TD (TD) Q2 2026 Earnings Call Transcript

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Date

Thursday, May 28, 2026 at 7:00 a.m. ET

Call participants

• Group Head, Canadian Personal Banking — Raymond Chun
• Group Head, U.S. Retail — Leo Salom
• Group Head, Wealth Management & Insurance — Kelvin Vi Tran
• Group Head, Wholesale Banking — Tim Wiggan
• Group Head, Canadian Business Banking — Sona Mehta
• Group Head & Chief Risk Officer — Ajai Bambawale

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Takeaways

• EPS Growth -- Earnings per share rose 21% year over year, reflecting earnings momentum across segments.
• Return on Equity (ROE) -- ROE reached 14.4%, up over 200 basis points from the prior year, with management indicating they are ahead of their medium-term target of 13% for fiscal 2026.
• Positive Operating Leverage -- The bank achieved its fourth consecutive quarter of positive operating leverage, supported by structural cost reduction programs.
• Expense Growth -- Total expenses excluding variable compensation, FX, and U.S. strategic card portfolio rose 3% year over year, trending to the 3%-4% enterprise expense growth target for 2026.
• Dividend Increase -- The dividend was raised by $0.04 to $1.12 per share, marking management’s stated confidence in future growth.
• CET1 Ratio -- The common equity Tier 1 capital ratio ended at 14.3%, down 26 basis points sequentially, after repurchasing approximately 19 million common shares in the quarter, which reduced CET1 by 41 basis points.
• Share Buyback Commitment -- Management reiterated completion of the $7 billion buyback program, noting that combined with prior repurchases, $15 billion will have been returned to shareholders.
• Canadian P&C Loan and Deposit Growth -- Personal and commercial average loans rose 6% year over year; average deposits increased 3%, with 5% growth in business deposits and 1% in personal deposits.
• Canadian RESL and Business Lending -- Real estate secured lending volumes grew 5% year over year; business loans were up 7%, driven by distribution expansion and momentum in the commercial bank.
• Credit Card KPIs -- Toronto-Dominion Bank (NYSE:TD) maintains the largest active credit card portfolio in Canada, adding the most cards in the market, and achieved record penetration rates in consumer and small business segments.
• TD Auto Finance -- The segment received the highest dealer satisfaction ranking from J.D. Power and posted record Q2 originations in U.S. Banking.
• U.S. Banking Core Loan Growth -- Core loan balances increased 3% year over year and 1.2% sequentially; middle market lending balances rose 13% year over year, and proprietary U.S. credit card balances expanded 18%.
• U.S. Banking Deposit Trends -- Deposits, excluding sweeps and targeted runoff, increased by 1% year over year, as deposit costs declined quarter over quarter due to a pullback on higher-cost accounts.
• U.S. Banking Net Interest Margin (NIM) -- NIM improved to 3.41%, up 3 basis points sequentially, with management guiding to a modest increase next quarter.
• Expense Growth in U.S. Banking -- Expenses rose 10% year over year, driven by governance, control investments, and the Nordstrom card client conversion platform; core operating expenses grew below 3% after isolating these factors.
• Wealth Management & Insurance -- The segment delivered record earnings and assets; wealth account growth reached 15%, with 16% growth in TD Direct Investing accounts and 11% increase in trades per day.
• ETF Asset Momentum -- Toronto-Dominion Bank’s ETF assets more than doubled since end of fiscal 2024, progressing toward a $54 billion medium-term target.
• Insurance Digital Engagement -- Over 80% of insurance clients are digitally engaged, with management targeting above 90% for digital adoption.
• Wholesale Banking Performance -- Wholesale posted record earnings, with ROE at 14.5% (up 360 basis points year over year) and an efficiency ratio of 63%, driven by client activity in global markets and corporate investment banking.
• PCL Trends -- Total provision for credit losses remained stable at 43 basis points quarter over quarter, within management’s 40 to 50 basis point fiscal-year guidance.
• Impaired PCLs and Loans -- Impaired PCLs were $973 million, down $191 million quarter over quarter, while gross impaired loans fell 4 basis points from the previous quarter to 54 basis points.
• Allowance for Credit Losses -- Allowance decreased by $147 million quarter over quarter, now at 97 basis points of coverage, reflecting continued resolution in the wholesale segment and a performing reserve build tied to macroeconomic outlook.
• AI Value Creation -- AI initiatives delivered almost $145 million in value this year, well ahead of the $200 million annual delivery target for 2026, with over 40,000 colleagues using Copilot and 7,000 engineers leveraging AI for development.
• AML Remediation Spend -- AML remediation expenses have moderated quarter over quarter; management confirmed the $500 million full-year guidance for AML costs in 2026, with cost composition shifting toward validation and sustainability.
• Nordstrom Card Conversion -- The successful conversion of Nordstrom card clients to Toronto-Dominion Bank’s servicing platform generated a USD 144 million receivable adjustment, treated as an item of note.

