q2, on spot balances. On average balances, which is what the segment table reports, total U.S. loans still fell 1% sequentially and 7% year over year, while core average loans grew 3% year over year and were flat sequentially. The run-off book has fallen from US$27B of average balances a year ago to US$9B, so the arithmetic drag is nearly exhausted regardless.

"If I look at core loan growth, core loan growth was 3% for the quarter, and it was really well distributed across both our consumer lending portfolios as well as commercial loans. [...] I'd say turning to commercial, I was particularly pleased about the quarter-on-quarter performance in commercial. Overall 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." — Leo Salom, Group Head, U.S. Banking

The CEO framed the aggregate crossover as prospective rather than achieved, which is the more conservative of the two characterizations offered on the same call: the business is "building towards sustainable growth with increases in core loans expected to be more than offsetting balance sheet runoff beginning next quarter."

Assessment: The direction is unambiguous and the measure is not. Spot balances lead average balances by roughly a quarter, so the average-basis crossover management originally committed to should arrive in fiscal Q3 as promised. We are grading this commitment as met, with a note that the basis moved without being flagged, and we will grade the fiscal Q3 average-balance figure as the confirming test.

6. The Nordstrom Conversion Landed as Pre-Announced, and the Ambition Behind It Got Larger

The US$145M item of note pre-announced on the fiscal Q1 call arrived at US$144M, or $197M pre-tax and $147M after tax, nine cents of EPS. It reflects amounts no longer recoverable from Nordstrom for expected credit losses now that TD has converted the portfolio onto its own servicing platform and takes a greater share of both revenue and credit losses. There is no ambiguity here and no surprise, which is itself notable: a pre-announced charge that lands within US$1M of its guide is a small credibility deposit.

What is new is the strategic framing around it. The U.S. segment head described cards as a deliberate three-year build now bearing fruit, with proprietary balances up 18%, new account acquisition up 32%, and a 200bp year-over-year gain against a 30% deposit-book penetration target he says he would like to exceed.

"I'm thrilled about the successful conversion of the 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 bolt-on other really high-quality card partnerships, that will be a priority for us in the future as well." — Leo Salom, Group Head, U.S. Banking

Assessment: Cards are the right answer to the U.S. margin question, because a larger card book structurally lifts segment net interest margin and diversifies asset earnings away from a commercial book that has been shrinking. They are also the highest-loss-content asset on a bank balance sheet, being scaled in an economy the bank's own economists describe as slowing, by a segment whose consumer portfolios are already showing credit migration. We would rather see this build proven through a full credit cycle than accelerated into one.

7. Anti-Money-Laundering Remediation: a Real Milestone, and a Second Half That Has to Halve

The concrete progress this quarter is the completion by the third-party vendor of the first population of lookback reviews, which is the deliverable most directly tied to the OCC consent order and the one with the least management discretion in it. The bank also embedded an improved customer risk rating model into its new know-your-customer platform and updated onboarding systems for money service businesses.

"From a financial perspective, the composition of our AML remediation spend has begun to shift towards validation and sustainability costs as management implementation expenses have started to moderate on a quarter-over-quarter and year-over-year basis. We expect that trend to continue with overall AML remediation costs moderating in the second half of the year, largely in line with the previous guidance of $500 million in fiscal 2026." — Leo Salom, Group Head, U.S. Banking

The arithmetic behind that sentence deserves attention. U.S. BSA/AML remediation cost was US$173M in this quarter against US$148M in fiscal Q1, so the first half consumed US$321M of an approximately US$500M full-year guide. Holding the guide requires the second half to run near US$179M, roughly 44% below the first half, in two quarters that also contain the internal-audit validation work the filing schedules for calendar 2026 and 2027.

Assessment: The lookback milestone is genuine and it is the first piece of this programme that an outsider can verify has moved. The spend guide is the part we would not underwrite. A 44% second-half step-down in a cost line that has risen in each of the last two quarters is a steep ask, and the filing itself warns that "there could be additional management remediation actions that would take place after calendar 2027 in which case the overall remediation timeline may be extended." The bear point stays contained, not resolved.

8. Wholesale Delivered a Record Without a Trading Quarter

Trading-related revenue of $868M fell 24.3% sequentially and was roughly flat year over year, and Wholesale still printed record earnings of $612M and a 14.5% return on equity, 150bp above its own Investor Day target. The revenue came from lending and financing, advisory fees, equity commissions and underwriting, and the average gross lending portfolio grew 6.5% sequentially to $100.0B. Provisions fell $94M sequentially.

"On capital specifically, I would continue to emphasize, we're not capital constrained by any means, but we do need to do more with that resource. So I always like to look at revenue growth relative to RWA growth. And again, in this quarter, that number was about 3x." — Tim Wiggan, Group Head, Wholesale Banking

The segment head also framed the geographic mix shift explicitly: U.S. revenue has roughly doubled as a share of the platform since 2022, the last full year before the Cowen acquisition, from about a quarter of the total.

Assessment: This is a genuine upgrade to the durability of the earnings mix and we are marking it as such. The caution is that the segment head's own framing of the operating environment was that "we are in a constructive market," capital markets conditions mean-revert, and a 14.5% return on equity earned in a constructive quarter is not the same as a 14.5% through-cycle return. The right conclusion is that the normalized level is higher than we assumed at initiation, not that the reported level is the normalized level.

9. Capital: 19 Million Shares Retired, and Book Value That Did Not Move

The CET1 ratio fell 26bp sequentially to 14.3%, with strong organic accretion offset by buybacks that cost 41bp of capital. Risk-weighted assets grew 1.0% sequentially to $641.4B, so the surplus above the 13% managed target is now roughly $8.3B. Management reaffirmed the commitment to complete the $7B programme, which together with the prior programme will have returned $15B of capital.

"The bank repurchased approximately 19 million common shares under its share buyback program in Q2, which reduced CET1 by 41 basis points. TD's capital position is a competitive advantage. As Ray shared, the bank remains committed to completing a $7 billion share buyback." — Kelvin Vi Tran, Chief Financial Officer

The consequence shows up in a line nobody discussed. Total equity fell $1.3B sequentially despite $4,251M of reported net income, and book value per share finished at $68.22 against $68.20, a two-cent increase in a quarter that generated $2.43 of reported earnings per share and paid $1.08 of dividends. Repurchasing stock at more than twice book value converts retained earnings into share-count reduction and leaves book value per share flat.

Assessment: This is not a criticism of the buyback, it is a description of what the buyback now costs. At 1.5x book the programme was accretive to per-share book value and to earnings; at 2.29x it is accretive to earnings per share and neutral to negative on book value per share. The board raised the dividend 3.7% to $1.12 in the same breath, and on the current yield of 2.87% that is the smaller half of the capital return. Investors buying today are funding a buyback executed at a materially higher multiple than the one the CEO called cheap three months ago, and that question was not put to management.

10. Canadian Retail Margins Under Competitive Pricing

The Canadian retail head confirmed what the segment tables imply, that price competition intensified during the quarter, and described the response as declining to compete on price.

"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 so as we anchor in this principle, we've nonetheless had 5% year-over-year RESL growth." — Sona Mehta, Group Head, Canadian Personal Banking

The guidance was rolled forward with an upgrade attached: relatively stable margin in fiscal Q3, with the possibility of upside in fiscal Q4. That is the first forward margin comment from this segment in two quarters that points anywhere other than flat.

Assessment: Holding 5% mortgage growth and expanding the margin 2bp in a quarter of intensifying price competition is the single best operational fact in the Canadian segment, better than the headline record. The claim to be watching is the fiscal Q4 upside, which is stated as optimism rather than guidance and comes from a segment already earning 31.3% on equity.

11. Deposits Are Still the Unaddressed Side of the Balance Sheet

Group deposits of $1,243.4B fell 1.9% year over year and were essentially flat sequentially. In the U.S., average deposits fell 5% year over year, with sweep deposits down 14%, personal down 2% and business down 2%, and fell 1% sequentially. Management characterized part of this as deliberate, describing a "strategic pullback on certain higher cost deposits," and noted that excluding sweeps and targeted run-off in government banking, U.S. deposits grew 1% year over year.

Canadian deposits are the offset, growing 3% year over year with business deposits up 5%. The group aggregate is therefore a U.S. contraction being partly filled by Canadian growth, and no group-level deposit trajectory was given for the second half in either the prepared remarks or the question period.

Assessment: A bank can shed high-cost deposits and improve its margin for several quarters, and TD has done exactly that. It cannot do so indefinitely while also growing loans, which it has now started doing again. The two trends collide at some point, and the funding cost consequence is the thing that would slow the margin expansion the entire U.S. story rests on. That collision is not visible in this quarter's numbers and it is not addressed in this quarter's guidance either.