Summary

Management explicitly stated they are ahead of their medium-term strategy targets, citing progress across revenue, cost, and digital priorities. The fourth consecutive quarter of positive operating leverage resulted from structural cost reduction and AI investment, supporting confidence in the bank's 3%-4% expense growth and 6%-8% EPS growth targets for 2026. Shareholder capital returns remain a priority, with a $0.04 per share dividend increase and continued execution of the $7 billion buyback, while capital and liquidity metrics remain robust. Management detailed the strategic value of recent investments in U.S. core banking, wealth, and wholesale, emphasizing a broader asset mix and growing fee income contributions as central to future earnings durability.

• Management emphasized, "we are ahead of the vast majority of the metrics and the medium-term outlook that we had set at Investor Day."
• AI deployment created measurable business value, including reducing mortgage pre-adjudication cycle time from 15 hours to 3 minutes through Agentic AI and implementing Canada’s first client-facing generative AI assistant in insurance.
• Management reported, "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," clarifying risk buffers.
• U.S. retail reported, "Core loans grew 3% year over year," with accelerated loan growth expected to persist as balance sheet restructuring concludes.
• Wholesale Banking's U.S. revenue share doubled since 2022, with management stating, "we're not capital constrained by any means, but we do need to do more with that resource."

Industry glossary

• PCL (Provision for Credit Losses): The amount set aside by a bank to cover estimated losses on loans or other credit exposures, expressed as a ratio to total loans or in basis points.
• RESL (Real Estate Secured Lending): Lending activity secured against residential or commercial property, typically including mortgages and home equity loans.
• RSP Season: A Canadian banking term referring to the annual peak period of Registered Savings Plan contributions by retail clients, impacting deposit and wealth management flows.
• CET1 (Common Equity Tier 1 Ratio): A core measure of a bank's capital strength, representing the ratio of common equity capital to risk-weighted assets.
• Agentic AI: Artificial intelligence technology designed for autonomous process execution, allowing end-to-end automation and decision-making in business processes.

Full Conference Call Transcript

Raymond Chun: Thank you, Brooke, and good morning, everyone. Thanks for joining us. In Q2, the bank delivered a strong quarter, reflecting continued momentum across our businesses and structural cost reduction. EPS was up 21% year-over-year and ROE was 14.4%, up over 200 basis points year-over-year. TD is executing against the strategies and targets that we shared at Investor Day. In fact, in many cases, we're ahead of schedule. The bank is on track to outperform its 6% to 8% EPS growth and 13% ROE targets for fiscal 2026, provided that the current macroeconomic conditions continue. Strong revenue performance this quarter was driven by momentum in our markets-driven businesses, margin expansion and volume growth in Canadian Personal and Commercial Banking.

Impaired PCLs declined quarter-over-quarter, reflecting strong credit performance, an update to our macroeconomic outlook resulted in a performing reserve build this quarter. We continue to expect total PCLs of 40 to 50 basis points in fiscal 2026. TD delivered positive operating leverage for the fourth consecutive quarter. Excluding variable compensation, FX in the U.S. strategic cards portfolio, expenses were up 3% year-over-year. We are well on our way to achieve our 3% to 4% expense growth target for fiscal 2026. The bank is driving structural cost reductions, enabling the team to deliver the smallest expense growth since 2022, while at the same time, accelerating investments across AI, innovation and frontline talent.

Today, we announced a $0.04 dividend increase, bringing our dividend to $1.12 per share, reflecting confidence in TD's future growth and earnings power. The bank's CET1 ratio was 14.3% with strong organic capital accretion offset by consistent share repurchases. It's been 8 months since TD's Investor Day. We see strong momentum across our businesses and unparalleled opportunities to take market share on both sides of the border. TD remains committed to completing our $7 billion share buyback program. Please turn to Slide 3. Canadian Personal and Commercial Banking delivered record Q2 revenue, PTPP and earnings. In real estate secured lending, volumes grew 5% year-over-year. This disciplined growth is anchored in our strategy of speed and specialization.