Guidance & Outlook

Two things changed in the guidance posture and both matter more than any individual line. First, the language on the fiscal 2026 targets moved from the first quarter's "potential upside" to this quarter's flat statement that the bank is on track to outperform them, conditioned only on macroeconomic conditions holding. Second, the expense guide was explicitly not raised despite the cost programme running ahead of pace, and the reason given was that the first quarter had overshot and the full year needs the average.

"Our guidance for 2026 expense growth ex FX and variable compensation and strategic card portfolio 3% to 4%. So this quarter, we're at 3%. Q1 was higher than that. And so just on an average basis, we'll get to that range for the full year, and we're confident that we'll get there." — Kelvin Vi Tran, Chief Financial Officer

Implied run-rate against the full-year guide: first-half adjusted EPS of $4.82 against $3.99 is 20.8% growth, and the full-year guide remains 6% to 8%. For the guide to be merely met rather than beaten, second-half adjusted EPS would have to fall roughly 7% below the prior-year second half, which nothing in the print or the call suggests. The guide is not a forecast at this point, it is a floor management has stopped pretending is a ceiling. On the return on equity, 14.3% in the first half against a 13% full-year target implies the same conclusion.

Street at: the consensus entering this print was $2.25 of adjusted EPS, which the quarter cleared by 5.8%, the second consecutive mid-to-high single-digit beat after the 8.4% clear in fiscal Q1. The pattern is now established: the Street models the published guide and management outperforms the published guide, which is a comfortable place for a management team rebuilding credibility and an uncomfortable one for anyone trying to value the shares off the guide.

Guidance style: Conservative, and now visibly so. Every fiscal 2026 target except expense growth and the provision range has been exceeded in each of the first two quarters, and management has responded by describing the targets as likely to be outperformed rather than by raising them. That is the correct posture for a bank two years out of a regulatory crisis, and it also means the published targets carry very little information about the actual earnings trajectory. The medium-term 16% return on equity target is the exception: it has now been reiterated for three consecutive quarters without a date, while the arithmetic behind it has been revised downward.

Analyst Q&A Highlights

Whether Canadian Consumer Credit Has Further to Deteriorate

The first question of the call went to credit, and specifically to whether the early indicators point to Canadian consumer trends improving or to further deterioration with no visible peak in delinquencies. The response was the most complete piece of forward risk disclosure on the call: three named sources of expected pressure, a quantified reserve against the largest of them, four reasons the Canadian consumer has held up, and an explicit admission of where migration is occurring.

Q: "As we look through the next 6 months and beyond, do you think generally credit -- and at least the early indicators that you see suggest that credit trends for the Canadian consumer book are moving in the right direction? Or do you expect further worsening and with the endpoint being unclear in terms of when we actually see some of the peaking on delinquency, GILs, et cetera?"
— Ebrahim Poonawala, BofA Securities

A: "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 RESL. We're seeing a bit of it in auto. We're seeing a bit of it in cards. But overall, I think credit is still in good shape."
— Ajai Bambawale, Chief Risk Officer

Assessment: This is the answer we wanted last quarter and did not get. The specificity is the point: a named cohort, three named portfolios, a named driver, and a reaffirmed guide, rather than a general statement about resilience. It also quietly reframes the credit story. The wholesale problem that dominated fiscal Q1 has resolved; the consumer question that replaces it is slower-moving, more macro-dependent, and considerably harder to call idiosyncratic.

Whether the Investor Day Targets Are Now the Floor Rather Than the Plan

The second exchange invited management to say that the medium-term targets are too low, and management came close to accepting the invitation without quite doing so. The response walked the return-on-equity arithmetic in public, confirmed the structural cost programme is ahead of pace with a specific figure, and flagged upside to the artificial intelligence target, while still declining to attach a date to the 16% return.

Q: "As we look forward -- I mean, I think you obviously laid out some ROE targets at the Investor Day, 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 had historically used to? And even in terms of as we think about the time line to achieve some of your Investor Day targets, are you feeling better about them today than you did on the day of?"
— Ebrahim Poonawala, BofA Securities

A: "And so when you look at that, that's about 200 basis points of ROE pickup, and that's all within our control. And I think that's what really gives us a lot of confidence that we can get to certainly our ROE targets ahead of what we had anticipated at Investor Day, assuming macroeconomic conditions remain."
— Raymond Chun, Group President and CEO

Assessment: Three consecutive quarters of "faster than we expected" without a fiscal year attached is now a pattern rather than a caveat. The substantive disclosure in this answer is the revised arithmetic, 90bp plus 110bp rather than 100bp plus 150bp, which nobody followed up on. A target that keeps being described as beatable while the bridge to it keeps getting shorter is telling you the same thing twice: execution is ahead of plan, and the remaining upside is smaller than it was.

The US$173 Million Anti-Money-Laundering Line and What Leaves the U.S. Expense Base

A pointed question noted that U.S. expenses were up sharply and that the quarter's remediation spend runs ahead of the annual guide's implied pace, and asked what was in the number that will not recur. The answer isolated the two elevated items, gave a base-expense growth figure below 3% excluding them, and reaffirmed both the mid-single-digit expense guide and the U.S. net income target.

Q: "The expenses, they were up quite a bit. I know you gave some explanation, but let's just revisit that, indulge me. And what stands out is the AML cost, $173 million, that's ahead of the $500 million annual kind of figure."
— Gabriel Dechaine, National Bank Financial

A: "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 the third quarter that we had relatively the same expense despite the fact, to your point, we did have higher governance and control expenses in the quarter."
— Leo Salom, Group Head, U.S. Banking

Assessment: The flat-sequential framing is the strongest defence available and it is a real one, because a cost base that stops growing while its composition shifts from remediation build to validation is a cost base approaching its peak. What the answer does not do is bridge the arithmetic the question actually raised. A first half at US$321M against an approximately US$500M full-year guide requires a second half near US$179M, and neither the question nor the answer put that number on the record.

Why the Expense Guide Was Not Raised Given the Progress on Cost and AI

The most useful exchange on the call started as a challenge and turned into a correction of a widely held misreading. The question observed that core expense growth was running better than the mid-single-digit guidance and asked why the guide was not being improved. Management clarified that the mid-single-digit figure applies to the U.S. segment only, while the enterprise guide is 3% to 4%, and that the quarter landed at 3%.

Q: "So I think, Kelvin, you're pretty clear in terms of core expense growth was pretty good this quarter. I think 2% if we adjust for some 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 will come back next quarter."
— Paul Holden, CIBC Capital Markets

A: "Paul, I just want to clarify, the mid-single-digit guidance is specific to the U.S. the guidance that we have for -- at the enterprise level, and we have confidence in that is 3% to 4%. And so we don't see -- there's nothing that we see as a onetime that's creating our expense this quarter."
— Raymond Chun, Group President and CEO

Assessment: Two useful facts emerged from a question premised on a mistake. The first is that management asserts nothing in this quarter's expense performance is a one-time benefit, which is a stronger claim than the disclosure alone supports, given the segment commentary attributes part of the Canadian expense decline to timing. The second is that the enterprise guide was reaffirmed rather than raised even after a $900M annual cost goal was hit at the halfway mark, which tells you management is holding room for second-half investment spend it has not yet described.

Canadian Retail Margins Under Intensifying Price Competition

A question on competitive pressure in both lending and deposits produced the clearest forward margin statement of the call, and the only guidance upgrade in it. The response conceded that pricing competition genuinely intensified during the quarter, described the strategy as competing on speed and specialization rather than price, and extended the outlook a quarter further than the formal guidance does.

Q: "Increasingly hearing about some increased competition 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?"
— Paul Holden, CIBC Capital Markets

A: "And so as we look ahead, we expect to see relatively stable NIM in Q3, similar to this quarter. And I'm even optimistic for some potential NIM upside in Q4. And if I just step back, Paul, I think -- and picking up off what Ray said earlier, I think we're out to capture organic growth upside."
— Sona Mehta, Group Head, Canadian Personal Banking

Assessment: An unprompted fiscal Q4 margin comment from a segment head, one quarter beyond the formal guidance horizon, is the kind of volunteered forward statement that only gets made when the internal forecast is comfortable. It is also stated as optimism rather than guidance, which is the appropriate hedge and should be read as one. The more durable point is the trade-off being made: 5% mortgage growth with margin expansion in a price war is a better outcome than higher growth at a worse spread, and it is consistent with what this segment has done for four quarters.

Cards as the U.S. Growth Engine, and the Appetite for More Partnerships

A question on how to balance card acquisition against credit normalization and potential new partnerships drew the most expansive strategic answer of the call. The response described a three-year rebuild of the U.S. card business covering talent, operations, product lineup and underwriting models, quantified the penetration progress against the Investor Day target, and named the direction of travel for the balance sheet.