The bank has the largest portfolio of active credit cards and added the most cards in the market based on the annual Nielsen report. We again achieved record penetration rates for consumer and small business credit cards, coupled with strong credit quality. In the Business Bank, loans were up 7% year-over-year, driven by distribution expansion and broad-based momentum. Our clients continue to demonstrate resilience through macroeconomic uncertainty. In TD Auto Finance, we were proud to be recognized again this year by J.D. Power with the highest rank in dealer satisfaction. In U.S. Banking, AML remediation remains our top priority. You will hear more about our continued progress from Leo.

The business is also building towards sustainable growth with increases in core loans expected to be more than offsetting balance sheet runoff beginning next quarter. We saw that momentum accelerated in Q2 with core business loans up 1.2% sequentially. This quarter, middle market lending balances were up 13% year-over-year and U.S. proprietary credit card balances were up 18% year-over-year, driven by strong acquisition. And in our U.S. wealth business, record mass affluent sales drove double-digit asset growth year-over-year. As we shared at Investor Day, U.S. banking has significant opportunities to accelerate commercial loan growth, scale our cards franchise and deepen U.S. wealth relationships, delivering substantial upside to the bank's earnings over the medium term.

Wealth Management and Insurance delivered record earnings and assets. We continue to drive innovation in TD Direct Investing, Canada's #1 digital investing platform. TD is the only Canadian bank to offer partial share ownership. With as little as $1, clients can now invest in some of the biggest companies in the world, bringing down barriers and creating new opportunities for Canadians. This quarter, we launched a fully redesigned TD Easy Trade. The app offers market-leading capabilities, 100 free trades, helping to widen the gap to peers in direct investing. With this launch, the bank is positioned to continue to serve the next generation of investors.

We continue to take share in ETFs with assets more than doubling since the end of fiscal 2024. We are well on our way to achieving our medium-term target of $54 billion in ETF assets. And in insurance, we continue to build on our position as Canada's leading digital direct insurer with over 80% of our clients digitally engaged, strong progress towards our Investor Day target of 90% plus. Wholesale Banking delivered record earnings this quarter, supported by strong client activity across Global Markets and Corporate Investment Banking. 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. Clients are entrusting TD Securities with their largest and most complex transactions as they navigate the evolving macroeconomic environment. Please turn to Slide 4. We continue to make progress against our strategy to deepen relationships, make TD simpler and faster and execute with discipline. This quarter, the Canadian Personal Bank delivered almost $9 billion in closed referrals to wealth, double-digit growth year-over-year and well on our way to achieving our medium-term target. Within wealth itself, TD has an unparalleled pipeline from direct investing to advice.

This quarter alone, direct investing referred $1.5 billion to advice, up 42% year-over-year, positioning TD to capture assets through the significant intergenerational wealth transfer currently underway. In Canada, we continue to invest in our small business banking franchise and attract clients with net client acquisition up 15% year-over-year in the first half of 2026. Effective next week, we are moving our small business banking franchise to Canadian Personal Banking. Almost 90% of small business clients also do their personal banking with TD. This realignment will enable TD to deliver simpler and faster for our small business banking clients, the backbone of the Canadian economy. Across the bank, we have a clear strategy that is driving higher ROE.

This quarter, U.S. banking and wholesale banking ROEs were up 130 basis points and 360 basis points year-over-year, respectively. As I said last quarter, TD may achieve its medium-term ROE target faster than we expected at Investor Day. Please turn to Slide 5. At our Investor Day, we shared targets to take out $2 billion to $2.5 billion in structural costs and generate $1 billion in annualized value from AI over the medium term. We have strong momentum and are tracking ahead of pace on both targets. Across the bank, structural cost reductions are fueling accelerated investments in innovation and AI. TD is and will continue to be a leader in AI.