Q: "You did highlight strong acquisition and market penetration. U.S. Bank card balances up and obviously, the Nordstrom conversion onto the TD's platform. Just how are you thinking about cards in general as a growth engine, especially balancing kind of acquisition, credit normalization and maybe potential new strategic partnership?"
— Matthew Lee, Canaccord Genuity

A: "I'd like to have cards receivables be a larger portion of the overall hold. And to your point, we're cognizant about the risk profile. But I can tell you, 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, being able to build a bigger cards business as part of our overall U.S. balance sheet will actually improve NIMs and will improve our overall diversification in terms of our asset earnings."
— Leo Salom, Group Head, U.S. Banking

Assessment: The strategic logic is sound and the timing is the question. Cards lift segment margin and diversify asset earnings, which is exactly what a U.S. franchise emerging from a shrinking commercial book needs. But the same call disclosed consumer credit migration in the sub-650 cohort across three portfolios, and the bank's own economists forecast a slowing global economy with Canadian unemployment at 6.5% to 7%. Scaling the highest-loss-content asset class into that is a defensible decision that will be graded on the credit outcome rather than the growth rate.

Whether a 14.5% Wholesale Return on Equity Is Sustainable, and What It Means for Capital

The final exchange picked up on Wholesale exceeding its own Investor Day return target by 150bp and asked both whether the level is sustainable and whether it changes how capital gets allocated. The two-part answer separated the market environment from the platform economics and gave a capital-efficiency metric alongside the return.

Q: "But ROE caught my eye in wholesale at 14.5%. I think you've targeted 13% from the Investor Day. Maybe Tim, you can talk a bit about sustainability. Is there room for further ROE expansion? And then what drives this?"
— Doug Young, Desjardins Securities

A: "So it is important to note, despite all the headlines, that we are in a constructive market. So from a capital markets perspective, equity capital markets, debt capital markets, credit generally are in a positive place. You've heard me speak before about volatility. I would characterize it as a healthy level, both from the standpoint of being able to monetize volatility on the trading side while keeping the capital markets open."
— Tim Wiggan, Group Head, Wholesale Banking

Assessment: The answer led with the market environment before the platform, which is the intellectually honest order and also the one that limits how much of the 14.5% an investor should capitalize. The revenue-to-risk-weighted-asset growth ratio of roughly 3x is the more durable disclosure in the exchange, because it is a measure of capital efficiency rather than of market conditions. The capital half of the question, whether a 14.5% return justifies allocating more of the surplus to this segment, was answered in terms of flexibility rather than intention.

What They're NOT Saying

1. Why the return-on-equity bridge shrank from 250bp to 200bp. Last quarter the components were 100bp of capital and 150bp of cost; this quarter they are 90bp and 110bp. Both legs were restated on the call without acknowledgement, and no analyst asked. The capital change is explicable from the smaller surplus. The 40bp reduction in the cost leg is not explained anywhere in the disclosure, and it is the single largest revision in the quarter.
2. The second-half anti-money-laundering spend arithmetic. US$321M consumed in the first half against an approximately US$500M full-year guide requires roughly US$179M across two quarters, a 44% step down from the first-half run rate, in the same period the filing schedules internal-audit validation work. Management said the costs will moderate. Nobody put the required number on the record.
3. What the $28M performing build is composed of. The Chief Risk Officer attributed it to an update to the macroeconomic outlook and to putting "more weight on our downside case" for the Middle East conflict, partially offset by migration to impaired. Three drivers, no split. This is the same disclosure gap as last quarter's $125M release, in the opposite direction.
4. The basis change on U.S. loan growth. The commitment was net growth in total U.S. loans at the aggregate level in fiscal Q3. The claim of early delivery is on spot balances, while the segment tables report averages, on which total loans still fell 1% sequentially. Spot leads average, so the claim is probably right, but the measure changed and the change was not flagged.
5. Whether the buyback still creates value at 2.29x book. Three months ago the CEO characterized the shares as undervalued at 1.98x book and the board authorized $7B of repurchases on that basis. The stock has since risen 15.6% against a book value per share that rose two cents. The capital discussion this quarter covered pace and commitment and never touched price.
6. A group-level net interest margin or deposit trajectory. For the second consecutive quarter, forward margin guidance was given at the segment level one quarter out and nothing was said about the group margin path or the deposit base through the second half, when the U.S. franchise is simultaneously trying to grow loans and shed high-cost deposits.
7. What the FINTRAC review could produce. The filing states that the review of the bank's Canadian remediation steps "is ongoing, and subject to the outcome, may result in additional regulatory actions." That sentence has now appeared for multiple quarters. It was not raised in the prepared remarks and not asked about in the question period.
8. A date for the 16% return on equity. Third consecutive quarter of "faster than we expected at Investor Day" and third consecutive quarter with no fiscal year attached. A medium-term target with no terminal date and a bridge that is being revised downward is not falsifiable, which is precisely what makes it comfortable to keep repeating.

Market Reaction

• Pre-print setup: the shares closed at US$112.20 on the NYSE line and C$155.13 on the TSX line the session before the print. Entering the print the stock was +19.1% year to date in U.S. dollars, +64.7% over the trailing twelve months and +6.5% over the trailing thirty days, inside a 52-week closing range of US$67.70 to US$112.56. In Canadian dollars the comparable figures are +19.9% year to date, +64.6% over twelve months and +7.6% over thirty days, against a 52-week closing range of C$93.42 to C$156.56. The S&P 500 was +9.9% year to date.
• Print-day session (May 28, before the open): the NYSE line opened at US$112.47, a 0.2% gap, traded US$111.27 to US$113.42, and closed at US$113.34, up 1.0% or US$1.14. The TSX line opened at C$155.86, traded C$153.94 to C$156.88, and closed at C$156.18, up 0.7% or C$1.05. The 30bp gap between the two listings is currency, not disagreement.
• Volume: 3.3 million shares on the NYSE line against a 1.7 million thirty-day average, 1.9 times normal; 5.8 million on the TSX line against a 4.5 million average, 1.3 times normal.
• New high: the NYSE close of US$113.34 exceeded the pre-print 52-week closing high of US$112.56, a fresh 52-week closing high. The TSX close of C$156.18 finished C$0.38 below its own pre-print 52-week closing high of C$156.56.
• Peer context: two other Canadian majors reported the same morning. Across the six large Canadian banks on that session, TD was the only one to close higher. The moves ranged from -5.4% to TD's +0.7%, with the largest decline belonging to a bank that reported a 23% profit increase and cleared expectations on the same day. The S&P/TSX Composite closed +0.3% and the S&P 500 +0.6%.

The absolute move is small and the relative move is not. A 0.7% gain is an unremarkable response to a 5.8% earnings beat in isolation, and it is a striking one in a session where every other large Canadian bank fell and one of them fell more than 5% on a quarter that also beat. Three months ago TD landed mid-pack on its own print day and gave most of the gain back the following session. This time it led the group.

The explanation is what the two prints resolved rather than what they delivered. Fiscal Q1 was a record with an open credit question and an unproven cost programme, and the market treated the record as already owned. Fiscal Q2 was a smaller headline beat that closed both questions: impaired provisions fell where management said they would, and expenses landed inside the guided range for the first time. Markets pay for the removal of doubt more reliably than they pay for the extension of good news, and this session is a clean example.

The setup remains the constraint on how much that can be worth. This is a stock that has appreciated roughly 65% over twelve months, entered the print within 0.3% of its 52-week closing high on the U.S. line, and closed at 2.29 times reported book value. A 1.9 times normal volume day on the U.S. line says the print was fully engaged with; a sub-1% price response says the engagement resolved close to where it started. TD is no longer being repriced for recovery. It is being priced for the destination, and the argument from here is about the multiple rather than the franchise.

Street Perspective

Debate: Does the Quarter Justify Raising the Sustainable Return on Equity, or Just Pulling It Forward?

Bull view: the bull case on the Street is that the evidence changed this quarter in a way the target has not caught up with. A full-year structural cost goal was delivered at the halfway mark, the artificial intelligence programme is running ahead of its own annual number, expenses landed inside the enterprise guide, and every operating segment now earns above or near its Investor Day return target. On that reading the medium-term 16% is a floor set by a management team that has not yet chosen to move it.

Bear view: the bear camp points at the arithmetic management itself published. The bridge to the target shrank from 250bp to 200bp in a single quarter, and the cost leg specifically fell from 150bp to 110bp. If cost savings were revealing more upside, the leg would grow rather than shrink. What is happening is faster delivery of a fixed prize, which pulls the date forward without raising the destination.

Our take: the bears are right on the mechanics and the bulls are right on the direction. Faster delivery of a fixed destination is worth something, because it shortens the discounting period, and it is worth much less than a higher destination. We are raising our own exit-fiscal-2027 return assumption from 15.5% to 15.9%, which is a real upgrade and moves fair value by roughly 3%. The share price moved 15.6% over the same period.