I believe AI will transform our operations, make our colleagues more efficient, our processes faster and our products and services better. We're already seeing it across our businesses. In RESL, we reduced mortgage pre-adjudication cycle time from approximately 15 hours to 3 minutes using Agentic AI. In insurance, TD continues to innovate. We set a new industry standard for AI adoption in Canada, becoming the first home and auto insurer to launch a client-facing generative AI virtual assistant. And across the bank, we have over 40,000 colleagues using Copilot and over 7,000 engineers using AI for software development with the most active achieving a 29% increase in throughput.

TD is increasingly emphasizing AI opportunities that transform end-to-end experiences, drive lower unit costs and are scalable across the enterprise. We see significant opportunities across credit, contact centers, fraud and frontline productivity among other focus areas. 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. Please turn to Slide 6. For the fourth consecutive year, TD was named the most valuable brand in Canada by Brand Finance. TD was also recently ranked #1 on LinkedIn's list of the top 25 best Canadian companies to work for.

These incredible accomplishments reflect the dedication and commitment of our colleagues across the bank. Thank you for continuing to deliver for our clients and shareholders every day. Now before I hand it over to Leo, I'd like to take a moment to honor the memory of Richard M. Thomson. He was one of TD's true architects, dedicating more than 4 decades to our organization, rising to become Chairman and CEO. It was under his leadership, TD launched the first bank-owned self-directed brokerage in Canada, laying the groundwork for today's TD Direct Investing. TD Securities' roots can also be traced back to his time leading the bank. Dick cared deeply about TD, its clients, its colleagues and the community.

His impact will be felt for generations to come. With that, I will hand it over to you, Leo.

Leo Salom: Great. Thank you, Ray. As we enter the latter half of fiscal 2026, 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 completed its first 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. Turning to our AML platforms and 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 across our entire client population. We also continue to focus on improving our operational systems to enable frontline staff to complete critical AML tasks with greater efficiency. Specifically this quarter, we updated our onboarding systems for money service businesses, providing our colleagues with the ability to sustainably identify, detect and manage these types of businesses going forward.

Finally, we made an important enhancement to our financial crime risk management training program with the introduction of enhanced controls, which provide detailed insights into the training effectiveness, completion metrics and workforce readiness, all of which are important elements of a sustainable training program. 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. With that, I'll turn it over to Kelvin.

Kelvin Vi Tran: Thank you, Leo. Please turn to Slide 8. TD delivered a strong quarter with momentum across our businesses. Through the TD Cowen acquisition and as you heard on Investor Day, we are taking deliberate strategic action to diversify the bank's business mix. We saw the benefits of that strategy play out this quarter with strength in our markets-driven businesses, margin expansion and volume growth in Canadian Personal and Commercial Banking, delivering robust top line growth. At 43 basis points, total PCLs were within our guided range and flat quarter-over-quarter. Expenses increased 5% year-over-year with approximately 2% driven by variable compensation, foreign exchange and the impact of the U.S. strategic cards portfolio.

We delivered our fourth consecutive quarter of positive operating leverage. We made significant progress on our structural cost reductions, enabling accelerated investments in business growth. Total bank PTPP was up 12% year-over-year after removing the impact of the U.S. strategic cards portfolio, FX and insurance service expenses. We've shared the details on Slide 23. Please turn to Slide 9. Canadian Personal and Commercial Banking delivered record Q2 revenue, PTPP and earnings. Average deposits rose 3% year-over-year, reflecting 1% growth in personal deposits and 5% growth in business deposits. We had a strong RSP season, including record closed referrals from the Canadian personal bank to our wealth business.

Average loan volumes rose 6% year-over-year with 5% growth in personal volumes and 7% growth in business volume. Strong business loan growth reflected continued investment in our frontline bankers and execution against our local advice-focused model. Net interest margin was relatively stable, up 2 basis points sequentially. As we look forward to Q3, based on the current rate and competitive market dynamics, we again expect net interest margin to be relatively stable, similar to this quarter's results. Expenses rose 2% year-over-year and benefited from some timing impacts. Please turn to Slide 10. In U.S. Banking, Earnings were up 12% year-over-year and ROTCE expanded by over 200 basis points to 14.8%.

Excluding sweeps and targeted runoff in our government banking business, deposits were up 1% year-over-year. Deposit costs declined quarter-over-quarter, reflecting our strategic pullback on certain higher cost deposits and the strength of our non-term personal deposits and operating business deposit franchises. Core loans grew 3% year-over-year, driven by accelerated momentum across our portfolios. New bank card account acquisition was up 32% year-over-year, and TD Auto Finance delivered record Q2 originations. We also saw a 17% year-over-year increase in middle market lending commitments and our home equity lending pipeline remains robust. Net interest margin was 3.41%, up 3 basis points quarter-over-quarter, driven by higher loan and deposit margins.