Debate: Is the Credit Improvement the End of the Question or a Pause in It?

Bull view: the constructive reading is that every adverse indicator from the prior quarter reversed at once. Impaired provisions fell $191M, formations fell 5bp, gross impaired loans fell 4bp, the wholesale single-name explanation was validated by a $136M decline in that segment's impaired provisions, and the bank still carries close to $500M of largely unused trade and tariff reserve against a 97bp allowance.

Bear view: the skeptics observe that the composition of the risk moved rather than disappeared. Canadian personal and commercial impaired provisions rose $41M sequentially, the Chief Risk Officer named consumer migration in the sub-650 cohort across mortgages, auto and cards, and volunteered three separate sources of expected future pressure. Allowance coverage fell 2bp in a quarter in which reserves were added for a war, and the performing line swung from a release to a build.

Our take: both are describing the same handoff. The wholesale problem was lumpy, disclosed and is now resolved; the consumer question that succeeds it is slower, broader and macro-linked, which makes it harder to dismiss as idiosyncratic but also much harder to move quickly. We are marking the credit bear point down from emerging to contained and keeping it on the list rather than retiring it, because a 6.5% to 7% Canadian unemployment rate with high household debt is a genuine adverse setup regardless of how good this quarter looked.

Debate: Is the U.S. Franchise Now a Growth Story?

Bull view: the optimistic camp reads this as the inflection quarter. Total loans grew sequentially on spot balances for the first time since the restructuring began, a quarter ahead of the commitment. Core loans grew 3%, card balances 18%, new card accounts 32%, middle market balances 13%, commercial loans 1.2% sequentially, and the run-off drag has fallen from US$27B of average balances to US$9B. The margin reached 3.41% and return on tangible common equity crossed 14.8%.

Bear view: the bear camp notes that the segment's adjusted return on equity was flat sequentially at 9.6%, that adjusted expenses grew 9.9% against revenue growth of 6%, that the adjusted efficiency ratio deteriorated in both comparisons, and that adjusted earnings fell 3% sequentially in U.S. dollars. Average deposits are still down 5% year over year. A franchise earning 9.6% on equity is diluting a bank earning 14.4%, and it has been earning single digits for as long as anyone has been modelling it.

Our take: the volume inflection is real and the profitability inflection is not yet. Those are separable, and the order matters: loans have to turn before returns can, so this is the right sequence rather than the wrong outcome. The number to watch is not the loan balance but the 9.6%, which has been flat for two quarters after four quarters of improvement. If it is still 9.6% at fiscal year end, the U.S. leg of the return-on-equity bridge is not working, whatever the balance sheet is doing.

Debate: Does 2.3x Book Have Any Remaining Case?

Bull view: the bulls argue the multiple is the wrong frame for a bank compounding this quickly. Earnings per share grew 20.8% and the guide is now expected to be outperformed, the dividend rose 3.7%, the share count is falling 4% a year, and returns are rising 200bp a year. At an unchanged multiple that arithmetic delivers a mid-teens total return without any re-rating, and published targets have moved up with the price rather than capping it.

Bear view: the bears note that the shares have re-rated from 1.98x to 2.29x book in a single quarter while book value per share rose two cents and the delivered return rose 20bp. On adjusted earnings the multiple is 17.0 times at the print-day close, against the 11.4 times reported at the prior-year quarter end. Decomposing the 66.1% share-price gain between those two quarter-end closes, roughly two thirds is multiple expansion and one third is earnings growth. A Canadian bank at 2.3x book is priced for a destination it has not reached, by a market that has already been told the bridge got shorter.

Our take: this is where the rating is decided and it is genuinely close. On our justified price-to-book framework the shares trade above all nine cells and roughly 9% above the midpoint of the two most defensible ones, which points to a negative twelve-month total return. On the constant-multiple arithmetic the bulls use, low-double-digit earnings growth plus a 2.87% yield points to a strongly positive one. The gap between those two answers is entirely the question of whether 2.29x holds, and we do not think anyone should claim confidence about that in either direction. A stock whose expected return is that dependent on multiple persistence is the definition of a Hold.

Model Update & Valuation Framework

The table below records the changes to the assumptions we set at initiation three months ago. Where management publishes a target we anchor to it and state where we sit relative to it.

Valuation: Price-to-Book Against Sustainable Return on Equity

We use the same construction as at initiation. Justified price-to-book equals return on equity less growth, divided by cost of equity less growth, with long-run growth held at 3%, run across the plausible range of both inputs rather than resolved to a single point. Book value per share is $68.22 as reported at April 30, 2026.

Justified multiple = (ROE - g) / (COE - g) with g = 3.0%. Implied prices apply the multiple to reported book value per share of $68.22 and are rounded to the nearest dollar. The first row uses the adjusted return actually earned this quarter; the second uses the published medium-term target; the third uses the sum of the current return plus the 90bp and 110bp contributions management attributed to the capital and cost levers on this call.

The competing arithmetic, stated fairly. The framework above assumes the multiple converges toward a justified level within a year, and multiples routinely do not. If 2.29x simply holds, the twelve-month return is earnings growth plus the dividend. On our new 13% to 15% fiscal 2026 adjusted EPS growth assumption plus a 2.87% yield, that is a mid-to-high-teens total return. The two methods differ by more than twenty points, and the entire difference is the persistence of the multiple. Published price targets on the Street sit at and modestly above the traded price, implying something in between: a low-to-mid single-digit price return plus the dividend. We regard that as the honest central case and it is, definitionally, a market-like return.

What the multiple has to believe. Solving backwards, 2.29x against $68.22 of book requires either a 16.4% sustainable return at a cost of equity of 8.9%, or a 9% cost of equity with a sustainable return of 16.7%. Neither is far-fetched, and that is the fairest thing to say about the valuation. But note what the second one is: 16.7% is precisely the bridge management published last quarter and revised down to 16.4% on this call. The market is paying for the arithmetic as it stood in February, at a cost of equity that assumes the regulatory overhang is behind the bank, while a consent-order lookback runs into calendar 2027 and the FINTRAC review remains open. That is not an error. It is a set of assumptions with no slack in any of them.

Sensitivity that matters most. The cost of equity continues to dominate: one point of it moves fair value by between C$14 and C$22 per share on this book value, comparable to the entire remaining gap between the delivered return and the target. At 2.29x the shares carry no cushion against a higher required return, and a higher required return is the specific mechanism by which a well-executing bank de-rates.

Dividend. The quarterly dividend rose $0.04 to $1.12, a 3.7% increase and the second consecutive raise. It annualizes to a 2.87% yield at the print-day close, down from 3.2% at the fiscal Q1 print purely because the share price rose faster than the dividend. The reported payout ratio of 44.1% is comfortable and the trajectory is supported by the capital position. The falling yield is not a deterioration in the dividend; it is a measure of how much of the total-return case the price has already consumed.

Thesis Scorecard Post-Earnings

The pillars below are the ones established at initiation, carried forward unchanged and graded against what this quarter's print and call revealed. Status tags follow the standing thesis: bull pillars are on track, at risk or broken; risk points are contained, emerging or materializing.

Overall: the standing thesis is stronger on six of eight points and the rating does not move, which is an uncomfortable conclusion to write and the honest one. Of the two things we said at initiation we needed to see, the credit line normalizing and the cost programme becoming schedulable rather than illustrative, both happened in a single quarter, and the U.S. loan inflection we were told to expect in fiscal Q3 arrived in fiscal Q2. The operating thesis is now materially better evidenced than we assumed. The problem is the other half of the trade: the entire improvement, and rather more than the entire improvement, was capitalized into the price while it was happening. Our estimate of fair value rose roughly 3% this quarter. The share price rose 15.6%.

Action: Maintaining Hold. None of the three downgrade triggers we set at initiation fired, and we would note that all three were operational, which was a gap: we published a valuation-based upgrade trigger without a symmetric valuation-based downgrade trigger, and we are correcting that now. We would upgrade to Outperform on a de-rating toward roughly 1.9x book, about C$130, which would restore the margin of safety, or on evidence that lifts the sustainable return above 17%, which on the current disclosure would most plausibly come from the U.S. segment return breaking out of 9.6% while the cost programme keeps running ahead. We would downgrade to Underperform if the multiple exceeds roughly 2.45x book without a corresponding upward revision to the return destination, if the U.S. adjusted return on equity is still at or below 9.6% at fiscal year end, if the second-half anti-money-laundering spend materially breaches the approximately US$500M full-year guide, or if impaired provisions sustain above 55bp. For existing holders this remains a well-run bank compounding at mid-teens rates with a rising dividend and a shrinking share count, and we would not sell it on the multiple alone. For new capital, the price now assumes management's February arithmetic at a cost of equity that assumes the regulatory chapter is closed, and we would still wait.