As we look forward to Q3, we expect net interest margin to modestly increase. Expenses increased 10% year-over-year, reflecting higher governance and control investments and spend supporting business growth initiatives, including the conversion of Nordstrom credit card clients onto TD's servicing platform. There is no change to our guidance for fiscal 2026 overall expense growth in the mid-single-digit range and approximately USD 2.9 billion in net income for the U.S. Banking segment. As we shared on our Q1 call, in February, we converted Nordstrom card clients onto TD's servicing platform.

The conversion was completed smoothly and marked an important strategic milestone that provides scale as we build out our credit card franchise and opens opportunities to pursue new strategic card partnerships and drive down unit costs over time. Slide 22 provides an illustrative example of the accounting for our strategic cards portfolio. As a result of the Nordstrom change and consistent with similar transactions, the receivable adjustment of USD 144 million was treated as an item of note in Q2. Please turn to Slide 11. Wealth Management and Insurance again delivered record earnings and assets. 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. Sequentially, expenses for this segment, excluding variable compensation, were relatively flat. We are driving structural cost savings while investing for the future, including accelerated distribution expansion. Please turn to Slide 12. Wholesale Banking delivered record earnings, driven by strong execution across global markets and corporate and investment banking, including strength in our equities, capital markets and lending businesses. Our performance reflects the depth and diversification of the platform, combined with high levels of client activity and constructive market conditions. Expenses increased 6% year-over-year as we continue to invest in talent and technology.

Return on equity for the quarter was 14.5%, an improvement of 360 basis points year-over-year, driven by strong revenue growth, moderating expense growth and disciplined capital management. Please turn to Slide 13. Corporate net loss for the quarter was $166 million, relatively flat to the same quarter last year. Please turn to Slide 14. The common equity Tier 1 ratio ended the quarter at 14.3%, down 26 basis points sequentially. We delivered strong organic capital accretion again this quarter. 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. Upon completion of this program and together with our previous share buyback, we will have returned $15 billion in capital to our shareholders. And with that, I will turn it over to Ajai.

Ajai Bambawale: 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 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. Please turn to Slide 16. Gross impaired loans decreased 4 basis points quarter-over-quarter to 54 basis points, reflecting lower impairments in wholesale and 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 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 basis points, stable quarter-over-quarter as lower provisions in the wholesale and corporate segments were partially offset 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 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. 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 build largely related to an update to the macroeconomic outlook. Now I'd like to spend a few minutes discussing 2 key risk topics. First is 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. Second 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 if warranted. With that, let me summarize the quarter. The bank exhibited strong credit performance as evidenced by lower gross impaired loans and gross impaired loan formations and stable PCLs. 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.

Operator: [Operator Instructions] The first question comes from Ebrahim Poonawala with BofA Securities.

Ebrahim Poonawala: So I guess, maybe, Ajai, starting with you on credit quality, hear 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, the sort of dynamic with high unemployment, rates going higher. 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?

Ajai Bambawale: Yes. Again, there's quite a few things there, Ebrahim, but let me answer your question comprehensively. And let me start with what I expect. First, I should remind you, I've reaffirmed the bank's guidance. 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. With respect to the Middle East war, I'd call it a watch item.

Having 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 bps, 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'd start by saying household 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, okay? If you look at where rates peaked, rates are down 275 bps. 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 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. Yes, there are some uncertainties. We'll continue to watch them. We'll reassess them through our process. But at 97 bps, including $500 million for trade and tariffs, I think the bank is very well provisioned. So hopefully, I gave you enough context, Ebrahim.

Ebrahim Poonawala: No, that's good context and very comprehensive. And I guess one for you, Ray. AI is going to transform the bank, like you talked a lot in terms of the details and how TD is deploying AI. 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?

Raymond Chun: Thanks, Ebrahim, for the question. So let me tackle that in a few different buckets. Let me start with the Investor Day. And I think it was about 8 months ago, certainly feels a little bit longer than that. But as I've said for the last number of quarters, we continue to have momentum. And we are ahead of the vast majority of the metrics and the medium-term outlook that we had set at Investor Day. All the businesses are ahead of their targets. And so we feel very good not only in achieving them, but achieving them sooner. 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. 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. 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. And so on that side, we think there's upside. And on the $1 billion AI objective that we set out, $500 million in expense reduction, $500 million in productivity or revenue, we definitely see, as we've gotten more and more into the Agentic AI and generative and predictive AI, we definitely see more upside to the $1 billion goal that we had set.

So coming back to your question, do we think that we can do more than what we had put on the Investor Day? We believe we're ahead of pace. We have momentum right across all of our lines of businesses. And I think that's setting us up well for accelerated growth on a go-forward basis.

Operator: The next question comes from Gabriel Dechaine with National Bank Financial.

Gabriel Dechaine: First, on the -- well, a couple of angles here on the U.S. 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. Was there mention of some sort of a third-party agreement that's no longer going to be costing you money, something like that?

Leo Salom: 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 $702 million and that was up 12% on a year-on-year basis. And if you break down the factors, we had positive core loan growth. We had moderate NIM expansion. And as Ajai 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 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. And I think composition matters here. We're seeing more -- as I'd indicated in previous quarters, we would expect to start seeing more validation look back and monitor expenses this year 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 was that we completed the conversion of Nordstrom.

And so we had higher conversion and operating expense that we assumed as part of that transaction. So if you isolate those 2 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. I should -- let me just reaffirm that we still believe that we will achieve our mid-single-digit expense growth guidance for the year. In fact, we've got 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 our NIAT objective that we laid out in Investor Day. So net-net, I'm feeling good at where we are.

Obviously, any opportunity that I've got to accelerate the remediation process, it is my #1 priority. We're trying to work through it as quickly as possible because we know how important that is to the overall franchise.

Gabriel Dechaine: Yes. No, I get that. I wasn't critiquing the number. Just trying to get a sense of the, I guess, additional elements this quarter that might not be around in coming quarters as that cost line kind of does drift down sequentially. But I guess more on the strategic side, as you move -- and I appreciate that AML remediation is your #1 priority. But as you move through the process and maybe increased bandwidth for growth initiatives. It sounds like there's some improvement in the core commercial banking loan book. You're open, it sounds, to exploring new strategic card partnerships.

I want to get a sense for how you're thinking about the growth aspect of the business at this point and what we can look forward to.

Leo Salom: Yes, 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 of stats. One, 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.

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 our 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 that was -- where 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 3 years, and we're beginning to see the fruits of some of those investments.

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. But probably more important than just the absolute number was the composition. We've been seeing really strong performance in sort of the middle market segment for some time. What we saw this quarter was stronger performance in both small business and our commercial regional businesses. So it was a slightly broader base win this quarter, and I think that's quite encouraging.

I do think that given the work that we're doing, to your point, the fact that we're increasing the number of bankers on the street supporting 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.

Gabriel Dechaine: Okay. And Ray, I heard you say it felt like a long time since Investor Day, I thought time was supposed to fly when you're having fun.

Operator: The next question comes from Paul Holden with CIBC Capital Markets.

Paul Holden: I want to ask a question on the expense guide. 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. And I would have thought given what Ray has 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.

Raymond Chun: Paul, maybe I'll just kick off and then Kelvin can jump in. 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. And so we see the structural cost reductions that we've been making across all of our business lines continuing.

And as we accelerate our value from AI and automation, I think you're going to see -- as I've been saying previously that we try to continue to take the structural cost run rate of the organization down consistently on a unit cost basis. And so you're seeing that play through, and you'll continue to see that play through, Paul. So I just wanted to clarify, the mid-single digit is U.S., not enterprise.

Kelvin Vi Tran: Yes. That's right. It's Kelvin here. 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.

Paul Holden: Okay. My mistake, I understand. And then maybe just a quick one for Sona. 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?

Sona Mehta: Okay. Thanks for that question, Paul. 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. And so let me tug 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 so as we anchor in this principle, we've nonetheless had 5% year-over-year RESL 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 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. We see tremendous momentum across the businesses. Obviously, we're pleased within RESL, how we're leaning in competing on speed and specialization rather than price.

But across the board, we see momentum. We've had #1 year-over-year growth in RESL, in cards and in deposits. So we're particularly pleased with the quarter and proud of our team's work.

Operator: The next question comes from Matthew Lee with Canaccord Genuity.

Matthew Lee: Most of my questions have been answered, but maybe one on cards. 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?

Leo Salom: Yes. 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 -- it's a product that we're very focused on. And it's one of the reasons why 3 years ago, we embarked on a really comprehensive build. We added significant talent. We retooled our cards 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 to 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. So I absolutely want to grow our bank card. 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 basis points on a year-on-year basis. So clearly, we want to try to maximize the growth of our core bank card business.

But I also -- 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. 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. So net-net, it's a long-winded way of saying it's a big priority for us in the U.S. Sona?

Sona Mehta: Yes. Maybe just briefly, Matt, really strong story north of the border as well in our cards business. We've had 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. What I'm particularly pleased with is 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 increase this depth of relationship within our existing clients. And so most of our growth year-over-year is actually coming from strong preapproval 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 #1 position in the industry this year.

Operator: The next question comes from Doug Young with Desjardins Securities.

Doug Young: 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 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? And Ray, as you look over at that, does that give you more comfort? I mean 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 deploying capital into capital markets?

Raymond Chun: So why don't I start and then Tim, you can jump in after. I would say, first and foremost, very pleased with the continued momentum in TD Securities. And as we said also at Investor Day, what we're trying to do in the organization is balance or rightsize our NII and fee income. And whether it's our wealth business, our insurance business, which both had record quarters or our wholesale business, getting the fee income mix up across TD Bank was a priority for us coming out of Investor Day. And you're seeing exactly that, not just from Tim's business, but from Paul Clark's businesses. So I'm pleased there.

And before I hand it over to Tim, from a capital perspective, what I would just say is it is an area of the organization that we do believe has outsized opportunity for accelerated growth, and Tim and team are demonstrating the power of the platform and the acquisition of TD Cowen and TD Securities combined. And so I would say it's playing along exactly what we thought on a go-forward basis. And then just from a capital perspective, the only thing I would say is I do think we are positioned differently than any other organization amongst our peers that we start with an incredibly strong capital position at 14.3% CET1.

But when you overlay our strong organic capital generation that we do here within the organization, it really gives me an advantage that we can deploy capital in different ways. At the same time, we can continue to do buybacks while we look at not only organic growth opportunities and how do we want to accelerate some of our organic growth opportunities like in TD Securities. So it gives me flexibility, Doug, to be able to do multiple things that maybe some of our peers can. So on that note, I'll hand it back over to Tim.

Tim Wiggan: Doug, I would just add 2 or 3 things. 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. And then I would just say, generally, there's an openness to M&A. So as we sit today, it's a constructive environment and quite a healthy backlog.

The second point, as 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 the first half, that's reflected where we had top line up 18% year-over-year despite the $180 million earned last year from the Schwab transaction. So very healthy from that perspective. 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.

The other point I wanted to emphasize is mix. So good balance between corporate and investment banking and global markets. And I think that's reflected as well in the results, but also geography. So directionally, if we look at 2022, which was the last year prior to the Cowen acquisition, we would be doing about 1/4 of our revenue in the U.S. And today, that number is twofold. And of course, it's a market that's about 20x the size of Canada. So we see a tremendous amount of runway. So all of that coming together drove the ROE 14.5% and the efficiency ratio of 63%.

But maybe the last point I wanted to leave you with, there's obviously always cyclicality in our business, but it's about creating durability and repeatability on our platform and positioning ourselves to be able to serve clients and deliver for shareholders through the cycle. And I think that's what you're seeing.

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

Raymond Chun: Thank you, operator, and thank you, everyone, for joining us today. We appreciate your questions and comments. In Q2, we continued our business momentum with strong credit performance, positive operating leverage and robust earnings growth. ROE was 14.4%, up 200 basis points year-over-year. I'm proud of the progress through the first half of the year, and I'm confident TD will continue to deliver for its stakeholders. Now before we close the call, I'd like to go a little bit off script for a moment to congratulate Brooke and her team on winning across 5 categories at the IR Impact Awards last month. What an incredible accomplishment, Brooke, reflecting strong engagement with all of you, our investors and analysts.

Thank you for your support, and congratulations again to Brooke and the team. I look forward to connecting with all of you again next quarter. Thanks, everyone.

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

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